Yields on Indian government bonds rose on Tuesday after the Reserve Bank of India (RBI) shortened the deadline for its government securities acquisition program (G-SAP) swap.
The RBI, which had previously set a June 30 deadline for the swap program, announced it would now close the facility on May 31, a move aimed at accelerating liquidity absorption in the banking system. The decision came as part of the central bank’s broader efforts to manage excess liquidity amid strong capital inflows.
The 10-year benchmark bond yield, a key gauge of borrowing costs, climbed to 7.25% from 7.18% prior to the announcement, reflecting investor concerns over reduced liquidity support. Shorter-term yields also edged higher, with the two-year bond yield rising to 6.80% from 6.72%.
Market participants noted that the RBI’s decision to front-load the swap deadline could tighten liquidity conditions sooner than expected, prompting a reassessment of bond valuations. Banks and financial institutions, which had been relying on the swap program for liquidity management, now face a tighter timeline to adjust their strategies.
The RBI has been using the G-SAP swap to absorb surplus liquidity from the banking system, a tool it introduced in April 2021 to support bond markets and manage yields. The program allows the central bank to swap government securities held by banks for cash, thereby reducing excess liquidity.
Analysts said the move could signal a shift toward more conventional liquidity tools, such as variable rate reverse repo auctions, as the RBI seeks to normalize its operations. The central bank has maintained a accommodative stance but has gradually been withdrawing pandemic-era support measures.
The rise in bond yields follows recent volatility in global markets, where concerns over inflation and monetary policy tightening have weighed on investor sentiment. Domestic factors, including India’s fiscal position and inflation outlook, also contributed to the upward pressure on yields.
The RBI did not immediately respond to requests for further clarification on the decision.
