RBI’s G-SAP: QE? Yield Curve Control? Or Somewhere In Between...
Police officers stand guard at the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Kanishka Sonthalia/Bloomberg)

RBI’s G-SAP: QE? Yield Curve Control? Or Somewhere In Between...

The Reserve Bank of India took another step towards managing long-term interest rates in the economy by announcing, upfront, government bond purchases via the secondary markets. While the central bank dips into the market every now and then to calm yields, it has now announced a quantum of bond buys, thereby calming yields on long-term securities.

On the sidelines of the Monetary Policy Review, RBI Governor Shaktikanta Das said the central bank has decided to put in place a “secondary market G-sec acquisition programme or G-SAP 1.0.” This, Das said, was being done following the experience of the past financial year, when the central bank bought Rs 3.13 lakh crore via open market operations. The G-SAP programme will give these purchases a “distinct character.”

For the first quarter of FY22, secondary market bond purchases of Rs 1 lakh crore have been announced. The 10-year benchmark yield fell 12 basis points from the day’s high following the announcement.

RBI’s G-SAP: QE? Yield Curve Control? Or Somewhere In Between...

Detailing the objectives behind the G-SAP, RBI Governor Shaktikanta Das said this will run alongside the central bank’s other liquidity operations, including open market operations. “For the first time we are giving a quantum for bond purchase in the secondary market. Within the quarter we will be announcing secondary market auctions from time to time,” said Das.

RBI deputy governor Michael Patra added that for the first time the RBI is committing its balance sheet to the conduct of monetary policy. “Giving an amount also allows participants to plan their engagement with the borrowing programme, said Patra, adding that the new instrument is a “challenging one” but it is a risk the RBI is willing to take.

While the G-SAP will run alongside other measures, Patra said the purchases under this plan will be factored into the central bank’s overall liquidity situation. This suggests that bond purchases under this programme may substitute bond purchases under open market operations.

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

The G-SAP programme is being seen, for all intents and purposes, as being equivalent to a calendar for open market operations. “This could lead to much lower sovereign risk premia ahead amid an elevated borrowing calendar this year. We reckon the RBI will continue to strive fixing artificially the skewed 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 from the markets this year.

“The G-SAP will almost serve the purpose of an OMO calendar, which had been on the bond market’s wish list for a long time. While we don’t think that the central bank is “targeting” any level for bond yields, they clearly recognize the need for anchoring interest rates during the current nascent stage of growth recovery and remain forthcoming in conveying that to the markets,” said Siddhartha Sanyal, chief economist at Bandhan Bank.

How will the markets interest the RBI’s new G-SAP facility? Deutsche Bank’s Kaushik Das and Quantum Advisors’ Arvind Chari share their views below:

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