G-SAP, the Securities acquisition plan to encourage market
- Posted By
8th Apr, 2021
To maintain its commitment towards the current accommodative policy stance, the Reserve Bank of India (RBI) launched the Government Securities Acquisition Programme (G-SAP).
What is Government Securities Acquisition Programme (G-SAP)?
- The program is being launched to support the ongoing government borrowing.
- It will provide certainty to the bond market participation by rein in a sharp increase in G-Sec bond yields.
- G-SAP aims towards providing more comfort to the bond market by stabilizing it, as the government borrowing expects to enhance the liquidity in the market which could impact the market stability.
- The program will help in purchasing government securities worth Rs 1 lakh crore in the first quarter of FY22.
- It is the return an investor gets on a bond or particular government security purchased.
- Bond's yield is based on its coupon payments divided by its market price.
- A reciprocal relationship exists between the bond price and the bond yield. As the bond prices increase, the bond yields fall.
Relation between bond yield and market
- A negative relationship between bond yields and equity markets.
- The higher level of bond yields enhances the opportunity cost of investing in equities, which makes the equities less attractive.
- A decline in bond yield is positive for the equities markets.
- Significance: This would help in calming the investors’ nerves and would help market participants to bid better in scheduled auctions.
- It would reduce volatility in bond prices.
- Currently, the 10-year G-Sec yield is over 6%, the yield on 5-year G-Sec is around 5.6% and that on 3-year Gsec is under 5%.
- RBI’s role: The RBI will continue with a variable rate reverse repo to take out excess liquidity.
- These are debt instruments that are issued by the government to borrow money
- They are issued to fund the daily operations of the government along with the special infrastructure and military projects.
- They guarantee the full repayment of invested principal during the maturity of the security.
- Government securities are said to be risk-free as they are backed by the issuing government.
- The two key categories of government securities are
- Treasury bills (T-bills) – These are short-term instruments that mature in 91 days, 182 days, or 364 days.
- Dated securities – These are long-term instruments, which mature anywhere between 5 years and 40 years.