RBI embarks on performance management with G-SAP

The Reserve Bank of India has taken a further step in the management of long-term interest rates in the economy by announcing, from the outset, purchases of government bonds through secondary markets. As the central bank dips from time to time in the market to calm yields, it has now announced a bond purchase amount, thus calming long-term securities yields.

On the sidelines of the monetary policy review, RBI Governor Shaktikanta Das said the central bank has decided to implement a “G-sec Secondary Market Acquisition Program or G-SAP 1.0. “. This, Das said, followed the experience of the past fiscal year when the central bank bought Rs 3.13 lakh crore through open market operations. The G-SAP program will give these purchases a “distinct character”.

For the first quarter of fiscal 22, secondary market bond purchases of Rs 1 lakh crore were announced. The benchmark 10-year yield fell 12 basis points from the day’s high after the announcement.

Detailing the goals of G-SAP, RBI Governor Shaktikanta Das said this would run alongside other central bank liquidity operations, including open market operations. “For the first time, we are donating an amount for the purchase of bonds in the secondary market. During the quarter, we will be announcing secondary market auctions from time to time, ”said Das.

While G-SAP will operate alongside other measures, Patra said purchases under this plan will be factored into the central bank’s overall liquidity position. This suggests that bond purchases under this program can replace bond purchases through open market operations.

The RBI is now acting as a direct filter for the supply and demand mismatch in the government securities market amid high borrowing levels, said Madhavi Arora, economist at Emkay Global. “It (G-SAP) is trying to break the negative loop of miscommunication of liquidity and sovereign premiums,” she said.

The G-SAP program is considered, for all intents and purposes, to be the equivalent of a timetable for open market operations. “This could lead to much lower sovereign risk premiums coming into a high borrowing schedule this year. We believe the RBI will continue to strive to artificially fix the biased yield curve, ”Arora said.

Bond yields have risen sharply since the Union budget was announced in February. The government intends to borrow Rs 12 lakh crore in the markets this year.

“G-SAP will almost serve the purpose of an OMO schedule, which has been on the bond market’s wish list for a long time. While we do not think the central bank is “targeting” any level for bond yields, it clearly recognizes the need to anchor interest rates during the current nascent phase of the growth recovery and remains prepared. to pass that on to the markets, ”Siddhartha said. Sanyal, chief economist at Bandhan Bank.