OPINION: RBI’s G-SAP 1.0 is certainly a much needed demand lever to support the government borrowing programme

OPINION: RBI’s G-SAP 1.0 is certainly a much needed demand lever to support the government borrowing programme
Reserve Bank of India (RBI)BCCL
  • The Monetary Policy Committee (MPC) announced that the Reserve Bank of India (RBI) will be initiating its first Government Securities Acquisition Programme (G-SAP 1.0) in April.
  • The RBI has committed to buy ₹1 trillion of government securities over the next three months, from April to June.
  • G-SAP 1.0 aims are increasing liquidity in the market by encouraging short term borrowing, which will hopefully lead to a boost in demand.

One of the roles of the Reserve Bank of India (RBI) is to act as a merchant banker to the government of India. The endeavour, among others, is therefore to ensure that the government’s borrowing programme goes through without much disruption. In line with this intent, the RBI announced a new programme, G-SAP 1.0 (Government Security Acquisition Programme) under which it has committed to buy ₹1 trillion of government securities in the current quarter (Q1 FY22).

This is certainly a much needed demand lever to support the government borrowing programme. This is in addition to the OMOs/OTs (open market operations/operation twist) that they have been conducting.

OPINION: RBI’s G-SAP 1.0 is certainly a much needed demand lever to support the government borrowing programme
How RBI plans to use G-SAP 1.0 to improve demand BI India

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Given the supply, this comes as music to ears of the bond markets. We have already seen 15-25 basis points (bps) easing across the yield curve. The RBI also extended its VRRR (variable rate reverse repo), which is currently 14 days to a longer tenor as well. For now, it has been retained at 14 days tenor and at ₹2 trillion.

This could ease off some pressure from the short end of the yield curve, which had started inching up at the long tenor VRRR announcement. Yet, VRRR at short-end and G-SAP at mid to long-end may mean some yield curve flattening on the way.

Way forward for investors



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The policy in no way signalled any sense of urgency to depart from the current accommodative policy bias. This also reflects the fact that the central banker is mindful of the developments on the pandemic front.

The intent to support bond yields and ensure orderly evolution of the yield curve should offer comfort to bond investors. The current yield curve is quite steep and was pricing in quite a bit of negative news (including rate hikes in near term).

The RBI policy comes as a soothing summer drink, which could see some spread compression across the yield curve. As part of asset allocation hence, one should continue to hold fixed income in the portfolio.

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Investors need to plan such allocations in line with their intended investment horizon and not get disturbed by near term volatility. The current surplus liquidity is here to stay for some time – and we expect liquidity normalisation to happen gradually. There are fixed income solutions suited to meet varied risk appetite and return aspiration. Hence investors need to bucket their fixed income investments, accordingly.

In the monetary policy review, the RBI maintained status quo on the key benchmark rates – repo rate at 4% and reverse repo rate at 3.35%.

The Monetary Policy Committee (MPC) stated that an accommodative stance would continue as long as it is necessary to sustain growth on a durable basis and to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.

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Time periodInflation forecast
Q1 FY225.2%
Q2 FY225.2%
Q3 FY224.4%
Q4 FY225.1%

*Lakshmi Iyer is the CIO of debt and head of products at Kotak Mahindra Asset Management Company. View expressed here are personal.

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