The bond market shook up after the Reserve Bank of India (RBI) on Friday said it may conduct open market operations (OMO) as a tool to manage liquidity.

The yields on the benchmark 7.18% 2033 bond rose to a 14-month high of 7.36% during intra-day trades before closing at 7.34% against the previous close of 7.21%.

“Going forward, while remaining nimble, we may have to consider OMO sales to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions,’’ RBI Governor Shaktikanta Das said.

The RBI buys or sells government securities through the process of OMO, thereby infusing or sucking out liquidity.

“Given that excess liquidity could be inflationary and can pose risks to financial stability, the RBI has started deploying policy tools from the August policy to remove the excess liquidity from the system. Unexpected by all, the RBI announces that OMO sales also becomes a policy tool for the future in its efforts to suck out liquidity. This is important even from a longer perspective, given that India could be expecting large foreign exchange flows in FY25 on the back of bond index inclusion,” said Indranil Pan, chief economist at Yes Bank.

Last month, JPMorgan Chase and Co. said it would add India’s bonds on its emerging market gauge by June. The move could bring in as much as $50 billion from investors, with a fifth of the flows likely by March, according to ICICI Bank Ltd.

The inflows will be a challenge to RBI to keep liquidity under tight control in the wake of inflationary pressures.