RBI announces second round of G-SAP to keep yields in check

In a bid to manage the yield curve and enable the government to borrow at lower rates, Reserve Bank of India governor Shaktikanta Das said on Friday there would be a second round of the Government Securities Acquisition Programme (G-SAP) in the second quarter of the financial year, given that the earlier two auctions had evoked keen interest from market participants with bid cover ratios of 4.1 and 3.5, respectively.

Das said the central bank has decided to undertake G-SAP 2.0 in Q2 of FY22 by conducting secondary market purchase operations of ₹1.20 lakh crore to support the market. In addition, a third round of bond buying has also been announced under G-SAP 1.0. The central bank has decided that another operation under G-SAP 1.0 for purchase of G-Secs of ₹40,000 crore will be conducted on June 17.

While this move will help keep borrowing costs lower for the government, there is good news for the private sector as well. The Confederation of Indian industry welcomed the move. Chandrajit Banerjee, director general of the CII, said: “While keeping the policy rates unchanged, the RBI’s move to continue to use its unconventional tools to keep yields stable amid a large government borrowing programme provides succour to keep borrowing costs contained for the private sector. The G-SAP 2.0 is one such step in this direction.”

The first two auctions conducted by the RBI under the first G-SAP programme helped keep interest rates benign for 91-day T Bills, commercial papers and certificates of deposit. The market was keenly looking out for another round of G-SAP, which the RBI announced on Friday.

Indranil Pan, chief economist at Yes Bank, said: “To enable the government to borrow at attractive rates, another round of bond buying was announced under G-SAP 1.0, while a G-SAP 2.0 was announced. We think that over the current FY, the RBI will not have any leeway to change its interest rates to provide support to the economy. Instead, it will do whatever necessary to push credit and liquidity to the stressed areas of the economy so as to prevent erosion of the supply chains in the economy.”

The central bank has been deploying both conventional and unconventional tools to manage liquidity in the system in consonance with its monetary policy stance. The governor said the timing of the second auction was aimed at replenishing the drainage of liquidity due to the restoration of the cash reserve ratio (CRR) to its pre-pandemic level of 4% of net demand and time liabilities (NDTL), effective May 22, 2021. The redemption of government securities worth around ₹52,000 crore during the last week of May has fully neutralised the CRR restoration.