How RBI G-SAP Bond Reduces Volatility In Bond Price?
The central bank of India announced a ₹1 trillion bond-buying plan called RBI G-SAP 1.0, to put a stop to the long-term interest rates amongst the huge government borrowing program, even as it grasped the policy rates steady and held back an accommodative stance to support the brittle economic recovery. This was done as the Monetary Policy Committee keeps ahead with its obliging policy stance.
What is the RBI G-SAP 1.0 Programme?
RBI G-SAP 1.0 is a program that has been formulated under which the Reserve Bank of India (RBI) will buy government bonds from the peripheral market that is worth ₹1 trillion in the first quarter of 2021-22. This is a form of the “quantitative easing” programs that has been adopted by many developed economies.
The announcement of this government borrowing plan in the Union Budget 2021-22 led to a keen rise in bond yields. The well formulated G-SAP is expected to soothe the investor’s nerves and curb fluctuations in long term bond yields. This uncustomary monetary policy tool aims to build further an economic scenario that will be beneficial for faster financial recovery of the economy.
Last year RBI bought government securities from Open Market Operation (OMO) worth ₹3.3 lakh crore that helped it to manage a record of ₹13.7 lakh crore borrowing of the government.
There was a positive response from the marketers with the yield on the mark of the 10 year old government bond falling from 10 basic points from their interest of 6.19 per cent. According to the traders, this announcement has stopped the bonds from yielding higher.
How Is It Different From Other Borrowing Plans?
This borrowing plan will be conducted along with other plans that were already existing. These include liquidity adjustment facility, out right open market operations, and Operation twist. RBI purchased bonds in the financial year 2021 that was worth ₹ 3.13 trillion in an ad hoc manner. But now it has directly confessed the amount of the bonds for the investor’s better understanding during auctions. This is assumed to reduce the chances of fluctuations in the economy and will enable methodical development in the yield curve.
How Does RBI Plan To Execute This Programme?
The RBI plans to execute the program by making the first purchase of ₹25,000 crores under the “multiple price method”. This was done on April 15 which resulted in a 6.12 per cent of bond yields. Having said that it should be kept in mind that the RBI is the debt manager of the Centre and the RBI G-SAP 1.0 is expected to relieve the bond market from further tensions.
Immediate Impact of RBI G-SAP 1.0
While the bond market was overjoyed with the announcement with the 10 year bond yielding falling to 6.08 per cent and 6.03 per cent on 7 and 8 April respectively, the value of the rupee depreciated to ₹74.587 on April 8. The outcome is the result of a lowering of return on investment between India and the US.