Monetary policy: RBI to buy Rs 1.2 trillion in G-SAP for Sept quarter

The Reserve Bank of India (RBI) will buy Rs 1.2 trillion of bonds from the secondary market under its government securities acquisition programme (G-SAP) for the second quarter, Governor Shaktikanta Das said on Friday.
 
This is in line with the expectation of the market participants who were hoping for at least a trillion-rupee purchase under G-SAP for the second quarter. The central bank has so far purchased Rs 60,000 crore of bonds of its Rs 1 trillion programme for the first quarter. The remaining Rs 40,000 crore of bonds will be purchased on June 17, the governor said in his online address, announcing the second bi-monthly monetary policy of the fiscal. 

 
However, included in the purchase will be Rs 10,000 crore of state development loans. According to bond dealers, this indicates that in the second quarter purchase also, there will be state development loans (SDL). 
 

The move impacted the sentiment a little bit and the 10-year bond yields rose 3 basis points from their previous close of 5.99 per cent. 
 
“The rise in yields is probably nothing linked to the credit policy. The market got what it was hoping for. However, the SDL purchase was a new factor. And the fact that when the inflation is statistically down, the RBI is still expecting it to rise to 5 per cent, even as the core inflation remains sticky, may have impacted the sentiment somewhat,” said Harihar Krishnamurthy, head of treasury at First Rand Bank. 

 
Bond dealers say there are other global factors at play, too. The recent US employment data release indicated that the world’s largest economy is on a recovery path and there would be a slow exit from expansionary monetary policy. This will push up US interest rates, and therefore developing market bond yields.
 
However, the yields would probably scale back to below 6 per cent in the subsequent days as the RBI has made conditions conducive enough for the market, they say.
 
The RBI governor also said India’s $600 billion forex reserves lend it resilience to face taper tantrum-like challenges. This will lend stability to the local currency.

 
“Our forex operations are mainly driven by the consideration of maintaining the stability of the exchange rate, which, I think, we have been quite successful in. Emerging market economies have to build up their own buffers and RBI is no exception to that,” Das said.  At the same time, Deputy Governor Michael Patra explained that the recent volatility in currency forward premiums is essentially a market outcome, exacerbated by a thin market.  “We watch these outcomes and stand ready to take countervailing actions to cool the forwards or the opposite, as and when necessary,” Patra said.
 
The rupee closed at 72.99 a dollar, from its previous close of 72.92 a dollar.