The Reserve Bank of India (RBI) recently announced to purchase and sell government securities worth ₹15,000 crore on September 30 as part of the open market operations (OMOs). When the central bank wants to inject liquidity into the system, it buys the government securities. On the other hand, when it wants to absorb liquidity from the market, it sells the securities.
The latest bond purchase comes under the G-SAP (Government Securities Acquisition Programme). This programme is different from vanilla OMOs in a way that it entails a commitment by the Reserve Bank to the market to purchase the bonds of a particular value, thus adding a sense of comfort to the bond markets.
The Reserve Bank’s aim is to keep the bond yields down, and to keep the government’s cost of borrowing lower.
Why does RBI carry out open market operations?
The RBI deploys several tools of monetary policy in its arsenal to influence key interest rates. Open market operations (OMOs) are a part of these tools where the central bank purchases government securities when it wants to inject liquidity into the system. On the other hand, it sells government securities to absorb liquidity.
When the RBI wants to implement its expansionary monetary policy in a bid to ease interest rates, it buys G-Secs and adds liquidity into the system by printing more money. The increased money flow is used by banks to lend to its borrowers and as a result, interest rates start moving downward.
On the contrary, if the RBI wants to implement contractionary policy to tighten interest rates, it sells the government securities to suck liquidity. As the cash flow in the system declines, the interest rates move upward.
What are government securities?
Government bond is a debt instrument which the government issues to borrow money from the bond buyers. Since they have a sovereign guarantee, they are risk-free.
Why did RBI start G-SAP?
To keep the bond yields and government’s borrowing cost lower, the RBI announced G-SAP (Government Securities Acquisition Programme) in April 2021. This was meant to give stability to the bond market, and to facilitate the government's borrowing programme by giving a definite timeline and quantum of bond purchases in advance.
Under G-SAP 1.0, the central bank purchased securities worth ₹one lakh crore in the first quarter of 2021-22. After its success, the G-SAP 2.0 was announced in June 2021 with a plan to buy securities worth ₹1.2 lakh crore in the second quarter.