Tell us about the Government Security Acquisition Programme (GSAP) and how it will impact the bond markets; does it also signal that the RBI is more than willing to pump in liquidity at a difficult time?
Given how tumultuous the past year has been – with a pandemic, increasing fiscal deficit and estimated multi-year highs on indicators – India’s markets have been seeking a structure and clarity with regards to the government’s participation in the bond market. Now, with recovery expectations gaining momentum, the GSAP comes as a welcome move. What it means is, one – there’s a clear assurance that the Central Bank is on standby and will do what is necessary. They’ve provided a de facto calendar – at least for the June quarter, and a number, one trillion.
What we also need to remember is that they are not really bound only by the GSAP, it’s merely one of the instruments they have, which means there is sufficient flexibility in the event that yields are not in our control – for instance, when things like oil prices spike. These are things that are beyond the bank’s control and that can impact domestic yield curves as well. Which means the flexibility is necessary.
Now, as for their protracted plan which starts with the first quarter, so if we say one trillion per quarter, that’s about $4 trillion plus help to the banks. We’re looking at an sizable amount of support from the RBI, which is certainly a huge positive, and in an environment where rates are generally going up it is very important to keep a very firm hand in terms of bond yields.
How that helps is that the yield curve is kept relatively flat, and since borrowing costs hinge around the belly, it serves as an important benchmark. In the end, their aim is to keep the curve as flat as possible.