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Key Point of the Operation

Objective of G-SAP:

  • The RBI has formally announced that the first stage of G-SAP 1.0 operations will begin on April 15, 2021.
  • The first step will be the acquisition of five dated securities for a total of Rs 25,000 crore.
  • The multiple pricing technique will be used for the first stage of the G-SAP acquisition, and bidders will pay at the rates they submitted in their bids.
  • Four securities with various maturities have been notified by the RBI for the G-Sec acquisition.
  • Along with implementing the G-SAP strategy, the RBI will carry on with routine activities.
  • The LAF, longer-term repo/reverse repo auctions, currency operations, and open market operations, including special OMOs, would fall under this.
  • This is done to make sure that the evolution of the liquidity conditions is consistent with the direction of monetary policy.

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.

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Key Point of the Operation:

The RBI has formally announced that the first stage of G-SAP 1.0 operations will begin on April 15, 2021. The first step will be the acquisition of five dated securities for a total of Rs 25,000 crore. The multiple pricing technique will be used for the first stage of the G-SAP acquisition, and bidders will pay at the rates they submitted in their bids. Four securities with various maturities have been notified by the RBI for the G-Sec acquisition. Along with implementing the G-SAP strategy, the RBI will carry on with routine activities. The LAF, longer-term repo/reverse repo auctions, currency operations, and open market operations, including special OMOs, would fall under this. This is done to make sure that the evolution of the liquidity conditions is consistent with the direction of monetary policy....

Objective of G-SAP:

As part of G-SAP 1.0, the RBI will agree in advance to buy a certain quantity of government securities on the open market in order to maintain a steady and orderly evolution of the yield curve amid favorable liquidity conditions. To control the economy’s liquidity and produce a stable and orderly evolution of the yield curve. A yield curve is a line that represents the yields (interest rates) of bonds with similar credit ratings but various maturities. The yield curve’s slope provides insight into potential future changes in interest rates and economic activity....

Significance of the Government Securities Acquisition Program (G-SAP):

It will provide the bond market with more security. This year, the Government borrowed more money, thus RBI must make sure the Indian market doesn’t suffer, which lowers the cost of borrowing for the government and maintains the yield. To enable a steady and controlled evolution of the yield curve, this open market purchase will be made. The difference between the repo rate and the yield on ten-year government bonds will be narrowed as a result. It will almost fulfill the function of an OMO calendar, which the bond market had long wished for. With its extensive borrowing program (such as the National Infrastructure Pipeline Project), the Indian government can now sigh with satisfaction as long-term borrowing costs decline....

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....

Conclusion:

In the first quarter of the current fiscal year, the RBI will purchase government securities worth Rs 1 lakh crore through the G Sec Acquisition Programme (G-SAP) announced by the Governor of the Reserve Bank of India. This program serves as a signal from the RBI to support the bond market and control long-term yield. The money raised from the sale of government securities might be used for other costs or to finance infrastructure improvements. If initiatives like this were implemented in India, they would not only reduce the country’s budget deficit but also encourage government spending on development projects that could increase jobs....

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Objective of G-SAP: