Reserve Bank To Set Up G-SAP 1.0 For Evolution Of Yield Curve: All You Need To Know

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The Reserve Bank of India (RBI) Governor Shaktikanta Das announced in the Monetary Policy Committee (MPC) review today that the authority has decided to set up a secondary market Government Security Acquisition Programme or G-SAP 1.0, for the orderly functioning of the G-sec market and evolution of yield curve in the financial year 2021-22. In this regard, the central bank announced a G-SAP amounting to Rs 1 lakh crore in the first quarter of the current fiscal, and the first purchase of Rs 25,000 crore will be done on April 15. (Also Read: RBI Monetary Policy Highlights: Repo Rate Steady, Growth Projection Retained At 10.5% )

”RBI has delivered a dovish pause and reaffirms its accommodative stance and impetus to support the economic recovery. The central bank announced a secondary market G-Sec acquisition programme (GSAP 1.0), which indicates an intention to calendarize its G-sec purchases and will help to manage the yield curve and may help to reduce the term premium as well,” said Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life

”The RBI also intends to lengthen the tenor of variable repo rate auctions, thereby helping to manage the system liquidity depending on evolving conditions and keeping it stable (although the governor said it should not be read as liquidity tightening). Overall, the policy has been dovish as supported by fall in bond yields, and this should also benefit the equity markets by keeping borrowing costs in check for some time,” added Mr Reddy.

The RBI Governor said that the positive externalities of G-SAP 1.0 operations need to be reflected in those segments of the financial markets that rely on the G-sec yield curve as the main pricing benchmark. Additionally, the extension of Held-to-Maturity (HTM) dispensation opens up space for investments of more than Rs 4 lakh crore.

Mr Das explained that the central bank will continue to deploy the regular operations under the liquidity adjustment facility (LAF), the longer-term repo or reverse repo auctions, forex, as well as open market operations (OMOs). These operations will ensure that the liquidity conditions evolve in tandem with the accommodative policy and that the financial conditions are supportive for all stakeholders.

The objective of the Reserve bank is to erase volatility in the G-sec market, due to its central role in the pricing of the other financial market instruments across the term structure and issuers, both in the public and private sectors. 

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