Remember the days when you waited for Saturday newspapers just to read movie reviews? For me, they worked. A handful of critics, a standard yardstick, and more often than not, my experience matched the verdict. Today, anyone with a camera, a mic, and the internet reviews movies, resulting in more noise and confusion.
Banking liquidity in India resembles a movie today. Ask a few economists or bankers about it, and you're likely to walk away unsure whether the current surplus liquidity is sufficient or not.
On paper, the system looks comfortable. But the discomfort is still there.
What's Happening to Bond Yields?
Over the past year, RBI has cut repo rates by 125 basis points. Shorter tenor bond yields and banks' lending and deposit rates have eased as expected. However, longer tenor government bond yields have, instead, slightly moved up compared to the last year. It's tempting to read this as a liquidity problem-but that misses the point.
Long-term bond yields are driven less by today's liquidity alone and more by tomorrow's expectations. Elevated global bond yields, expectations that inflation may rise from current lows, and a large central and state government borrowing programme lined up for the next fiscal year are pulling the yields higher. Unfortunately, they are reacting to factors that liquidity alone cannot resolve.
In my previous article on government bond yields, I explained it in detail.
What's With The Liquidity?
As of Feb. 5, system liquidity was in a surplus of about Rs. 2.12 lakh crore, after weeks of volatility through December and January. In December, we also saw it going into deficit because of advance tax and GST payments.
At the same time, foreign investors have been pulling money out of India, pressurising the rupee. To stabilise the rupee and contain the volatility, the RBI has been selling dollars, which, in turn, hurts liquidity. Therefore, the RBI neutralised this through OMOs, variable-rate repos, and buy-sell swaps.
What stands out is the scale of intervention. According to SBI Research, the RBI has injected or announced roughly Rs. 6.6 lakh crore of liquidity in FY26 through various instruments - an unprecedented figure in India's monetary history.
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Two Camps On Liquidity
And this is where we see people debating.
One camp argues that liquidity conditions are broadly comfortable or at least moving in that direction. They point out that the surplus is nearly at the RBI's target level of 1% of net demand and time liabilities (NDTL), and year-ending government spending should add even more. They also expect that new trade deals will ease pressure on the rupee and bring back foreign investment, so the RBI won't need to act much. After all, with all the recent easing and big liquidity boosts, a wait-and-watch approach makes more sense than flooding the system with more liquidity.
The other side-mostly bankers-sees it very differently. They have recently asked the RBI for relief by seeking a delay in tighter liquidity coverage (LCR) norms, more flexibility to shift bonds out of held-to-maturity portfolios, and permission to count a part of the cash reserve ratio (CRR) as liquid assets. Together, these steps would have made it easier for banks to manage funds without the RBI having to inject additional liquidity. But none of these requests made it into the latest policy update. That also means that the RBI doesn't think the situation is bad enough to intervene.
OMO Asymmetry And A Smart Way Out
Beyond disagreement on whether liquidity is enough, there is also disagreement in how banks behave.
SBI Research points out that since January 2025, banks have moved in the same direction in the government bond market only a few times. Most months, one group of banks buys while another sells, cancelling out the impact of liquidity injections and keeping yields firm.
There is also a more technical issue. RBI's OMOs have largely focused on illiquid, off-the-run bonds instead of benchmark securities. While this adds liquidity, it does little to guide market expectations.
SBI's suggestion is simple: conduct OMOs in liquid benchmark bonds. That would send a clearer signal. Without this, even large liquidity injections struggle to change how markets think about yields.
Final Take
Despite adding record liquidity this year, long-term bond yields stay elevated due to factors beyond the RBI's direct control. By pausing rate cuts and avoiding new liquidity steps, the central bank acknowledges the situation's complexity. However, what the RBI has made clear, though, is that liquidity tools remain available and will be used if conditions demand it.
Much like movie reviews, we all watched the same policy unfold, but everyone - economists, bankers, bond markets and journalists - seems to be walking away with a different verdict.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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