India bonds rally most in 4 months on RBI's ‘shock-and-awe’ cash-injection plan

By Admin

25 Dec, 2025

Introduction
Indian government bonds recorded their strongest rally in four months after the Reserve Bank of India (RBI) announced an aggressive liquidity infusion plan aimed at easing tight banking-system conditions. The central bank’s decisive move lifted market sentiment and pushed bond yields sharply lower, offering relief after weeks of pressure on the debt market.

RBI’s Liquidity Boost Measures
The RBI announced that it will purchase ₹2 lakh crore (2 trillion rupees) worth of government bonds in four tranches spread across December and January. In addition to bond purchases, the central bank will also conduct a $10 billion foreign-exchange swap next month. These measures are designed to inject substantial liquidity into the banking system at a time when conditions have tightened significantly.

Immediate Market Reaction
Following the announcement on Tuesday evening, Indian bonds rallied strongly on Wednesday. The benchmark 10-year government bond yield fell by as much as eight basis points to 6.56%, marking its biggest single-day decline since August 14. Market participants described the move as a clear “shock-and-awe” strategy by the RBI to reverse negative sentiment.

According to Dhawal Dalal, Chief Investment Officer for Fixed Income at Edelweiss Asset Management, the scale of the announcement was meant to decisively influence market psychology. Analysts and traders at institutions such as RBL Bank Ltd. and ICICI Securities Primary Dealership Ltd. now see room for the 10-year yield to drift towards 6.50% in the near term.

Why the RBI Stepped In
The planned liquidity infusion is double the amount announced earlier this month. It is expected to offset the cash drain caused by the RBI’s dollar sales, which were undertaken to support the rupee, currently Asia’s worst-performing currency this year. Earlier this week, the benchmark yield had climbed to a nine-month high, intensifying concerns over borrowing costs.

Liquidity conditions deteriorated sharply due to tax outflows and sustained dollar sales by the RBI. Banking-system liquidity slipped into a deficit of ₹727 billion on December 22, compared to a surplus of ₹2.6 trillion earlier in the month, highlighting the urgency for intervention.

Supporting Economic Stability
The latest measures add to the RBI’s broader efforts to keep borrowing costs stable and support economic growth, especially at a time when global uncertainties, including punitive US tariffs, pose risks to India’s outlook. Rising overnight borrowing costs for lenders had signaled stress in the money markets, making liquidity support crucial.

Additional Factors Supporting the Rally
Wednesday’s bond rally also came after a challenging period marked by worries over a potential surge in state government debt supply. Further support came from data released after Tuesday’s trading session, showing that a category of market participants, including the RBI, purchased ₹47.4 billion worth of government notes   the highest since November 11.

Conclusion
The RBI’s bold liquidity injection has delivered a strong signal to markets, easing fears of prolonged tightness and restoring confidence in Indian bonds. With yields retreating from recent highs and liquidity conditions set to improve, the central bank’s “shock-and-awe” approach may help stabilize borrowing costs and support economic momentum in the months ahead.