RBI war on bond yields birthed India's first QE, the G-SAP

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  RBI war on bond yields birthed India's first QE, the G-SAP

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Read more on - Polity | Economy | Schemes | S&T | Environment

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• RBI's war on yield: Right after the April 2021 MPC announcements, the 10-year bond yield dropped to 6.03 per cent, lowest since the 2021-22 Budget Day. It was clearly responding to the Reserve Bank of India’s (RBI’s) commitment to buy at least Rs 1 trillion of bonds from the secondary market in the June 2021 quarter.
• India's first QE: In its own version of quantitative easing (QE), the central bank introduced a G-sec Acquisition Programme (G-SAP) in the policy, committing upfront how much it would buy every quarter. The bond market expects the RBI to run a G-SAP programme of at least Rs 3.5-4 trillion in the full fiscal year. The impact on the RBI balance sheet would be minimal considering the debt to be bought would be government securities and the total purchase would be in line with what the RBI did in FY21.

1. The 10-year bond has fallen more than 15 basis points since March 31, 2021, in just four trading sessions, even without a rate cut.
2. RBI Deputy Governor Michael Patra had clarified in a post-policy interaction with the media that the G-SAP will run alongside the regular bond buying tool: open market operations (OMOs). While they are separate programmes, the quantum of liquidity infusion through various tools would remain within the requirement decided by the liquidity framework calculation.
3. Considering RBI Governor Shaktikanta Das had already committed to a Rs 3-trillion bond buying programme from the secondary market, it can be assumed that the amount can be raised either via OMO or G-SAP, or both in tandem, say experts.
4. The governor had also clarified that considering the total borrowing programme of Rs 22-23 trillion between the states and the Centre, RBI’s purchase is not that material.

• The two are different: There is an important distinction between the two. The G-SAP can technically be used more effectively to bring down yields, than a regular OMO. In OMOs, bonds can be sold from the held-to-maturity (HTM) portfolio of banks. That may not be the case with G-SAP. It seems that in G-SAP, only bonds that are available for sale (AFS) can likely be sold to the RBI. So since banks can’t sell directly from HTM, as this is not under OMO window, the Rs 1-trillion figure looks a reasonably good amount in the absence of a mammoth HTM stockpile of banks.

1. So, the G-SAP mechanism will give support to traders, and primary dealers, as they can now dispose of their stock much more effectively in a much less competing environment.
2. Since the AFS stock is thin, the G-SAP action can drive down the yields effectively. The outright OMO would be subsumed by the new G-SAP, and the OMO itself will be used more like an Operation Twist to control yields.
3. Even as Patra said the RBI is opening its balance sheet for the first time, alluding to a QE programme, albeit accepting the highest-rated securities possible, economists and bond traders do not see it impacting the RBI balance sheet much. 

• Summary: The G-SAP would likely be wound down once vaccinations reach a critical mass and the pandemic subsides, and G-SAP may not be permanent. It is the same as OMO, but with a different name so that it can be wound down quickly. The RBI is running a parallel variable reverse repo auction as a means of normalisation already so that excess durable liquidity doesn’t get created. This is essentially yield management. The G-SAP has the added merit that it will be a price taker rather than a direct price maker.

Read more on - Polity | Economy | Schemes | S&T | Environment

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