India’s central bank is on a liquidity spree. In early June 2025 the Reserve Bank of India (RBI) cut its policy rate by 50 bps to 5.50% and announced a 100 bps cut in the Cash Reserve Ratio, unleashing more cash into the banking system. At the same time, RBI rolled out new tools like STRIPS (Separate Trading of Registered Interest and Principal Securities) to deepen markets. STRIPS let banks convert fixed-coupon bonds into zero-coupon parts. For example, RBI now permits eligible state government securities up to 14 years to be “stripped” into individual principal and interest bonds. Banks can still count these STRIPS towards their SLR requirements, but with more flexibility: they remove reinvestment risk and help match liability durations. In short, STRIPS add liquidity to bond portfolios by making trading easier and helping banks manage rate risk.
On the other side of the balance sheet, banks are plowing more into non-SLR investments (assets outside government bonds) to chase higher yields. In FY2024-25, Indian banks’ non-SLR holdings jumped about 15% (vs. 10% in SLR bonds). These non-SLR assets include corporate bonds, stocks and mutual funds, which typically yield roughly 100 bps more than sovereign securities. The appetite for non-SLR suggests banks have excess funds and are reaching beyond government debt. It also reflects RBI’s easy policy: with CRR slashed to 3% and surplus liquidity of ~Rs 2.5 lakh crore in the system, banks can take on more credit risk or diversify their portfolios.
• What is STRIPS? It’s a mechanism to chop a bond’s cash flows into pieces. Each coupon and the principal become zero-coupon securities that trade separately. This means a 10-year bond can split into multiple shorter-dated paper, making them easier to trade and match with liabilities.
• RBI’s STRIPS move: For the first time ever, RBI allowed state government bonds to be stripped. Previously only central govt bonds had STRIPS. Now eligible state bonds (with ?1000+ crore outstanding, up to 14 yrs maturity) can be converted, helping deepen the state-bond market.
• Non-SLR demand: With bond yields at multi-year lows (10-year GoI yields around 6.2%), banks are hunting yield. By parking more in corporate and equity-linked products, they lift overall asset returns. In FY25 alone, non-SLR assets of banks grew 15%, indicating strong risk-taking.
These liquidity measures have helped Indian bond markets rally. The 10-year sovereign yield has fallen from ~6.7% in March to about 6.2% now. Analysts note that “bond yields and overnight rates are expected to continue their slide as the RBI is seen infusing liquidity and cutting rates”. Indeed, RBI has pumped roughly $100 billion (about Rs 8 lakh crore) into markets via CRR cuts, OMOs and FX swaps over the last six months. The RBI’s surprise cut in June came as a “growth propellant”, underscoring its commitment to ample liquidity. The market’s reaction was upbeat: equities were up ~0.7% on the news, and yields eased modestly.
For banks, abundant liquidity means cheaper funding and more lending capacity. With short-term rates down and the RBI keeping Rs 3T+ in daily surplus, banks find themselves flush with reserves. Many are thus reallocating some of these reserves beyond SLR bonds into higher-yielding assets. The new STRIPS facility further helps banks adjust portfolio durations without losing SLR status.
Investor sentiment has responded positively. Bond funds and investors are bullish on yields remaining low. As Mirrae Asset strategist Gaurav Dua noted, the budget’s tax and consumption measures (and RBI actions) should keep yields trending lower. Meanwhile, credit growth (infrastructure loans, mortgages) benefits from this steady liquidity. Overall, RBI’s combined tactics – rate cuts, large liquidity injections, STRIPS and encouragement of non-SLR deployment – are fueling India’s financial markets by keeping borrowing costs down and supporting asset prices.
This content is for educational purposes only and does not constitute investment advice.