The RBI Governor unveiling the secondary market G-sec acquisition programme – G-SAP – in the recent monetary policy had many experts pointing out that this move is very similar to the quantitative easing programmes initiated by central banks of advanced economies.

But while the programme is styled like QE of advanced economies, the RBI has not gone that path entirely. It’s QE is very short-term in nature, is restricted to G-secs and the intention is not to stimulate the economy. There are also many reasons why QE is not an option for India.

Why G-SAP?

The announcement of G-SAP 1.0, which promised to buy government bonds worth ₹1 lakh crore from secondary market in the first quarter of 2021-22 was done mainly to calm bond markets. Yields of 10-year bond yields, that had hovered around 5.90 per cent prior to the Union Budget had shot higher past 6.20 per cent since then, mainly due to the large central government borrowing of ₹12.03 lakh in FY22. If the State government borrowings are to be added, the total borrowings could near ₹20 lakh crore.

Prospects of this excessive supply was dragging bond prices lower and pushing yields higher. It did not help that global bond yields too began moving higher in mid-February 2021 due to concerns regarding the second wave of Covid-19.

The other reason behind the G-SAP was to help the government borrowing sail through smoothly. The total demand for government bonds from banks and other buyers such as mutual funds, insurance companies and FPIs is not sufficient to absorb even half of the borrowing of the Centre and the States planned this fiscal year. To bridge the gap, the central bank will be doing open market operations worth ₹3 lakh crore and an additional purchases through G-SAPs for at least ₹2-2.5 lakh crore, according to experts.

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A form of quantitative easing?

The G-SAP programme is similar to QE programmes of countries including the US, UK and Japan. The central banks of these countries promise to purchase a specified amount of bonds from the secondary market, for a specified period.

While the G-SAP looks like a QE programme, it is not entirely so. One, the RBI has given visibility about the purchases in just one quarter. The quantum of purchases can be much lower/higher in the subsequent quarters. Typical QE programmes of other countries promise purchase of specified value of bonds for an extended period.

Two, the QE programmes promise purchases of variety of securities such as mortgage backed securities and real estate bonds in order to provide liquidity to specific sectors. RBI’s program is limited to government bonds.

That brings us to the third difference, the aim of the QE programmes in other countries is to impart liquidity in to the system to promote growth. The aim of the G-SAP is not to infuse liquidity. As the Governor indicated, there is sufficient liquidity in the system currently with M3 expanding strongly in FY21. In fact RBI is trying to suck the extra liquidity infused by G-SAP through variable repo rate auctions that will now be done at the long end. The G-SAP mainly tries to create demand for the government paper thus keeping the finance cost of public and private borrowers in check.

Beware the fallout

It’s therefore clear that the RBI is not going down the path of an outright QE yet. It’s also not possible for a central bank of an emerging economy to expand its balance sheet with abandon. This is because of the debasing effect of such a move on the currency. The rupee has slipped below 75 level against the US dollar mainly due to the G-SAP.

Two, only advanced economies whose currencies are part of the IMF SDR basket – currencies that are used widely in global trade – can afford to print endless amount of money. QE is not an option for emerging economies because there are fewer takers for bonds issued by these economies. Finally, the impact of expanding money supply on inflation also needs to be kept in mind. CPI number for February has already exceeded 5.5 per cent for March.

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