RBI needs to ramp up bond purchases to cool yields, funds say

The Reserve Bank of India may need to infuse substantial additional liquidity into the banking system, as significant interest-rate reductions and historic bond purchases continue failing to meaningfully lower elevated yields, according to market experts.

Projections indicate the RBI could purchase up to 5 trillion rupees ($55 billion) in bonds by March 2027, as estimated by Aditya Birla Sun Life AMC Ltd. Nomura Holdings Inc. anticipates around 2.5 trillion rupees in acquisitions during the upcoming fiscal year, while PGIM India Asset Management Ltd. foresees purchases reaching 2 trillion rupees in the near term.

Despite the RBI implementing 125 basis points of rate cuts last year and unprecedented liquidity measures, the benchmark 10-year yield recently returned to near-previous levels. Current data shows only 10% of policy rate reductions have translated to bond yields – a stark contrast to the 83% average transmission observed in prior cycles, per Emkay Global Financial Services Ltd.

“India is experiencing significant monetary policy transmission challenges,” stated Kaustubh Gupta, CIO for fixed income at Aditya Birla Sun Life AMC. He emphasized that enhanced bond-market transmission through aggressive liquidity measures and expanded money supply will likely dominate market dynamics this year.

The central bank has injected a historic 14.5 trillion rupees since late 2024 through multiple instruments including CRR reductions, open-market operations, and FX swaps, according to Kotak Mahindra Bank Ltd. However, long-term yields remain stubbornly elevated, with the 10-year yield declining just 17 basis points last year. Shorter-term instruments showed opposing pressure, as 1-year certificate of deposit rates rose 19 basis points in December – the sharpest increase since October 2023.

Corporate borrowing costs mirror this dislocation. The Small Industries Development Bank of India recently paid approximately 30 basis points more for a 2029-maturity bond compared to its similar issuance two months prior.

Reserve Bank of India Sanjay Malhotra acknowledged transmission challenges in a recent interview, noting monetary policy faces inherent limitations in influencing the long end of the yield curve. This ineffective transmission maintains expensive financing costs for both government and corporate borrowers, exacerbating economic pressures already heightened by substantial US trade barriers.

Currency pressures have further complicated policy effectiveness. RBI interventions to stabilize the rupee have drained approximately $45 billion from the financial system since October, according to Kotak estimates, dampening bond demand.

Simultaneously, traditional bond buyers like insurers and pension funds have reduced participation due to slower product sales and regulatory-driven shifts toward equity allocations.

The unfavorable environment is prompting corporate borrowers to favor bank loans over bonds. Power Finance Corp. abandoned three bond issuances since November as costs climbed, instead securing bank loans at 50-70 basis point savings, Chairman Parminder Chopra confirmed last week.

Market participants suggest potential relief could emerge from an impending US trade agreement, which might ease growth concerns and reduce bond acquisition requirements. However, current conditions suggest continued RBI action, as Puneet Pal of PGIM Asset Management noted: “Persistent liquidity tightness and ongoing FX interventions indicate further bond purchases appear probable. The yield curve should maintain its steep trajectory given current supply-demand imbalances.”

Published on January 20, 2026