Money & Banking

With G-SAP, RBI moves to stabilise the bond market; holds key rates

K Ram Kumar Mumbai | Updated on April 07, 2021

Will continue with accommodative stance

The Reserve Bank of India on Wednesday unveiled a ₹1-lakh crore secondary market Government Security Acquisition Programme (G-SAP), committing for the first time its balance-sheet to the conduct of Monetary Policy.

The central bank unveiled this unconventional monetary policy instrument, which will provide guaranteed liquidity support to market participants, even as the Monetary Policy Committee unanimously voted to leave the policy repo rate unchanged at 4 per cent.

The six-member committee chose to maintain status quo as supply-side pressures on inflation could persist. Moreover, the recent Covid-19 surge has imparted greater uncertainty to the growth outlook.

Furthermore, all members of the MPC voted to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and to continue mitigating the impact of Covid-19 on the economy, while ensuring that inflation remains within the target.

Under G-SAP 1.0, the RBI will commit upfront to a specific amount of open-market purchases of government securities to ensure a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions, according to RBI Governor Shaktikanta Das.

Experts say this programme will provide guaranteed liquidity support to market participants as the government intends to borrow as mush as last fiscal year (2020-21).

Das said the endeavour will be to ensure congenial financial conditions for the recovery to gain traction.

 

Liquidity guidance

The RBI, as part of liquidity guidance, said it will conduct a G-SAP of ₹1-lakh crore in the first quarter (April-June) 2021. The first purchase of G-Secs for an aggregate amount of ₹25,000 crore under G-SAP 1.0 will be conducted on April 15.

“Last year, the total OMO (open market operation to purchase of G-Secs, thereby releasing liquidity) was ₹3.13-lakh crore. With that OMO, we supported a borrowing programme (of the Centre and States) of ₹22-lakh crore. Therefore, in the current year also ,with a similar size of borrowing programme, a ₹2-3-lakh crore intervention in the market cannot be seen as something which is completely taking over the government borrowing programme or supporting it in terms of quantum,” the Governor explained.

Das said the G-SAP, which is not part of the conventional tool kit of the RBI, is not a one-off kind of announcement. “We called this G-SAP 1.0. So, obviously there is a second one (2.0) which is following,” he added.

The G-SAP announcement triggered a rally in the government bond market, with the benchmark 10-year G-Sec (carrying 5.85 per cent coupon rate) closing 29 paise up at ₹98.32 over the previous close

MD Patra, Deputy Governor, emphasised that it is for the first time that the RBI is committing its balance sheet to the conduct of monetary policy. He observed that G-SAP is different from OMO because it gives away discretion. In OMO, the central bank typically announces the timing and the amount.

“We are giving up this discretion (under G-SAP) to give an explicit assurance to markets that we will assist them in the conduct of the borrowing program. 

“Giving an amount upfront also helps market participants to plan an engagement with the borrowing programme. So, upfront they know how much support is coming from RBI. So, you plan accordingly,” explained Patra. 

Dinesh Khara, Chairman, State Bank of India, said the RBI policy statement is a clear commitment to assuage uncertainties in the market through guaranteed, continued liquidity support and explicit guidance to navigate through the current Covid surge, the duration of which is uncertain. 

GDP, inflation projections 

The RBI has retained the projection of real GDP growth for 2021-22 at 10.5 per cent, at 26.2 per cent in Q1; 8.3 per cent in Q2; 5.4 per cent in Q3; and 6.2 per cent in Q4. 

The projection for CPI inflation has been revised to 5 per cent in Q4:2020-21 (previous projection: 5.2 per cent ); 5.2 per cent each in Q1 and Q2 of 2021-22; 4.4 per cent in Q3; and 5.1 per cent in Q4, with risks broadly balanced. 

Published on April 07, 2021

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