The Reserve Bank of India’s (RBI) balance sheet shows that the amount of government paper (including treasury bills) held as on 28 February was ₹21.34 trillion. It was ₹15.58 trillion in March 2025.
With RBI’s recently announced open market operations (OMOs), which will probably continue this month, the amount will only increase. The increase so far of ₹5.76 trillion in RBI holdings of government paper is remarkable. An increase of this scale has never been witnessed earlier. Is there an explanation?
Through OMOs, RBI is buying securities from banks to help augment their liquidity. This is usually carried out when liquidity is under pressure, which has been the case this year for a various reasons.
First, growth in bank deposits has been weak due to a migration of funds to mutual funds. Second, growth in credit has been faster. Further, RBI has been selling dollars in the market at various moments to stabilize the rupee.
This sucks out domestic liquidity, which is then replenished through the purchase of government paper. Note that the rupee weakened by about 7% from 85.60 against the dollar on 2 April 2025 to 91.68 on 6 March 2026.
RBI holdings of government paper have increased; this is tantamount to deficit monetization. But income on securities adds to its surplus, which is transferred to the Centre. Can this surplus be used for loans to private infra projects?
The history of RBI involvement in supporting budgets is quite interesting.
Starting from automatic monetization, under which 4.6% of treasury bills were once issued by the government to RBI for funding the deficit, the system has come a long way. There was also private placement of central debt with RBI during liquidity stress; RBI subsequently sold these holdings in the market once conditions improved.
In the late 90s, we shifted to the market becoming the sole point of contact for the government, with primary dealers introduced to underwrite government issuances and ensure full subscription. However, with frequent OMOs in recent times, there has been a tendency for that debt to be transferred to RBI and held by it.
The central bank’s holdings of central government paper stood at 13.5% of such debt last September, up from 11.2% a year earlier. These holdings tend to increase when RBI intervenes more in foreign exchange and bond markets. In a way, this is the cost of central bank intervention. Larger holdings also increase RBI’s income, in turn contributing to the annual surpluses it earns.
This brings RBI surpluses into the frame. These have risen remarkably from ₹50,000 crore in 2017-18 to ₹2.69 trillion in 2025-26. This was after recommendations made by the Bimal Jalan panel were adopted. In the last seven years, RBI’s surplus has averaged ₹1.32 trillion and ₹2.4 trillion in the last two.
The interesting thing here is that if this transfer of ₹2.69 trillion, which is part of the non-tax revenue of the government, is seen together with RBI’s net incremental holdings of government paper, the sum of ₹8.45 trillion is equivalent to 54% of the fiscal deficit for 2025-26. This is fairly strong support by RBI to contain disruptions in the bond market. In the absence of such interventions, the Indian bond market would have been under tremendous pressure and yields would have hardened.
The 10-year government bond yield has been fairly stable in the 6.60% range thanks to aggressive OMO support. Without it, the Centre’s borrowing programme would have been a challenge to fulfil, especially at a time when commercial credit has steadily been picking up. RBI’s repo rate was lowered to 5.25% last year, but there has been limited movement after its rather aggressive rate cut last June, followed by a 25- basis-point cut in December.
The low repo rate has led to a situation in which banks have not been able to mobilize deposits from their retail customers. Banks have taken recourse to the market for certificates of deposit and bulk deposits, which cost more.
Relatively high 10-year bond yields alongside OMOs indicate that interest rates cannot be reduced any further. The government’s net borrowing programme has been pegged at ₹11.7 trillion in 2026-27, around the same as in 2025-26. With the economy likely to grow by over 7% in 2026-27, notwithstanding war effects, growth in credit could be in the 12-14% range.
Much will depend on how the stock market performs, as this will influence investment choices by households. In 2024-25 and 2025-26, they showed a proclivity to capital market avenues. If this sustains, RBI’s OMOs may again be significant.
Surpluses of RBI support the budget but could also be transferred to a separate fund that can be used specifically for financing infrastructure development. The money can also be used by the government for lending to private enterprise through public financial institutions like public sector banks. This will widen the fiscal deficit but aid private investment, which has been lagging.
The interest on such loans can flow back to the government as revenue in future years. It will effectively hand the baton over to private players for infrastructure investment while the government fine-tunes its own efforts in this area.
These are the author’s personal views.
The author is chief economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’