G-SAP: Securities acquisition plan for market boost

Keeping policy rates unchanged, the Reserve Bank of India on Wednesday sought to quell the concerns of market participants over rising bond yields. Reiterating the RBI’s commitment to maintaining the current accommodative policy stance until the economy is back on track, the Governor enthused the markets with a new programme — Government Securities Acquisition Programme (G-SAP) — through which it will purchase government securities worth Rs 1 lakh crore in the first quarter of FY22. The RBI also announced that it will continue with a variable rate reverse repo to suck excess liquidity. While the 10-year G-Sec bond yields dropped 0.6% to 6.08 on Wednesday, the benchmark Sensex gained 0.9% to close at 49,661.7.

What do the two announcements mean?

In the backdrop of the government’s elevated borrowing for this year, which the RBI has to ensure goes through without causing disruption, G-SAP aims to provide more comfort to the bond market, market participants said.

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 A note by Axis Mutual Fund said, “This can be construed as Operation Twist, with liquidity being withdrawn at the short end and injected at the long end, which should effectively compress ‘term-premia’ (normalising the curve).” Currently, while the 10-year GSec yield is over 6%, the yield on 5-year Gsec is around 5.6% and that on 3-year Gsec is under 5% — around 4.85%.

What other benefits does the G-SAP offer?

Market participants say they have always wanted to know the RBI’s Open Market Operations (OMO) purchase calendar and the RBI has now provided that to the market through this announcement on GSAP. A report by Edelweiss Mutual Fund states that it will provide certainty to the bond market participants with regard to RBI’s commitment of support to the bond market in FY22.

“The RBI has purchased ~Rs. 3.13 trillion worth of bonds from the secondary market in FY21. However, it was carried out in an ad hoc manner with the market awaiting RBI OMO purchase announcements with bated breath on weekly basis. 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 report said.

The report notes that 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.

The move to introduce G-SAP “would rein in sharp spike in GSec bond yields.” While introduction of long-term VRRR (variable rate reverse repo) is an extension towards normalising liquidity, “liquidity surplus however will and is likely to continue. It is expected the yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end.”

Why did the equity markets rise?

The Sensex at the Bombay Stock Exchange, which had fallen significantly in February and March on account of rising bond yields, rose 460 points or 0.94% to close the day at 49,661. Following the RBIs monetary policy announcements that included the securities acquisition programme, the 10-year GSec bond yield dropped around 0.6% on Wednesday and was trading at 6.08 as against Tuesday’s closing of 6.122.

While a decline in bond yield is positive for the equities markets, the fact that the RBI has now come out with a structured purchase programme to manage liquidity in the market, and that it will keep bond price volatility in control, is a big positive for market participants.

The RBI’s commitment towards continuing liquidity support also played a role in lifting market sentiments.

While a rise in bond yields in February and March led to weakness in the equity markets, a decline or stabilisation in yields will see equity investor sentiment moving up once again. Not only will domestic investors move towards equity, FPI inflow into equities too could regain momentum.