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Government Security (G-Sec) prices rose for the second day on the trot on Thursday as the Reserve Bank of India (RBI) announced guaranteed liquidity support to market participants via a G-Sec acquisition programme (G-SAP).
Price of the benchmark 10-year G-Sec (carrying 5.85 per cent coupon rate) closed at ₹98.68, up 36 paise over the previous close, with its yield thawing about 5 basis points to 6.0313 per cent.
Yield declines 9 bps
In the last two days, the benchmark G-Sec gained about 64 paise in price terms, with its yield declining about 9 basis points. Bond prices and yields are inversely related, moving in opposite directions.
Vinay Pai, Head, Fixed Income, Equirus Capital, said: “By announcing upfront an amount of ₹1-lakh crore under G-SAP, the RBI has comforted traders.
“This additional monetary policy tool, along with other tools, will be appropriately be used to curtail volatility, which is expected during the year due to the large borrowing programme and global uncertainty. This will help in orderly evolution of the yield curve and curb aberrations.”
Under G-SAP, which was announced on Wednesday in the first bi-monthly monetary policy review of FY22, the RBI will commit upfront to a specific amount of open market purchases of government securities, with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.
In line with the aforementioned announcement, the Reserve Bank of India (RBI), on Thursday, said it will purchase five government securities (G-Secs) maturing between 2023 and 2035, aggregating ₹25,000 crore, under G-SAP on April 15.
VRRR auction
The RBI also said it will be conduct a 14-day Variable Rate Reverse Repo (VRRR) auction, through which surplus liquidity will be absorbed by the central bank, for a notified amount of ₹2-lakh crore on April 9.
Referring to the aforementioned VRRR auction, Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said: “Yesterday, the RBI said it will conduct VRRR auction of longer maturity – 30 or 60 days. But today, they announced VRRR for 14 days. Market doesn’t want surprises. It wants clarity.”
Madan Sabnavis, Chief Economist, CARE Ratings, observed that when there is liquidity surplus, VRRR will ensure that the market is stable.
To pre-empt liquidity shortages, G-SAP is coming, which will address large demand from government and private sector. In consonance with this, the yield curve will be well behaved, he added.
“On the whole the RBI has sent its feelers that it will ensure stability in the system at all costs. Such a stance will finally help the government which can raise funds at a low cost.
“G-SAP will run with OMO (open market operation) and OT (operation twist). Ideally, high borrowing should go with high cost. But that will not happen. Corporates can take heart as yields are benchmarked with G-Secs and the benefit will percolate,” said Sabnavis.
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