NewKerala.com

RBI's OMO Puzzle: Why Rate Cuts Fail to Tame Yields, Says SBI

An SBI Research report highlights an unprecedented situation where the RBI's substantial repo rate cuts and massive liquidity injections have failed to lower bond yields, indicating asymmetric transmission. The report notes that while lower bank lending rates have made credit more attractive for corporates, money market and state development loan yields remain high. It points out the RBI's recent full prepayment of 90-day repo borrowings as an innovative but potentially volatile move not seen elsewhere. The core proposal is for the RBI to conduct Open Market Operations in highly liquid securities to effectively signal and influence the yield curve.

Key Points: RBI OMO Strategy Needs Innovation for Better Yields: SBI

  • Asymmetric transmission across markets
  • Largest OMO in monetary history
  • Corporates shifting back to bank loans
  • State loan yields remain stubbornly high
  • RBI's prepayment move is unprecedented
3 min read

RBI needs to innovate on OMO management as better signalling device: SBI report

SBI report says RBI's massive liquidity injections aren't lowering yields, calls for targeted OMOs in liquid papers as a new signalling tool.

"We propose that RBI does OMO in papers that are liquid to make a meaningful impact on yields. - SBI Research Report"

New Delhi, Jan 28

Even as the RBI has cut repo rate by 125 basis points and has proactively injected/announced Rs 6.6 lakh crore in the current fiscal as part of open market operations, yields are refusing to budge down, as such level of liquidity management has resulted in asymmetric transmission across market segments, an SBI Research report said on Wednesday.

This is unprecedented as this is the largest OMO in the history of monetary management. Factoring in the CRR injection, the buy/sell swap, the currency leakage, total liquidity injection is around Rs 5.5 lakh crore, the report mentioned.

"Firstly, the good thing. Owing to higher decline in bank lending rate commensurate to the corporate bond yield the pricing gap has narrowed down, thereby making corporates shifting back to banks for loans with bank credit now being more lucrative than market borrowing," said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The reduction in pricing arbitrage between bank loans and bond market, leading to shift towards bank loans is more visible in higher rated corporates.

Secondly, with 65 per cent of the loans benchmarked to EBLR, transmission to bank lending rates has been swift with weighted average lending rate (WALR) on fresh rupee loans declining by 62 bps in 2025 to 8.71 per cent in November 2025.

"However, monthly trends indicate increase in the money market rates since August 2025 and even in December the rates increased compared to November, though the monetary policy was eased further. When we look at the bond market, AAA Corporate bond yield for 10-year which declined till early June, started increasing after that, Ghosh explained.

The asymmetry is further stark in case of state development loans with weighted average yield of borrowing during April-December 2025 higher at 7.16 per cent (only 7 bps lower than 23 per cent in Apr-Dec 2024).

Interestingly, the decision by RBI to prepay the full amount borrowed in repo for 90 days as notified today is something not seen in any other country. It might inject some volatility, but the good thing is that RBI is introducing innovations in liquidity management and it may even result in new bidding strategies, said the report.

"We propose that RBI does OMO in papers that are liquid to make a meaningful impact on yields. For example, the current 10 year paper is 6.48 per cent 2035. The RBI can do OMO in just the preceding 10 year paper, that is 6.33 per cent 2035/immediate outgoing benchmark paper," said the report.

This will ensure yield curve signalling in the most recent liquid paper that could revive market sentiments across different segments.

"Owing to higher decline in bank lending rate commensurate to the corporate bond yield the pricing gap narrowed down, thereby making corporates shifting back to banks for loans with bank credit now being more lucrative than market borrowing due to ease of borrowing," said the report.

- IANS

Share this article:

Reader Comments

P
Priya S
As a small business owner, I just hope these "innovations" eventually lead to lower loan rates for us. The report talks about higher-rated corporates benefiting, but what about MSMEs? The transmission needs to reach the grassroots.
R
Rohit P
Rs 6.6 lakh crore! That's a staggering number. The scale of intervention is historic. The proposal to focus OMOs on the most liquid papers makes perfect sense. Clear signalling can reduce market confusion and volatility. Good analysis by SBI.
S
Sarah B
Interesting read. The prepayment of repo borrowings is indeed a unique move. While it might inject short-term volatility, such proactive steps are needed to manage expectations. Hope the new bidding strategies bring more efficiency.
V
Vikram M
The core issue is communication. The RBI needs to be a better communicator to the markets. If yields aren't budging despite such massive liquidity, the signalling is failing. The SBI report's suggestion is a step in the right direction.
K
Karthik V
With all respect to the experts, sometimes these reports feel disconnected from the common saver's reality. FD rates are falling, but inflation isn't. The transmission asymmetry hurts depositors too. Need a more balanced approach.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

Leave a Comment

Minimum 50 characters 0/50