Government Securities Acquisition Programme (GSAP 2.0)

Context:

Recently, the Reserve Bank of India (RBI) has announced that it will conduct an open market purchase of government securities of Rs 25,000 crore under the Government Securities Acquisition Programme (GSAP 2.0).

• Earlier, under G-SAP 1.0, the first purchase of government securities for an aggregate amount of Rs. 25,000 crore was made.

Key Highlights Government Securities Acquisition Programme (GSAP 2.0):

• RBI’s move to continue to use its unconventional tools to keep yields stable amid a large government borrowing programme provides succour to keep borrowing costs contained for the private sector.
• The first two auctions conducted by the RBI under the first G-SAP programme helped keep interest rates benign for 91-day T Bills, commercial papers and certificates of deposit.
• The central bank has been deploying both conventional and unconventional tools to manage liquidity in the system in consonance with its monetary policy stance.
• The timing of the second auction was aimed at replenishing the drainage of liquidity due to the restoration of the cash reserve ratio (CRR) to its pre-pandemic level of 4% of net demand and time liabilities (NDTL).
• The G-sec Acquisition Programme (G-SAP) 2.0 will help in calming yields and control undue volatility faced by market participants in the government securities market.

Government Security (G-Sec)

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Why G-Secs?

• Like bank fixed deposits, g-secs are not tax-free.
• They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
• However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
• Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

How are the G-Secs issued?

• G-Secs are issued through auctions conducted by RBI.
• Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI.
• Commercial banks, scheduled UCBs, Primary Dealers, insurance companies and provident funds, who maintain funds account (current account) and securities accounts (Subsidiary General Ledger (SGL) account) with RBI, are members of this electronic platform.

Objective: 

To achieve a stable and orderly evolution of the yield curve along with management of liquidity in the economy.

Significance: 

The government will mainly benefit from the G-SAP.

• By purchasing G-secs, the RBI infuses money supply into the economy which inturn keeps the yield down and lower the borrowing cost of the Government.
  • The government of India, with its massive borrowing programme (for example, National infrastructure pipeline project), can now breathe a sigh of relief as long-term borrowing costs come down.

Open Market Operations:

• Open Market Operations (OMO) is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
• OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
• The central bank sells g-secs to remove liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

Yield Curve

• Bond yield is the return an investor realizes on a bond.
• The mathematical formula for calculating yield is the annual coupon rate (interest rate promised by the bond issuer) divided by the current market price of the bond.
• Movements in yields depend on trends in interest rates, it can result in capital gains or losses for investors.
  • A rise in bond yields in the market will bring the price of the bond down.
  • A drop in bond yield would benefit the investor as the price of the bond will rise, generating capital gains.
• A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.
• The slope of the yield curve gives an idea of future interest rate changes and economic activity.

Source: The Hindu

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