RBI’s Government Securities Acquisition Programme (G-SAP)

RBI’s Government Securities Acquisition Programme (G-SAP)

Subject – Economy

Context – RBI’s G-SAP 2.0 may hinder banks’ credit offtake

Concept –

• Under the G-SAP 2.0 programme, the RBI will conduct open market purchases of government securities worth ₹1.2 lakh crore across the various maturity spectrum.
• The programme aims to ensure the orderly evolution of the yield curve such that all segments of the yield curve remain liquid.
• G-SAP 2.0 is the Indian version of quantitative easing, which has been the go-to monetary policy to pull economies out of recession after the global financial crisis.
• In quantitative easing, central banks pump money into the economy through the banking system, with the tacit belief that the banks will pass on that liquidity to the rest of the economy in the form of credit, thus propping up the productive activity in the economy.
• The current annual credit and deposit growth rates for the scheduled commercial banks are 10 per cent and 6 per cent, respectively, raising serious concerns about the pass-through.
• The ownership pattern of government securities reveals that the commercial banks hold approximately 40 per cent of government securities.
• The massive quantitative easing programme under G-SAP may flatten the yield curve and inflate the prices of government securities held by the banks, causing an increase in the banks’ equity.
• The Reserve Bank of India (RBI) has given a twist to its Operation Twist exercise, subsuming purchase of longer tenor Government Securities (G-Secs) under the G-Sec Acquisition Programme (G-SAP) 2.0 and simultaneously selling short-term G-Secs under open market operation (OMO).
  • Under special OMOs (operation twists) that the RBI usually conducts, the notified amounts for the purchase and sale legs are equal and, therefore, intended to be liquidity neutral. These are aimed at lowering longer term interest rates, thereby reducing the term premium.

To know more about G-SAP, please click here.