Criticism of Government Securities Acquisition Program (G-SAP)
Critics of GSAP claim that the rupee may be in danger. They held the opinion that the rupee’s decline was already due to the GSAP announcement. Therefore, opponents point out that a weaker rupee trades off favourably with low rates or cheaper borrowing costs. A surplus of money will also drive up inflation.
The issue with this substantial borrowing is that there is a cap on the amount of money that may be lent by the financial system. It is only natural for investors to start seeking a larger rate of return on their lending when the market’s demand for capital increases. Additionally, it causes the bond market to demand larger returns, which raises the yield on the G-Sec. The rising yields on its bonds are causing problems for the government. The RBI will have to offer a greater rate of return for the new securities it will be issuing in 2021–2022, which will ultimately raise the government’s interest cost as the yields on the existing securities increase. Since it is thought to be the safest form of investment, G-Sec serves as the standard for all other borrowings in the nation. All the other loan rates that the RBI is not monitoring will increase as soon as the G-Sec interest rates rise.
Note: Open Market Operations (OMO)
- It involves the RBI, the nation’s central bank, buying and selling treasury bills and other government securities. OMO’s goal is to control the amount of money in the economy.
- The central bank will purchase government assets on the open market when it needs to inject liquidity into the financial system. In this manner, it offers liquidity to commercial banks.
- In contrast, it reduces liquidity when it sells securities. This means that the central bank has some indirect control over the money supply and short-term interest rates.
- These activities are frequently carried out on a daily basis in a way that keeps inflation in check while assisting banks in continuing to lend.
- RBI works with the public indirectly through commercial banks to implement the OMO.
- The RBI adjusts the quantity and cost of money in the system using OMO in addition to other monetary policy tools like the repo rate, cash reserve ratio, and statutory liquidity ratio.
Government Securities Acquisition Program (G-SAP)
The Government Securities Acquisition Program (G-SAP) is essentially a much bigger and more unconditional Open Market Operation (OMO). The G-SAP is an OMO with a “unique character,” as per RBI. The term “unconditional” in this context means that RBI has promised up front that it will purchase G-Securities regardless of the state of the market. A marketable instrument known as Government Security (G-Sec) is one that the federal or state governments have issued. It acknowledges the financial responsibilities of the government. The government securities will be bought by the RBI through a multi-security auction using the multiple-price approach. It will make five different types of government securities purchases through a multi-security auction with various price methodologies. The Liquidity Adjustment Facility (LAF), OMOs, and Operation Twist will continue to operate as usual with G-SAP, and the program is integrated into the central bank’s overall liquidity planning framework for 2021–2022. The government can borrow money by using G-Secs, which are instruments of government-issued debt. The RBI has announced that as part of the G-sec Acquisition Program, it will buy government securities on the open market for Rs. 25,000 crores in August 2022 (G-SAP 2.0), which is why it has recently made headlines.