G-SAP: Securities acquisition plan for market boost.
Q. What is the news?
RBI Governor recently enthused the markets with a new programme — Government Securities Acquisition Programme (G-SAP) — through which it will purchase government securities worth Rs 1 lakh crore in the first quarter of FY22. The RBI also announced that it will continue with a variable rate reverse repo to suck excess liquidity.
Q. What do this mean?
In the backdrop of the government’s elevated borrowing for this year, which the RBI has to ensure goes through without causing disruption, G-SAP aims to provide more comfort to the bond market.
At the same time, since liquidity is already in a large surplus, RBI will continue with variable rate reverse repos at the short end. This can be construed as Operation Twist, with liquidity being withdrawn at the short end and injected at the long end, which should effectively compress ‘term-premia’ (normalising the curve).
Q. What other benefits does the G-SAP offer?
It will provide certainty to the bond market participants with regard to RBI’s commitment of support to the bond market in FY22.
The RBI has purchased ~Rs. 3.13 trillion worth of bonds from the secondary market in FY21. However, it was carried out in an ad hoc manner with the market awaiting RBI OMO purchase announcements with bated breath on weekly basis. A structured purchase program of similar size such as this will definitely calm investors’ nerves and help market participants to bid better in scheduled auctions and reduce volatility in bond prices.
The announcement of this structured programme will help reduce the spread between the repo rate and the 10-year government bond yield. That, in turn, will help to reduce the aggregate cost of borrowing for the Centre and states in FY22.
Q. Why did the equity markets rise on this news?
The Sensex at the Bombay Stock Exchange, which had fallen significantly in February and March on account of rising bond yields, rose 460 points or 0.94%. Following the RBIs monetary policy announcements that included the securities acquisition programme, the 10-year GSec bond yield dropped around 0.6% and was trading at 6.08 as against closing of 6.122.
While a decline in bond yield is positive for the equities markets, the fact that the RBI has now come out with a structured purchase programme to manage liquidity in the market, and that it will keep bond price volatility in control, is a big positive for market participants.
