The Reserve Bank of India successfully completed its fourth open market operation since the December 2025 monetary policy meeting, injecting ₹50,000 crore into the financial system while rejecting all bids for a specific long-term bond paper. The central bank accepted the full notified amount across other securities but declined all offers for the 8.30% 2040 paper due to pricing concerns.

OMO Results and Market Response

The RBI received overwhelming response from market participants, with total bids worth ₹1.32 lakh crore across all securities offered in the auction. However, banks participating in the operation likely bid higher than the prevailing market price for the 2040 paper, leading to complete rejection of those bids by the central bank.

"In all papers that were illiquid, bank books would have been in profit. So, they (banks) likely sold them and booked these profits. These securities were sold at a 15-20 paise discount to market prices," explained Gopal Tripathi, head of treasury at Jana Small Finance Bank.

Security-wise Performance

The auction results showed varied demand across different maturity papers, with the 7.40% 2035 security emerging as the most sought-after instrument:

Upcoming Market Operations

The RBI has announced a series of additional market operations scheduled for January 2025. Two more open market operations of ₹50,000 crore each are planned for January 12 and January 22, indicating the central bank's continued focus on liquidity management.

Additionally, a significant USD/INR buy/sell swap auction worth $10 billion is scheduled for January 13, which will provide market participants with foreign exchange liquidity options. These operations reflect the RBI's systematic approach to managing both rupee and dollar liquidity in the financial system.

Market Implications

The rejection of bids for the 2040 paper highlights the central bank's disciplined approach to pricing, ensuring that securities are purchased only at appropriate market levels. Banks' willingness to bid above market prices suggests strong liquidity positions and profit-booking opportunities in illiquid securities. The successful completion of the ₹50,000 crore target demonstrates robust market participation and adequate liquidity absorption capacity in the banking system.

The Reserve Bank of India has announced comprehensive changes to credit risk management rules for commercial banks, introducing stricter controls on related-party lending and enhanced governance frameworks. The new regulations, which take effect on April 1, 2026, represent a significant overhaul of existing lending practices and aim to strengthen the banking sector's risk management capabilities.

Key Prohibitions and Restrictions

The revised norms establish clear prohibitions on lending to specific categories of related parties. Banks are now barred from providing loans to their promoters, relatives of promoters, and shareholders holding 10% or more equity stake. The restrictions also extend to entities controlled or influenced by these parties, with exceptions only for non-strategic institutional holdings without control rights.

Governance and Approval Framework

The new regulations mandate banks to implement robust governance structures for managing related-party transactions. All banks must adopt board-approved policies covering lending to related parties and establish aggregate and sub-limits for such exposures. The framework includes mandatory recusal requirements for directors, key managerial personnel, and specified employees from decisions involving their own interests or those of related parties.

Loan approval thresholds are structured based on bank size, ensuring appropriate oversight for material transactions:

Monitoring and Compliance Requirements

Banks must establish comprehensive monitoring mechanisms to ensure ongoing compliance with the new regulations. Key requirements include maintaining updated lists of related parties, conducting quarterly compliance reviews, and reporting any deviations to audit committees. Annual disclosure of loans to specified employees is also mandatory under the new framework.

The regulations incorporate whistleblower mechanisms to flag irregular or unethical loans, strengthening internal controls and promoting transparency in lending decisions. Listed banks face additional compliance obligations under capital markets regulator SEBI's disclosure rules and RBI's intra-group exposure limits.

Treatment of Existing Transactions

The RBI has provided clarity on the treatment of existing related-party transactions that may not comply with the revised norms. These transactions can continue until maturity but face restrictions on renewal, repricing, or enhancement unless they meet the new requirements. The central bank stated that existing non-compliant transactions are permitted to continue until there is any enhancement, renewal, re-pricing, or change in terms and conditions.

Scope and Definitions

The regulator has modified the definition of related parties, removing the previous ₹5.00 crore monetary threshold for shareholding considerations. Nominee directors of other banks appointed by statutory bodies are excluded from related-party definitions, while restrictions remain on RBI's own nominee and independent directors. Notably, equity investments fall outside the scope of these new directions, though investments in debt instruments of related parties remain covered.

Enforcement and Penalties

Non-compliance with the new regulations will attract significant enforcement actions from the RBI. Potential penalties include monetary sanctions, additional provisioning requirements, forensic audits, and business restrictions. The central bank has emphasized that circumvention attempts will also face similar enforcement measures, underscoring the seriousness of compliance expectations.