The Reserve Bank of India (RBI) on Wednesday announced secondary market purchases of government bonds worth Rs 1 lakh crore in Q1FY22. Termed as the G-sec acquisition programme or G-SAP 1.0, the programme will see the RBI commit upfront to a specific amount of open market purchases of government securities, RBI governor Shaktikanta Das said.
The endeavour will be to ensure congenial financial conditions for the recovery to gain traction. The first purchase of government securities for an aggregate amount of Rs 25,000 crore under G-SAP 1.0 will be conducted on April 15. The governor sought to emphasise that the RBI wants to ensure an orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof. The statement possibly sought to allay concerns that the central bank intends to conduct the government borrowing programme at specific prices such that yields remain within the 6%-level. Such concerns gained ground when the RBI let multiple bond auctions devolve on primary dealers.
Even as the market was hoping for a calendar for open market operations (OMOs), RBI deputy governor Michael Patra said this was the first time the central bank was committing its balance sheet to the conduct of monetary policy. “This is different from OMO because it gives away discretion. We are giving up this discretion to express an assurance to markets that we will assist them in the conduct of the borrowing programme,” Patra said.
Two other liquidity-related measures were announced — the extension of the deadline for the targeted long term repo operations (TLTRO) on tap scheme by six months to September 30, 2021, and a Rs 50,000-crore liquidity facility to all India financial institutions (AIFIs) for new lending in FY22. National Bank for Agriculture and Rural Development (NABARD) will be provided a special liquidity facility (SLF) of Rs 25,000 crore for a period of one year to support agriculture and allied activities, the rural non-farm sector and non-banking financial companies-microfinance institutions (NBFC-MFIs). An SLF of Rs 10,000 crore will be extended to National Housing Bank (NHB) for one year to support the housing sector. To meet the funding requirements of micro, small and medium enterprises (MSMEs), the Small Industries Development Bank of India (SIDBI) will be sanctioned Rs 15,000 crore under this facility for a period of up to one year.
Money markets cheered the G-SAP announcement, with yields sliding soon after the governor made his statement. Siddhartha Sanyal, chief economist and head – research, Bandhan Bank, said the programme effectively precluded the need for an OMO calendar. “The sharp knee-jerk positive reaction by the bond market after today’s monetary policy and related announcements is clearly justified…The G-SAP will almost serve the purpose of a OMO calendar, which had been on the bond market’s wish-list for a long time,” Sanyal said.
At the same time, the announcement convinced market participants that the central bank is not trying to hold yields at a particular level. Suyash Choudhary, head – fixed income, IDFC AMC, said by providing upfront guidance on the extent of near-term bond supply absorption that the RBI will undertake it is ensuring that the market does not face undue volatility. “This is consistent with our own thought that the RBI is not trying to control either direction of movement or trying to set a line in the sand with respect to yields. Rather, it is attempting to control the volatility as this evolution occurs,” he said.
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