Explained: What is the Government Securities Acquisition Program (G-SAP)

Market participants say that through G-SAP the RBI is looking to provide more comfort to the bond market in the backdrop of government’s elevated borrowing for this year.

Keeping the policy rates unchanged, the Reserve Bank of India moved to quell the concerns of market participants over the rise in bond yields. While it reiterated its commitment to maintaining the current accommodative policy stance until the economy is back on track, the Governor enthused the markets with Government Securities Acquisition Program (G-SAP) through which it will purchase government securities worth Rs 1 lakh crore in Q1FY22. The RBI also announced that it will continue with variable rate reverse repo to suck excess liquidity. While bond yields dropped 0.6 per cent to 6.08 on Wednesday, the benchmark Sensex gained 0.9 per cent to close at 49,661.7.

What do the two announcements mean?

While RBI has to ensure that the government’s borrowing program goes through without causing disruption, market participants say that through the Government Security Acquisition Programme RBI is looking to provide more comfort to the bond market in the backdrop of government’s elevated borrowing for this year. At the same time, since the liquidity is already in a large surplus, RBI will continue with variable rate reverse repos at the short end. A note by Axis Mutual Fund said, “This can be construed as Operation Twist, with liquidity being withdrawn at the short end and injected at the long end, which should effectively compress ‘term-premia’ (normalising the curve).”

What other benefits does the G-SAP offer?

Market participants say they have always wanted to know the RBIs Open Market Operations (OMO) purchase calendar and through this announcement of GSAP, the RBI has provided that to the market. A report prepared by Edelweiss Mutual Fund states that it will provide certainty to the bond market participants with regard to RBI’s commitment of support to bond market in FY22. “The RBI has purchased ~Rs. 3.13 trillion worth of bonds from the secondary market in FY21. However, it was carried out in an ad hoc manner with the market awaiting RBI OMO purchase announcements with bated breath on weekly basis. A structured purchase program of similar size such as this will definitely calm investors’ nerves and help market participants to bid better in scheduled auctions and reduce volatility in bond prices.”

The report also points that the announcement of this structured programme will help reduce the spread between the repo rate and the 10-year government bond yield. That in turn will also help to reduce the aggregate cost of borrowing for the Center and states in FY22.

Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund said the move to introduce G-SAP “would reign in sharp spike in GSec bond yields.” She added that while introduction of long-term VRRR (variable-rate reverse repo) is an extension towards normalising liquidity, “Liquidity surplus however will and is likely to continue. We expect the yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end.”

Why did the equity markets rise?

The Sensex at the Bombay Stock Exchange that had fallen significantly in February and March on account of rising bond yields, rose 460 points or 0.94 per cent to close the day at 49,661.

Following the RBIs monetary policy announcements that included the securities acquisition program, the 10-year GSec bond yield dropped around 0.6 per cent on Wednesday and was trading at 6.08 as against Tuesday’s closing of 6.122.

While a decline in bond yield is positive for the equities markets, the fact that the RBI has now come out with a structured purchase program to manage liquidity in the market and it will keep bond price volatility in control is a big positive for the market participants.

The RBI’s commitment towards continuing liquidity support also played a role in lifting market sentiments.

While a rise in bond yields in February and March led to weakness in the equity markets, a decline or stabilisation in yields will see equity investor sentiment moving up once again. Not only will domestic investors move towards equity, but even FPI inflow into equities could also regain momentum.

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