Given the current market uncertainty, the Reserve Bank of India (RBI) is not only keeping a close eye on global cues but also adjusting its current policy and implementing several monetary measures. For example, it recently lowered the repo rate to 6% to boost consumption levels and keep up with economic growth. The regulator is once again in the news, this time due to its efforts to boost liquidity through OMO auctions.
Let’s break down the RBI monetary policy of 2025 and its impact in detail, starting with a clear understanding of what Open Market Operations (OMO) means.
OMO Auctions Explained
OMO refers to Open Market Operations conducted by the RBI. The central bank buys and sells government securities in the open market during an OMO auction. The primary goal of OMO is to regulate the money supply in the economy. When the RBI seeks to increase liquidity, it purchases government bonds, injecting more money into the banking system. Conversely, it sells government securities to absorb money from the system when it aims to reduce excess liquidity.
Through OMO, the RBI aims to control inflation, stabilise interest rates, and support economic growth. Banks and financial institutions are typically the key participants in OMO auctions.
Details of the RBI’s Liquidity Injection Plan
The Reserve Bank of India has announced a significant liquidity injection through OMO to stabilise the financial system. Starting in May 2025, the RBI will conduct OMO purchase auctions of government securities worth ₹1.25 lakh crore in four tranches. The first auction, valued at ₹50,000 crore, is scheduled for May 6, followed by three auctions of ₹25,000 crore each on May 9, May 15, and May 19.
This move is part of the RBI’s strategy to address evolving liquidity conditions and ensure surplus liquidity in the banking system. Liquidity had turned into a deficit in the fourth quarter of FY25 because of seasonal factors and forex operations but shifted to a surplus by late March.
Impact of RBI Liquidity Injection Through OMO Auctions
The liquidity measures by the RBI through OMO auctions have varied impacts on different segments. Here are the details:
Impact on Bond Market
As the RBI buys government securities, the increased demand pushes bond prices higher, bringing yields down since bond prices and yields move in opposite directions. The result? The benchmark 10-year G-Sec yield, currently around 6.40%, may ease to 6.20%-6.30% as market participants adjust to the improved liquidity conditions.
Apart from influencing yields, improved liquidity can also boost overall market sentiment. This could encourage investors to take positions in longer-duration bonds. Such a shift may lead to a flattening of the yield curve as short-term yields remain stable while long-term yields decline.
However, the impact on corporate bonds may vary. With the liquidity boost, the spread between government and corporate bond yields might widen for lower-rated securities due to continued risk aversion.
Impact on the Stock Market
In layman’s terms, banks have more cash to lend when the RBI injects liquidity. As a result, interest rates decrease, making it cheaper for businesses and individuals to borrow money. This move may rally interest rate-sensitive sectors, such as banking, real estate, and infrastructure, as these industries benefit from lower financing costs.
Banking stocks, in particular, are expected to gain, as the liquidity infusion can improve their balance sheets and reduce the cost of funds. However, remember that the impact of RBI liquidity measures on the stock market will also depend on other factors, such as global economic conditions, corporate earnings, and investor sentiment.
Impact on Inflation
Increasing liquidity in the economy drives demand but carries inflationary risks, especially if supply-side constraints persist in sectors such as food and energy. As more money flows into the market, demand may outpace supply, pushing prices higher. The RBI must strike a balance between growth and price stability through timely monetary policy actions.
When it comes to consumer spending, they initially benefit from easier access to credit, which improves purchasing power. However, if inflation rises sharply, it could reduce the real value of income and weaken consumer spending. Ultimately, the effectiveness of the RBI’s response will shape the long-term impact on inflation and economic growth.
Conclusion
While the RBI liquidity injection plan is considered a positive development, investors and other market participants will closely monitor how this measure aligns with the RBI’s broader monetary policy objectives and its implications for inflation and interest rates. Overall, the move is expected to provide short-term support to the stock market, particularly in sectors such as real estate, banking, and other financial institutions, which will directly benefit from improved liquidity.
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