The Reserve Bank of India (RBI) introduced the Government Securities Acquisition Programme (G-SAP) as a measure to support the government’s borrowing program and to provide liquidity to the economy. This initiative was aimed at ensuring stable and low-cost borrowing for the government by committing to purchase government securities regardless of market conditions. However, the recent discontinuation of G-SAP marks a significant shift in the RBI’s approach towards liquidity management.
Understanding G-SAP
G-SAP is a type of Open Market Operation (OMO), which is an activity where the central bank buys or sells government bonds in the market. The unique aspect of G-SAP is its unconditional nature, meaning that the RBI promised to buy a specified amount of government securities upfront. This was not influenced by the prevailing market sentiments, which often dictate the demand and supply of such securities. By doing so, the RBI aimed to provide certainty to the market and help manage the overall liquidity in the financial system.
The Impact on Government Borrowing
The primary beneficiary of the G-SAP programme was the government. By ensuring that there was always a buyer for government securities, the RBI helped in keeping the yields, or the effective interest rates on these securities, at lower levels. Lower yields translate into reduced borrowing costs for the government, making it cheaper for them to raise funds to finance various projects and initiatives. This was particularly important given the increased borrowing requirements prompted by the economic challenges of the COVID-19 pandemic.
Liquidity Management and Economic Stability
Another key objective of G-SAP was to manage the liquidity in the economy. Liquidity refers to the availability of cash and other assets that can be easily converted to cash. Excessive liquidity can lead to inflation, while too little liquidity can cause economic stagnation. Through G-SAP, the RBI injected a substantial amount of money into the banking system, which banks could then lend to businesses and individuals, thereby stimulating economic activity.
The End of G-SAP
The RBI’s decision to scrap the G-SAP indicates a shift towards liquidity normalization. This decision comes in the backdrop of an increase in average liquidity in the banking system, which rose from about Rs.7 lakh crore in September to Rs.9.4 lakh crore until October 5. The central bank appears to be taking a more cautious approach, gradually reducing the amount of excess liquidity in the market to preempt inflationary pressures and to signal a return to a more regular functioning of the financial markets.
Resumption of Liquidity Normalization Programme
The cessation of G-SAP is seen as a step towards the resumption of the liquidity normalization programme. This programme is designed to carefully manage the reduction of surplus liquidity from the economy. The RBI aims to achieve a balance where there is enough liquidity to support economic growth but not so much that it leads to high inflation. The normalization process is expected to involve a series of calibrated measures, such as reverse repo rate adjustments and market stabilization scheme (MSS) operations, to absorb the excess liquidity from the banking system.
The discontinuation of the G-SAP programme marks a turning point in the RBI’s liquidity management strategy. With the Indian economy showing signs of recovery and the banking system flush with funds, the central bank is now focusing on preventing any potential inflationary risks that could arise from the prolonged period of high liquidity. As the RBI moves forward with its normalization programme, it will continue to monitor the economic indicators closely to ensure a stable and balanced financial environment.
