Decoding G-SAP
Updated: Jun 16, 2023
Government Securities Acquisition Program
G-SAP or Government Securities Acquisition Programme is a recent initiative taken by the Reserve Bank of India, under which the Central bank, in advance, has pledged to purchase government bonds valued at a definite amount. This is an effort to dispense ease for the market participants. The RBI declared to buy government securities worth ₹1 lakh crore [1] within G-SAP 1.0 in the first quarter of the financial year 2021-22. Further, it was issued that the second quarter of FY 2021-22 would witness the purchase of government securities worth ₹1.2 lakh crore [2] under G-SAP 2.0. The purpose of G-SAP is to furnish stability in the bond market. The ordered framework of the programme will help the market participants in offering prices at the auctions and subsequently, keeping the fluctuations in prices in control.
The G-Sec Acquisition Programme has been introduced as a result of heavy borrowings by India. The Indian government is burdened with a borrowing of ₹12.8 lakh crore [3] in 2020-21 and furthermore proposed to borrow ₹12.05 lakh crore [4] in 2021-22. It is notable that the Central bank performs the role of banker to the government. So, it can be drawn that this programme is an attempt to aid the government borrowing. This high borrowing can lead to demand for a higher return from government securities in the bond market. G-SAP is expected to ensure financial stability by bringing certainty to the timing and amount of bond buys. The functioning of G-SAP induces the Central bank to purchase bonds by printing money and injecting liquidity into the economy. This, in turn, will make sure that the returns on government bonds do not rise and will cater to the government’s need of borrowing at lower rates.
G-SAP is often compared to the Open Market Operations (OMO). G-SAP is slightly different from the usual OMO conducted by the RBI. Open Market Operations can be referred to as a monetary policy tool through which the Central bank purchases and sells government securities in the open market. On the other hand, G-SAP commits beforehand to purchase government securities. OMOs aims to control the supply of money and are undertaken to withdraw or inject liquidity, keeping in mind the existing liquidity situation in the economy, whereas G-SAP is unconditional and is carried out irrespective of the situation in the market. That’s why G-SAP was also called an “OMO with distinct character”, by the present RBI Governor, Shaktikanta Das. G-SAP, at times, is debated as a Quantitative Easing programme as well. However, G-SAP cannot be equated with the Quantitative Easing programmes, which are carried out mostly in the developed economies. Quantitative Easing Programmes are implemented in a situation where the general price level is severely close to deflation; which is opposite to the case in India where inflation is expected to reach close to 5% [5] in the fiscal year 2022. The purchases committed under the quantitative easing programme are for a prolonged period of time whereas the G-SAP process claims to be short-term in character. The RBI simply assures purchases in the next quarter.
RBI opted for a secondary market G-SAP for the orderly evolution of the yield curve. RBI would ensure that interest rates on government bonds do not go up, so the price of the bond will remain high. This will result in a low yield on government bonds due to the inverse relationship between bond yields and bond price. With the revelation of G-SAP 1.0, the 10-year G-Sec bond yield fell from 6.08% to 6.03% [6]. Meanwhile, the Indian Rupee too faced consequences and projected a drop to 74 on April 7, 2021, against the American dollar. Amidst all these events, G-SAP can all together, still be deemed as a smart action by the RBI keeping in mind the backdrop of a huge borrowing plan of the Indian government.
This article is proof read by Elizabeth Annie Sleeba.