Indian government bonds gained ground early Wednesday, driven by growing trader expectations of Reserve Bank of India intervention through secondary market purchases and potential additional open market operations. The benchmark 10-year 6.48% 2035 bond yield improved to 6.6658% as of 10:12 a.m. IST, compared to Tuesday's closing level of 6.6722%.

Bond Market Performance

The following table shows the key bond market movements:

Bond yields move inversely to prices, indicating that bond prices rose as yields declined. The 10-year bond broke a four-session losing streak on Tuesday, leading to speculation that the RBI was actively buying in the secondary market to replenish stock after ₹20,000 crores of securities matured in January.

Market Dynamics and RBI Intervention

Traders are increasingly betting on RBI intervention as the central bank navigates between managing liquidity and supporting demand in a market starved of natural buyers. A private-bank trader explained the central bank's challenging position: "The RBI is constantly making a trade off between liquidity and intervention as both the rupee and bonds need central bank support to stay afloat. So, they will have to continue open market purchases."

Investor activity data from the clearing house revealed significant institutional buying:

Scheduled RBI Operations

The RBI has scheduled bond purchases worth ₹50,000 crores on Thursday, representing the final tranche of four under its current buying schedule. Market participants are hoping the central bank will announce another round of open market operations to maintain support for the bond market.

Interest Rate Movements

India's overnight index swap rates showed mixed movements, with some receiving activity at the short-end driven by hopes of liquidity support:

Global Pressures

U.S. Treasury yields have remained elevated as investors react to turbulence in Japanese bonds and President Donald Trump's trade tensions with Europe, which continue to add pressure on Indian debt and the rupee. These global factors are contributing to the challenging environment that necessitates RBI support for domestic bond markets.

The current exchange rate stands at $1 = ₹91.0460, reflecting the broader pressures on Indian financial markets amid global uncertainties.

The Reserve Bank of India has introduced stringent compliance measures for priority sector lending (PSL), requiring all intermediary lenders to provide external auditor certificates to prevent multiple banks from claiming the same loan under priority sector categories. The enhanced framework targets microfinance institutions, non-bank finance companies, and housing finance companies as key intermediaries in the lending chain.

Regulatory Response to Compliance Issues

The revised framework follows recent regulatory action against major banks including ICICI Bank and HDFC Bank for over-classification of agricultural loans under priority sector lending. These institutions had categorized loans as agricultural priority sector lending even when the funds were utilized for non-farm purposes, prompting the central bank to strengthen oversight mechanisms.

New Certification Requirements

Under the updated norms, all scheduled banks must obtain external auditor certificates from their intermediary partners. The certification process covers three key categories of financial institutions:

The Reserve Bank has emphasized that banks must establish robust internal systems and controls to monitor the end-use of funds categorized under priority sector lending. This includes ensuring that loans are utilized only for approved purposes as defined under PSL guidelines.

Lending Limits and Categories

The existing framework for priority sector lending through intermediaries remains unchanged, with specific limits maintained for different categories:

These limits are calculated based on individual bank's total priority sector lending from the previous financial year. Bank loans to NBFC-MFIs specifically target individuals and members of self-help groups and joint liability groups engaged in farming and small business activities.

Enhanced Monitoring Framework

The central bank has expanded the scope of priority sector lending to include bank credit extended to the National Cooperative Development Corporation (NCDC) for on-lending to cooperative societies. This addition broadens the reach of priority sector benefits while maintaining strict compliance standards.

Compliance monitoring will be conducted on a calendar quarter basis, allowing for more frequent assessment of bank adherence to the revised norms. The RBI stated that the primary objective of these enhanced compliance measures is to ensure continuous and legitimate flow of credit to priority sectors of the economy.

Implementation and Oversight

The strengthened framework represents a significant shift toward more rigorous oversight of priority sector lending practices. Banks are now required to implement comprehensive verification processes before claiming priority sector benefits for loans extended through intermediary channels. The quarterly monitoring system will enable the Reserve Bank to identify and address compliance issues more promptly, ensuring that priority sector lending serves its intended purpose of supporting critical economic segments.