Day after monetary policy: RBI's G-SAP programme drives down yields

This is because while HTM stock can't be sold in OMOs, that may not be the case with G-SAP: Experts

The 10-year bond yield dropped to 6.03 per cent on Thursday, the lowest since Budget Day, 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 quarter.
 
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.
 
The 10-year bond has fallen more than 15 basis points since March 31 in just four trading sessions, even without a rate cut.
 
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.
 
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.
 
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.

 
But 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. While details are awaited, in G-SAP, only bonds that are available for sale (AFS) can likely be sold to the RBI. 
 
“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,” said Soumyajit Niyogi, associate director at India Ratings.
 
Therefore, 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.
 
Since the AFS stock is thin, the G-SAP action can drive down the yields effectively. “While details are awaited, it looks like 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,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank. 
 
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.  “The impact would be minimal, if at all,” said Krishnamoorthy. 
 
Economists also said the G-SAP would likely be wound down once vaccinations reach a critical mass and the pandemic subsides. “This is unlikely to be a permanent tool. 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,” said an economist requesting anonymity.
 
“The Rs 1-trillion G-SAP 1.0 is essentially the much-awaited quasi RBI OMO calendar,” said Indranil Sengupta of BofA, adding, “it has the added merit that it will be a price taker rather than a direct price maker”.