The Reserve Bank of India (RBI) is set to meet select primary dealers and banks on Tuesday to discuss current market conditions, three traders told Reuters. The move comes amid concerns that tightening liquidity in the banking system is putting pressure on the government bond market. While the meeting does not have a formal agenda, it is expected to focus on prevailing yield levels and broader market trends, the traders said, speaking anonymously as they were not authorized to comment publicly.
The concern follows Friday’s unexpected cancellation of a 110 billion rupee ($1.25 billion) auction of seven-year government securities, which triggered a seven-basis-point drop in the benchmark bond yield. “Things have changed sharply within a few days, and what we had thought would be a continued bull-run turned out to be a short-lived phenomenon, which must be worrying for them and could have led to Friday’s auction cancellation,” one trader said.
Traders indicated that the RBI may be troubled by current yield levels. Banking system liquidity has fluctuated between surplus and deficit over the past two weeks, creating volatility in the bond market. “The RBI definitely feels yields should be lower than what they currently are, and they had also taken steps like tweaking the supply calendar and convincing states to borrow less,” a second source told Reuters.
RBI Governor Sanjay Malhotra previously noted that there is room for bond yields to decline. “A number of measures have been contemplated in this regard, including how the primary G-Sec auctions will be held. The tenor of these government offerings, not only central government but also state government,” he said last month, highlighting the central bank’s active monitoring of market dynamics.
The developments signal that India’s central bank is closely managing liquidity and government bond issuance to stabilize yields, as volatility continues to challenge both policymakers and market participants.
