G-SEC ACQUISITION PROGRAMME
http://kyleschen.com/tag/antifragile/ What is in news : The Reserve Bank of India (RBI) on Friday said it was halting its bond buying under the G-Sec Acquisition Programme (GSAP) for now, stressing that the measure had succeeded in ensuring adequate liquidity and stabilising financial markets.
- Basically an unconditional and a structured Open Market Operation (OMO), of a much larger scale and size.
- The w ord ‘unconditional’ here connotes that RBI has committed upfront that it will buy G-Secs irrespective of the market sentiment.
- Objective: To achieve a stable and orderly evolution of the yield curve along with management of liquidity in the economy.
- Significance: The government will mainly benefit from the G-SAP.
- By purchasing G-secs, the RBI infuses money supply into the economy which inturn keeps the yield down and lower the borrowing cost of the Government.
- The government of India, with its massive borrowing programme (for example, National infrastructure pipeline project), can now breathe a sigh of relief as long-term borrowing costs come down.
- Issues: Critics of the G-SAP say that the rupee might get adversely affected.
- They are of the view that the G-SAP announcement has already led to depreciation of the rupee (a fall in the value of currency).
- So, critics are pointing to the fact that there is a trade-off between a tumbling rupee and lower borrowing costs/low yields.
- Further, too much liquidity will drive up inflation.