Recently, the Reserve Bank of India (RBI) has announced that it will conduct an open market purchase of government securities under the Government Securities Acquisition Programme (GSAP 2.0).
What are Government Securities?
- These are debt instruments issued by the government to borrow money.
- The two key categories are:
- Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
- Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
- Like bank fixed deposits, Government Securities (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).
What benefits does the Government Securities Acquisition Programme offer ?
- G-SAP aims to provide more comfort to the bond market, market participants.
- At the same time, since liquidity is already in a large surplus, RBI will continue with variable rate reverse repos at the short end.
- A structured purchase program of similar size such as this will definitely calm investors’ nerves and help market participants to bid better in scheduled auctions and reduce volatility in bond prices.
- the announcement of this structured programme will help reduce the spread between the repo rate and the 10-year government bond yield. That, in turn, will help to reduce the aggregate cost of borrowing for the Centre and states in FY22.
- G-SAP “would rein in sharp spike in GSec bond yields.”
Government Securities Acquisition Programme (GSAP 1.0)
- The RBI has officially notified that it would conduct the first phase of G-SAP 1.0 operations on April 15, 2021.
- It will begin with the purchase of five dated securities for an amount aggregating to Rs 25,000 crore.
- The first phase of G-SAP purchase will happen using the multiple price method under which the bidders pay at the respective rate they had bid.
- The RBI has notified four securities for the G-Sec purchase in different maturities.
- In addition to the G-SAP plan, the RBI will also continue to deploy regular operations.
- This would be under the LAF, longer-term repo/reverse repo auctions, forex operations and open market operations including special OMOs.
- This is to ensure that the liquidity conditions evolve in consonance with the stance of monetary policy.
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