RBI Needs New OMO Strategies to Signal Market Clearly: SBI Report

New Delhi: The Reserve Bank of India (RBI) has cut the repo rate by 1.25 percent and infused nearly ₹6.6 lakh crore liquidity into the market through Open Market Operations (OMO) involving government bond purchases and sales during the current financial year. Despite this, interest rates on government bonds and other investment instruments have not declined significantly, according to a report by SBI Research released on Wednesday.

The SBI report highlights an uneven impact of this liquidity injection across different market segments, a phenomenon termed as ‘asymmetric transmission’. While some areas have experienced greater benefits, others show limited effects.

This operation marks the largest-ever OMO in the history of India’s monetary policy. When cash infused through the Cash Reserve Ratio (CRR), buy-sell swaps, and currency leakages are included, the total liquidity injected into the market is estimated at around ₹5.5 lakh crore.

Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India, noted that a positive development is the significant reduction in bank lending rates and a narrowing gap between corporate bond yields and bank lending rates. This has made borrowing from banks more attractive for companies compared to raising funds from the market.

This shift is particularly noticeable among large companies with strong credit ratings.

The report also mentions that approximately 65 percent of bank loans are linked to external benchmark lending rates (EBLR), which has allowed the RBI’s rate cuts to quickly reflect in bank lending rates. Consequently, the average lending rate on new rupee loans fell by 62 basis points to 8.71 percent in November 2025.

However, since August 2025, interest rates in the money market have increased. December also saw higher interest rates compared to November, despite the monetary policy being eased during that period.

Regarding the bond market, the yield on 10-year AAA corporate bonds, which had declined till early June, started rising thereafter. The disparity is even more evident in State Development Loans (SDLs), where the average interest rate from April to December 2025 was 7.16 percent, only marginally 0.07 percent lower than the previous year.

The report points out that the RBI’s decision to prepay its 90-day repo borrowing ahead of schedule is unprecedented globally. While this may cause some market volatility, it also indicates RBI’s experimentation with liquidity management, potentially leading to new bidding strategies in the market.

SBI’s report recommends that RBI should conduct OMOs primarily in bonds with higher trading volumes. This approach would provide clearer signals to the market on interest rates and boost investor confidence across various sectors.

The report reiterates the narrowing difference between bank lending rates and corporate bond yields, making bank loans more accessible and cost-effective for companies compared to market borrowing.