Is RBI Set to Conduct More OMOs in Q1 CY26 While Pausing Rate Cuts?
Click to start listening
Synopsis
Discover the latest insights on the Reserve Bank of India's potential open market operations in early 2026. This analysis reveals how the RBI plans to maintain liquidity amidst changing market conditions, offering investors strategies to navigate the evolving financial landscape.
Key Takeaways
- The RBI is likely to conduct more open market operations in early 2026.
- Maintaining liquidity levels is crucial for market stability.
- Investors should consider a barbell strategy for optimal returns.
- The yield curve is expected to flatten, impacting bond yields.
- Corporate bonds may offer attractive yields in the coming year.
In New Delhi on December 30, NationPress reports that the Reserve Bank of India (RBI) is expected to conduct additional open market operations during February and March to ensure a consistent liquidity flow.
An analysis from Axis Mutual Fund indicates that the RBI aims to sustain liquidity levels around 1.25% to 1.75% of net demand and time liabilities, even though the peak of surplus liquidity for Indian markets has passed.
After the rate cut in December 2025, the RBI is anticipated to maintain a prolonged pause, keeping interest rates lower for an extended period in light of a favorable macroeconomic backdrop.
The fund house noted that liquidity remained in surplus starting April 2025 due to the RBI injecting ₹12 trillion through OMOs and reductions in the cash reserve ratio. December's policy measures are also expected to ensure positive liquidity through March 2026.
A stable interest rate environment, ongoing liquidity normalization, and the potential inclusion of Fully Accessible Route government bonds in the Bloomberg Global Aggregate Index are likely to result in a flatter yield curve in 2026, according to the report.
"As the curve-flattening trend gains momentum, we foresee long bonds yielding 7.25% to 7.40% to offer substantial protection in the current landscape," it added.
The fund house advocates a barbell strategy that combines short-tenor bonds for liquidity with long-duration government bonds for tactical gains, providing both steady earnings and potential upside.
Additionally, the preferred strategy includes investing in two-year AA corporate bonds for accrual and long-term government bonds for duration.
Another recent analysis from HSBC Mutual Fund predicts that the 2-3 year corporate bonds and the 7-12 year segment in Indian Government Bonds (IGBs) will likely deliver attractive yields in 2026.
The anticipated open market operations may positively affect the demand-supply dynamics for central government securities, as noted by the fund house.
Point of View
The Reserve Bank of India's forthcoming actions reflect its commitment to maintaining market stability. The potential for further open market operations highlights the RBI's proactive approach in navigating economic challenges, ensuring liquidity is sustained while balancing interest rates.
NationPress
02/01/2026
Frequently Asked Questions
What are open market operations?
Open market operations (OMOs) refer to the buying and selling of government securities by the central bank to regulate money supply and influence interest rates.
How does RBI's liquidity management affect the economy?
RBI's liquidity management impacts borrowing costs, investment decisions, and overall economic activity, influencing inflation and growth.
Why is the yield curve flattening significant?
A flattening yield curve suggests that the difference between short-term and long-term interest rates is decreasing, which can indicate changing economic expectations.
What investment strategies are recommended in this environment?
Investors may consider a barbell strategy combining short-tenor bonds for liquidity and long-duration bonds for potential gains.
What are the expected yields in corporate and government bonds for 2026?
Analyses suggest that 2-3 year corporate bonds and 7-12 year Indian government bonds may offer attractive yields in 2026.
