The Indian financial landscape is undergoing significant shifts, with surplus banking liquidity emerging as a key factor influencing the yield curve. According to a recent analysis , FY25 witnessed wide swings in liquidity—from neutral to deficit to a notable surplus—largely driven by the Reserve Bank of India’s (RBI) dynamic policy tools and interventions.
The RBI injected over ₹10 trillion into the system since December 2024, moving the banking system from a liquidity deficit of ₹3 trillion to a surplus of ₹1.25 trillion by March 2025. This intervention was aimed at supporting weak GDP growth, ensuring monetary transmission, and neutralizing forex-related liquidity pressures.
Looking ahead, the RBI is expected to distribute a record dividend exceeding ₹2.5 trillion, potentially raising banking and core liquidity above ₹6 trillion. The analysis suggests that sustained liquidity above 1% of Net Demand and Time Liabilities (NDTL), alongside muted credit growth, will likely lead to a steepening of the yield curve. This environment historically favors short-duration corporate bonds, offering strong risk-reward potential.
Despite a cumulative 50 bps rate cut so far, the effective monetary easing has been closer to 100 bps due to the shift from the Marginal Standing Facility to the Standing Deposit Facility rate, reflecting easier financial conditions.
Market experts concludes that unless significant forex outflows emerge, further RBI interventions via Open Market Operations are expected to be minimal. The outlook supports a rally in short-end fixed income securities while long-duration government bonds may see limited gains.
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