RBI initiates G-SAP 1.0 to keep the balance between yield curves and liquidity

Reserve Bank of India (RBI) on Wednesday said it is putting in place a secondary market government securities acquisition programme or G-SAP 1.0 for this financial to enable an orderly evolution of the yield curve.

RBI said the endeavour through the programme will be to ensure congenial financial conditions for the recovery to gain traction.

Under the programme, which will be for 2021-22, RBI will commit "upfront to a specific amount of open market purchases of government securities with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions," Governor Shaktikanta Das said while announcing the monetary policy.

For the first quarter of the financial year 2021-22, RBI will conduct a G-SAP of Rs 1 lakh crore, and the first purchase of government securities for an aggregate amount of Rs 25,000 crore will be conducted on April 15, Das said.

The benchmark 10-year bond, which traded at 5.93 per cent (on an average) during April 2020-January 2021, spiked to 6.25 per cent on March 10, 2021 before coming down again. In sync with G-Sec yields, corporate bond yields also hardened across issuers and rating categories in the recent period.

During the post policy conference, Das told reporters that G-SAP is different from the regular Open Market Operations (OMOs) that RBI conducts.

"It has a distinct character, in the sense that for the first time we are giving out a particular quantum of bond purchase in the secondary market. Within this particular quarter, we will be suitably depending on the evolving situation and will be announcing auctions from time to time," he said.

Deputy Governor Michael Patra said that with this, RBI, for the first time, is committing its balance sheet to the conduct of monetary policy.

"When we are unchanged on the policy rate, we need an instrument to run monetary policy. In the past, all our actions were to move the interest rates up and down and ensure that proper transmission happens across the market spectrum. This time we are being more explicit.

"We are not waiting for the indirect channel of interest rates and prices to operate. We are directly committing an expansion in our balance sheet of a certain specified amount which is known to the public with the hope of ensuring orderly conditions in the market," Patra added.

Giving up an amount upfront also helps market participants to plan their engagement with the borrowing programme, he noted.

G-SAP will run alongside RBI's regular operations including Liquidity Adjustment Facility (LAF), OMOs and operation twist, Patra said, adding that the programme is built into the central bank's liquidity planning framework for 2021-22 as a whole.

Das said the positive externalities of G-SAP 1.0 operations need to be seen in the context of those segments of the financial markets that rely on the G-Sec yield curve as a pricing benchmark.

When asked whether RBI will announce the amount every quarter under G-SAP, the Governor said it is not a one-off kind of thing and the effort will be to continue with G-SAP.

The central bank also announced that it will conduct 14-day Variable Rate Reverse Repo (VRRR) auctions of longer maturity as indicated in the Revised Liquidity Management Framework announced on February 6, 2020.

The amount and tenor of these auctions will be decided based on the evolving liquidity and financial conditions, RBI said.

"This is a part of RBI's liquidity management operations and should not be read as liquidity tightening. In fact, by paying a higher rate of interest on liquidity absorptions through the VRRR auctions, the RBI is indirectly expanding liquidity," Das emphasised.

While laying out the liquidity management strategy for 2021-22, Das said RBI's endeavour is to ensure orderly evolution of the yield curve, governed by fundamentals as distinct from any specific level thereof.

"Our objective is to eschew volatility in the G-Sec market in view of its central role in the pricing of other financial market instruments across the term structure and issuers, both in the public and private sectors," he said.

This is a necessary pre-requisite for the nascent and hesitant recovery to firm up and become durable.

Das also urged market participants to pay heed to RBI's actions, communication and signals in a balanced manner.

"Together, we can overcome the challenges and lay the foundations for a durable recovery beyond the pandemic. Let us prepare for our tryst with our potential firmly," he added.

Further, RBI extended on-tap targeted Long Term Repo Operations (TLTRO) by six months to September 30. The scheme was announced in October last year and was available till March 31, 2021.

To ensure continued flow of credit to the real economy, RBI also extended fresh support of Rs 50,000 crore to All India Financial Institutions (AIFIs) for new lending in the current financial year.

Accordingly, Rs 25,000 crore will be provided to NABARD; Rs 10,000 crore to National Housing Bank (NHB) and Rs 15,000 crore to Small Industries Development Bank of India (SIDBI).

Further, the timeline for banks to on-lend through non-banking finance companies has been extended by six months to September 30.