• RBI to hold talks with banks and primary dealers over tightening liquidity.
• Recent G-Sec auction of Rs 11,000 crore was cancelled, impacting yields.
• Bond yields have been volatile due to fluctuating banking liquidity.

The Reserve Bank of India (RBI) has called a meeting with select banks and primary dealers to discuss growing concerns over liquidity tightening in the bond market, sources told Reuters. The meeting comes just days after the central bank canceled an auction of Rs 11,000 crore worth of seven-year government securities, which led to a seven-basis-point drop in benchmark bond yields.

According to traders familiar with the matter, the meeting does not have a fixed agenda but is likely to address the ongoing volatility in the bond market. The recent cancellation of the government securities auction has sparked speculation that the RBI is uneasy about current yield levels.

Market conditions have shifted rapidly, leading to uncertainty. “The bullish sentiment we saw earlier fizzled out faster than expected, and that likely triggered the RBI’s auction move”, one trader noted, requesting anonymity.

Over the past two weeks, liquidity in the banking system has swung between surplus and deficit, creating instability in bond trading. Analysts believe the RBI is making efforts to bring yields down, including adjusting auction plans and advising states to limit borrowing.

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RBI Governor Sanjay Malhotra recently hinted at potential measures to support lower yields, such as reworking auction tenors and borrowing strategies.

As the RBI engages with market players, investors continue to watch for signs of further interventions to stabilize liquidity and restore confidence in the bond market.