RBI monetary policy: Bond market expects minimum Rs 1 trn of G-SAP in Q2

Expects minimum Rs 1 trn of G-SAP in 2nd quarter, sees it rising to Rs 1.25 trn to keep yields soft

The bond market is eagerly waiting for the Reserve Bank of India (RBI) to announce how much it plans to buy in the second quarter under its government securities acquisition programme (G-SAP), and if the second tranche would bring in any conditions. 
 
The central bank has plans to buy Rs 1 trillion of bonds under the G-SAP in the first quarter, of which it has already bought Rs 60,000 crore of bonds. 
 
Friday’s monetary policy will be the last for the quarter, and therefore, the second quarter numbers are expected to be spelt out in the policy.
 

The G-SAP announcement can come nearer to the end of the first quarter, but given that the bond yields are showing signs of firming up, and the central bank devolving primary auctions to control yields, the policy platform would be a good opportunity to address the bond market’s concerns, say bond dealers. 

 
The expectation in the market is that the G-SAP for the second quarter would be at least Rs 1 trillion, but it can go up to Rs 1.25 trillion, too. The central bank may want to reserve the higher numbers for the second half of the fiscal year, when the government tends to borrow extra.

 
Anand Bagri, head of the domestic market, said the G-SAP could be equally distributed across quarters by a trillion each.
 
Ram Kamal Samanta, vice-president (investments), Star Union Dai-ichi Life Insurance, expects the G-SAP amount to scale up as the quarters progress. He expects G-SAP to rise to as much as Rs 1.25 trillion for the next quarter.
 
“The G-SAP is expected to be anything between Rs 1 trillion and Rs 1.5 trillion,” said Debendra Dash, senior vice-president at AU SFB.
 
“If there is no announcement on G-SAP, the 10-year yield will go up by 25 basis points,” said Dash.

 
A senior bond dealer with a large domestic bank, however, said yields will rise if the RBI doesn’t announce more than Rs 1 trillion of G-SAP on Friday. 
 
Not all agree, though.
 
“Frankly, the Rs 1 trillion for GSAP 1.0 itself was a big leap for the RBI. They had refrained from giving a commitment on the amounts till the April policy. So now, expecting that the RBI will quickly become more generous with commitments of higher numbers, may be far-fetched,” said Badrish Kulhalli, head of fixed income at HDFC Life.
 
Expectations around the G-SAP assume significance as 10-year bond yields have started crossing 6 per cent, which the RBI wants to ideally avoid.

 
To send a strong signal to the market, the RBI had to devolve bond auctions. 
 
Primary dealers had to buy bonds worth Rs 10,735.76 crore, out of Rs  11,000 crore on offer for a bond maturing in 2026. Similarly, there was Rs 1,944.791 crore of devolvement out of the Rs 7,000 crore offered for a bond maturing in 2050. However, the central bank exercised greenshoe options to buy Rs 2,610.213 crore extra in a bond maturing in 2035.
 
The aggressive devolvement made the 10-year bond yields, which had just been climbing up beyond 6 per cent, settle at 5.99 per cent.