The Reserve Bank of India (RBI) on Wednesday announced secondary market purchases of government bonds worth Rs 1 lakh crore in the first quarter of fiscal year22. Called the G-sec or G-SAP 1.0 acquisition program, the program will see the RBI committing in advance to a specific amount of public securities purchases on the open market, said RBI Governor Shaktikanta Das. .
The effort will consist in securing favorable financial conditions for the recovery in order to gain ground. The first purchase of government securities for a total amount of Rs 25,000 crore under G-SAP 1.0 will be made on April 15th. The governor wanted to stress that the RBI wants to ensure an orderly evolution of the yield curve, governed by such distinct fundamentals at any specific level thereof. The statement may have been intended to allay fears that the central bank intends to run the government’s borrowing program at specific prices so that yields stay within 6%. These concerns gained ground when the RBI left multiple bond auctions to fall to primary traders.
Even as the market hoped for a timetable for open market operations (OMOs), RBI Deputy Governor Michael Patra said it was the first time the central bank had engaged its balance sheet in the conduct of monetary policy. “It’s different from OMO because it gives you discretion. We waive this discretion to express assurance to the markets that we will assist them in the conduct of the borrowing program, ”Patra said.
Two other liquidity-related measures were announced – the six-month extension until September 30, 2021 of the deadline for Targeted Long-Term Repo Transactions (TLTROs) on the tap system, and a liquidity facility of Rs 50,000 crore to all Indian financial institutions (AIFI) for new loans in fiscal year 22. The National Bank for Agriculture and Rural Development (NABARD) will receive a special liquidity facility (SLF) of Rs 25,000 crore for a period of one year to support agriculture and related activities, the rural non-farm sector and non-bank financial corporations. microfinance institutions (NBFC-IMF). A SLF of Rs 10,000 crore will be extended to the National Housing Bank (NHB) for one year to support the housing sector. To meet the financing needs of micro, small and medium enterprises (MSME), the Small Industries Development Bank of India (SIDBI) will be fined Rs 15,000 crore under this facility for a period of up to one year.
Money markets applauded G-SAP’s announcement, with yields slipping shortly after the governor made his statement. Siddhartha Sanyal, chief economist and head of research, Bandhan Bank, said the program effectively ruled out the need for an OMO schedule. “The instinctively positive bond market reaction to today’s monetary policy and related announcements is clearly justified… The G-SAP will almost serve the purpose of an OMO calendar, which was on the wishlist of the bond market for a long time, ”said Sanyal.
At the same time, the announcement convinced market participants that the central bank is not trying to keep yields at a particular level. Suyash Choudhary, Head of Fixed Income, IDFC AMC, said that by providing initial indications of the extent of absorption of the short-term bond supply the RBI will undertake, she is ensuring that the market is not faced with excessive volatility. “This is consistent with our own thinking that the RBI is not trying to control either direction of the movement or trying to put a line in the sand when it comes to returns. Rather, it tries to control volatility as this development occurs, ”he said.