Despite the Reserve Bank of India’s largest-ever liquidity infusion and a cumulative 125 basis point cut in the repo rate during the current fiscal, bond yields have remained stubbornly high, highlighting growing asymmetry in monetary policy transmission across market segments, according to an SBI Research report.
The report notes that the RBI has injected or announced liquidity of around Rs 6.6 lakh crore through open market operations (OMOs) in FY26. When adjusted for cash reserve ratio (CRR) injections, buy-sell swaps and currency leakages, the net liquidity injection stands at around Rs 5.5 lakh crore. This marks the most aggressive liquidity management effort in India’s monetary history. Yet, unlike past cycles, the surge in liquidity has not translated into a commensurate decline in yields, especially in the government securities and state development loan markets.
SBI Research describes this outcome as unprecedented, arguing that the sheer scale of liquidity support should have exerted downward pressure on yields. Instead, yields have remained elevated, resulting in uneven transmission across bank lending rates, money market instruments and bond markets.
The report highlights that one positive outcome of the liquidity push has been the narrowing of the pricing gap between bank loans and corporate bond yields. As bank lending rates have declined faster than bond yields, corporates, particularly highly rated borrowers, have increasingly shifted back to bank credit. The spread between the ten-year AAA corporate bond yield and the weighted average lending rate declined from 200 basis points in April 2024 to 150 basis points by November 2025, making bank loans more attractive than market borrowings.
Transmission to bank lending rates has been relatively swift, aided by the fact that around 65 per cent of outstanding floating-rate rupee loans are now benchmarked to external benchmarks such as the EBLR. The weighted average lending rate on fresh rupee loans declined by 62 basis points in 2025 to 8.71 per cent by November 2025.
However, the picture is markedly different in the money and bond markets.
Bond Yields And State Borrowings Remain Elevated
Money market rates initially softened but have shown an upward bias since August 2025, even as monetary policy eased further. Commercial paper weighted average yields declined sharply earlier in the year but rose sequentially towards the end of 2025. Similarly, ten-year AAA corporate bond yields, which fell until early June, have since moved higher, indicating rising risk premia.
The asymmetry is most pronounced in state borrowings. The weighted average yield on state development loans during April to December 2025 stood at 7.16 per cent, only marginally lower than the previous year, despite the historically large liquidity support. SBI Research notes that this is concerning, especially as the RBI acts as the debt manager for both the Centre and states in the absence of an independent public debt management agency.
The report argues that yield curve management should be treated as a public good, as recognised by the RBI in the past, and that current OMO operations may not be delivering effective signalling to the market.
Call For Innovation In OMO Strategy
SBI Research has called for a rethink of the RBI’s OMO strategy, suggesting that interventions should focus on the most liquid benchmark securities to improve yield signalling. It proposes that the RBI conduct OMOs in the outgoing benchmark ten-year paper rather than less liquid securities, which could help reduce term premia and revive market sentiment across segments.
The report also flags the RBI’s recent move to prepay the full amount borrowed under 90-day repo operations as an unconventional step that could introduce short-term volatility but may signal a willingness to innovate in liquidity management.
Separately, SBI Research draws attention to the rising share of gold in central bank reserves globally, likening the trend to patterns seen in the 1960s and 1970s. With gold prices on a strong upward trajectory, the report suggests this shift reflects deeper structural changes in global reserve management amid heightened uncertainty.
Overall, while liquidity conditions have supported a revival in credit growth and eased borrowing for select segments, SBI Research cautions that without more effective yield management, elevated borrowing costs and uneven transmission could continue to weigh on the broader financial system. |
