The Reserve Bank of India (RBI) has been making bold moves in 2025, but its recent decision to buy government bonds worth ₹1.25 lakh crore in May has sparked a bigger question in financial circles: Is the central bank engineering a stealth rate cut without actually changing the policy repo rate?
Let’s break it down.
Injecting Liquidity Without Cutting Rates
When a central bank buys bonds in the secondary market, it pays cash to the sellers (usually banks), injecting liquidity into the banking system. With more liquidity in the system, the cost of overnight borrowing between banks comes down. That’s exactly what the RBI seems to be targeting.
Currently, the RBI’s policy repo rate stands at 6.00%. But due to the ongoing bond buying program, the effective cost of overnight funds in the interbank market has dropped significantly. As of April 29, the weighted average call money rate was 5.93%, and analysts expect it to fall further to the Standing Deposit Facility (SDF) rate of 5.75%.
In simpler terms, the RBI is keeping borrowing costs lower through liquidity, even though the headline policy rate remains unchanged. Many analysts call this a “de facto” rate cut.
RBI Governor’s Liquidity Strategy
Under Governor Sanjay Malhotra, who assumed office in December 2024, the RBI has aggressively pumped liquidity into the banking system. Here’s a snapshot of the liquidity infusion so far:
- ₹2.83 lakh crore in January-March 2025
- ₹1.20 lakh crore in April 2025
- ₹1.25 lakh crore planned for May 2025
This adds up to nearly ₹5.28 lakh crore in just five months. The Governor had previously stated that the RBI aims to maintain a liquidity surplus of around 1% of total bank deposits, translating to approximately ₹2.30-₹2.50 lakh crore in durable liquidity.
Market Reaction
The bond market reacted swiftly to the latest announcement. The yield on the 10-year benchmark government bond, which had touched 6.40% a day prior, fell to 6.32% after the May bond purchase plan was revealed. Lower yields reflect market expectations of softer borrowing costs in the near term.
Why This Strategy Matters
There have already been two policy rate cuts in 2025, but their transmission to the broader economy has been slower than expected. By increasing liquidity through bond purchases, the RBI is ensuring that these rate cuts reach the real economy faster. Cheaper interbank borrowing means lower lending rates for businesses and consumers, boosting credit and economic activity.
This approach also provides the central bank flexibility. Instead of committing to more formal rate cuts (which could stoke inflation or spook foreign investors), the RBI can subtly influence short-term rates and maintain broader macroeconomic stability.
Here’s a quick look at the liquidity tools deployed by the RBI since January 2025:
| Tool | Month | Amount (in billion ₹) |
|---|---|---|
| Secondary Market Bond Buys | Jan | 388.25 |
| OMO (Open Market Operations) | Jan | 200.2 |
| 6-month FX Swap | Feb | 445 |
| OMO | Feb | 800 |
| OMO | Mar | 1445.41 |
| 3-year FX Swap | Mar | 1735 (870+865) |
| OMO | Apr | 1200 |
| Planned OMO | May | 1250 |
This shows a consistent and strategic effort to maintain surplus liquidity using a mix of bond purchases and forex swaps.
Conclusion
The RBI is clearly walking a fine line. On one hand, it is not overtly loosening policy through explicit repo rate cuts. On the other, it is delivering the same effect through targeted bond buying and liquidity infusions.
This hybrid approach allows the RBI to stimulate credit growth and economic momentum without sending overtly dovish signals to global markets.
Analysts believe that if inflation stays under control and external conditions remain stable, this strategy could work well in rebooting India’s economic engine.
So yes, RBI’s big bond buy does look like a secret rate cut. And markets are already acting like it is one.
Disclaimer: This article is for informational purposes only and should not be considered as investment advice.
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