In 2021, the RBI has purchased nearly Rs. 3.13 lakh crore worth of bonds from the secondary market. However, all this was done in an ad-hoc manner leading to uncertainty (volatility) in the bond market and a sharp spike in bond yields. To ward off the uncertainty in the bond market, Government Securities Acquisition Programme (G-SAP) was announced by the RBI to give certainty to the bond market about its OMO purchase program.
What is G-SAP?
The bond market has been looking for RBI’s OMO purchase calendar, which has been fulfilled with the announcement on G-SAP.
Under G-SAP, the central bank will purchase government bonds worth Rs. 1 lakh crore. That means RBI infuses 1 lakh worth liquidy into the economy through OMO operations that will boost the money supply and investment activity etc. The first purchase of Rs 25,000 crore will be made on April 15, 2021.
Benefits of G-SAP on Indian Bond market:
- With a structured program, G-SAP will help market participants (bond issuers and holders) to bid better in scheduled auctions and reduce volatility in bond prices.
- Thus, G-SAP aims to offer more comfort to the bond market.
- The announcement of G-SAP would provide certainty to the bond market participants with regard to RBI’s commitment to supporting the bond market in FY22.
- G-SAP will contain a sharp spike in GSec bond yields.
- It will help reduce the spread between the repo rate and the 10-year government bond yield.
What is Government Securities (GSec)?
Government Securities (GSec) are debt instruments that are issued by GoI to borrow money. There are two types of G-Sec:
- Short-term instruments, which mature in 91 days
- Long-term instruments, which mature anywhere between five years and forty years
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