Government Securities Acquisition Programme
The Government Securities Acquisition Programme (GSAP) has been abolished by the Reserve Bank of India. Instead, the resumption of the liquidity normalization programme has been announced by the RBI.
Highlights
- Shaktikanta Das, the present governor of RBI has said that liquidity normalization should be uninterrupted and gradual and there isn’t any need for GSAP auctions.
- On 5th October, average daily liquidity increased to Rs 9.4 lakh crore o up from Rs 7 lakh crore in the month of September.
After effects of this announcement
Government bond market participants were disappointed with the Reserve Bank of India’s decision to stop purchasing Government Securities (G-Secs) through the GSAP, causing the G-Sec prices to fall and yields to rise. Bond prices and yields are inversely co-associated and flow in contrary directions.
About Government Securities Acquisition Programme
The GSAP is basically a structured and unconditional Open Market Operation (OMO) of a much broader scope. RBI has designated the GSAP as a “unique character” OMO. The word “unconditional” here means that RBI has agreed in advance to buy GSecs regardless of market sentiment. The objective of this programme is to achieve an orderly and stable development of the yield curve together with the control of liquidity in the economy. The government will benefit primarily from the GSAP. By purchasing Gsecs, RBI adds a supply of money to the economy, which in turn reduces the government’s borrowing costs and keeps yields low. The government of India with its massive loan program projects can now breathe a sigh of relief as the costs of long-term loans are falling.
Criticism of Government Securities Acquisition Programme
Critics of GSAP say the rupee could be compromised. They believed that the announcement of the GSAP already caused the depreciation of the rupee. So, critics point out that there is a trade-off between a falling rupee and lower borrowing costs or low yields. Also, too much liquidity will increase inflation.
