RBI’s Government Bond Holdings Soar to Record Levels Amid Liquidity Push

The Reserve Bank of India (RBI) has recently made headlines as its holdings of government bonds have surged to unprecedented levels. The given development is driven by various liquidity measures, which have made a significant impact on the Indian economy.

Let's understand in detail how it has helped to grow the Indian economy.

Record-Breaking Bond Holdings by the RBI

By the end of March 2025, the Reserve Bank of India’s footprint in the nation’s debt market hit an all-time high—its holdings of government bonds swelled to 12.78% of every rupee the government has borrowed. Just three months earlier, in December 2024, that share stood at 10.55%, making this leap feel especially dramatic. Looking at the balance sheet of the RBI it has more than Rs 2.83 trillion between Jan and March. Meanwhile, in other words the RBI has never been this deeply invested in India's borrowing while underscoring how long it has stepped into making the markets steady.

The RBI drove this surge by actively buying up government bonds through its open market operations, then doubled down with extra purchases on the secondary market—all within the first quarter. Never before in recent memory has the central bank moved so decisively, snapping up paper at this scale to flood the system with liquidity and reassure worried investors.

The Liquidity Push: Policy Actions and Rationale

Liquidity is multifaceted according to the liquidity push of the RBI in 2025. The surprise decision was seen in June, whereby the central bank cut the benchmark repo rate by 50 basis points to 5.50 per cent and announced a 100 basis point cut in the cash reserve ratio (CRR), which was reduced to 3%. This marked the third consecutive rate cut of the year, amounting to a cumulative 100-basis-point easing since February.

These moves were complemented by large-scale OMOs. In late April, the RBI announced it would buy government bonds worth Rs1.25 lakh crore in four tranches between May and mid-May—an intervention of a magnitude not seen even during recent cash shortages. Notably, this liquidity injection came at a time when the market already had a surplus of over Rs1 lakh crore, underscoring the RBI’s proactive stance.

Why Such Aggressive Liquidity By RBI?

Several factors underpin the RBI’s actions:

• Dollar Sales and Rupee Liquidity: The RBI has sold a significant amount of dollars, which has drained Rs from the market. The purchase of bonds are seen as a way to replenish that.

• Targeting Systemic Liquidity: There appears to be a shift in the RBI’s approach, with the central bank now aiming to maintain liquidity at around 1% of net demand and time liabilities (NDTL), regardless of traditional market rate signals.

• Supporting Growth and Inflation Targets: The RBI is utilising its policy instruments to avert both price stability and healthy economic growth, as the inflation is expected to average at 3.7 percent in FY2025-26 and the GDP is estimated to grow by 6.5 percent.

Impact on Bond Yields, Banks, and Investors

Bond Market Dynamics

The RBI’s bond buying spree has had a pronounced effect on yields. The 10-year government bond yield has remained stable within a narrow 6.6%–6.8% band, supported by strong domestic demand and the central bank’s liquidity measures. The 5-year yield, at 5.86% in June 2025, offers a cushion above analysts’ year-end targets, with expectations of a further decline as short-covering and liquidity injections continue to buoy prices.

Banking Sector: State-owned banks, which participate in a large number of primary bond auctions, have been purchasing mid-term debt in significant quantities to hedge against liquidity risk through liquidity hedging strategies. The lowering of the repo rate and CRR has released more funds to lend, which could lead to lower lending rates for businesses and individuals, and will expand credit.

Investor Behaviour: The combination of rate cuts, stable inflation, and ample liquidity has created a favorable environment for Indian markets—characterised by low inflation, strong growth, and declining borrowing costs. This has triggered a rush to better positions where investors are substituting government bonds with other risky investments quite especially during uncertainties experienced in the world. The easy prices and compressed yields have further been boosted by short-covering on the part of investors who had gone short on emerging market bonds.

Strategic Shifts and Future Outlook: According to traders and analysts, RBI has changed gears intentionally. The central bank is no longer focused on reacting to spot checks of cash in the system instead it is focusing on maintaining liquidity at a preset level. It’s juggling open market operations and policy rates to make sure banks hold at least 1% of deposits as extra cash—and it plans to stick to that playbook through March 2026.

Conclusion

As the government bonds reach a record size in 2025 by the RBI, it is high time that India took a radical shift in its monetary policy. The central bank has been keen in injecting liquidity aggressively and bringing down the policy rate to illustrate its intent on supporting the growth without escalating inflation. Moving into the future, how the RBI balances between liquidity, growth and inflation will be very important. Markets will also closely watch on the next steps taken by the central bank as part of its bond holdings mature, and liquidity conditions change.