The recent announcement by the Reserve Bank of India (RBI) regarding the open market purchase of government securities under the G-Sec Acquisition Programme (G-SAP 2.0) has made headlines. This program, which is essentially a larger and more structured version of an Open Market Operation (OMO), involves the purchasing of government securities to an aggregate amount of Rs. 25,000 crore.
The G-Sec Acquisition Programme (G-SAP) Explained
The G-SAP is an operation by the RBI where it commits to buying government securities, regardless of market conditions. This programme is distinct from regular OMOs and is considered to have a ‘distinct character’ according to the RBI. The term ‘unconditional’ refers to this guaranteed commitment by the RBI.
Objective of the G-SAP
The main aim of the G-SAP is to ensure a stable and orderly progress of the yield curve, as well as managing liquidity in the economy. By infusing a greater money supply into the economy through the purchasing of G-secs, the yield is kept lower and the cost of borrowing for the government is reduced.
Benefits and Criticisms of the G-SAP
The primary beneficiary of the G-SAP is the Indian government. For instance, with projects such as the National Infrastructure Pipeline, the government can now afford to borrow at lower costs due to the G-SAP. However, critics argue that this could negatively impact the rupee, leading to depreciation of the currency. They also warn that excess liquidity could drive up inflation rates.
Open Market Operations (OMO)
OMO is a tool employed by the central bank to regulate the money supply in the economy. It achieves this by selling or purchasing government securities. When the central bank sells g-secs, it removes liquidity from the system, and when it buys back g-secs, it infuses liquidity into the system. OMO is often carried out alongside other monetary policy tools such as the repo rate, cash reserve ratio, and statutory liquidity ratio.
An Overview on Government Securities (G-Secs)
Government securities are tradable instruments issued by either the central or state governments. These are debt obligations of the government, and can be both short-term (treasury bills) or long-term (government bonds or dated securities). They carry virtually no risk of default and are thus referred to as risk-free gilt-edged instruments.
Understanding the Yield Curve
The yield on a bond is the return realized by an investor. It is computed as the annual coupon rate divided by the current market price of the bond. Increases in yields can cause a drop in bond prices, while decreases in yields can cause a rise in bond prices. A yield curve plots yields of bonds with equal credit quality but varying maturity dates, giving an indication of future interest rate shifts and economic activity.
