GSAPs scrapped for now, bond traders fret

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MUMBAI: The scrapping of the Government Securities Acquisition Programme (G-SAP) programme pushed up bond yields raising the borrowing costs for the government, but the assurance that the liquidity stance would remain accommodative may temper it.

The benchmark bonds rose as much as five basis points during Friday’s trading to 6.32 percent. It closed at 6.31 per cent versus 6.27 per cent Thursday. The cut-off yield came almost similar to the repo rate (4 per cent) at 3.99 per cent for the 14-day Variable Repo Reverse Repo (VRRR) auction Friday.

“Stopping of GSAP led to perception about reverse repo rate rise in the next policy, which in turn sent yields higher,” said Jayesh Mehta –country treasurer at Bank of America. “The GSAP move actually indicates only a change of mode for liquidity management. OMOs or OTs will likely replace GSAPs, which are more of a passive nature.”

GSAP is a dedicated liquidity window through which RBI buys sovereign papers to infuse cash into the banking system. It also sold papers under the window to maintain liquidity equilibrium in the system.

Total liquidity injected into the system during the first six months of the current financial year through open market operations (OMOs), including G-SAP, was Rs 2.37 lakh crore, as against an injection of Rs 3.1 lakh crore over the full financial year 2020-21, show data from RBI.

RBI proposed to conduct the 14-day long-term variable rate reverse repo (VRRR) auctions on a fortnightly basis for a total estimated sum of Rs 25 lakh crore by December 3 this year.

The RBI may consider the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion.

“The stance remains accommodative as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy,” RBI governor Shaktikanta Das said in the policy statement.

The Reserve Bank, however, would remain in readiness to undertake G-SAP as and when warranted by liquidity conditions and also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs).

“While the discontinuation of GSAP was a disappointment for the bond markets, explicitly stating that rates will be kept at current levels for as long as necessary was very comforting,” said Vijay Sharma, executive vice president at PNB GILT.

“Our yields are higher in sympathy with higher US yields and higher crude oil prices,” he said.

US Treasury yields have weighed on the local yields with the US benchmark surging about 32 basis points since August.

Since the onset of the pandemic, the Reserve Bank has maintained ample surplus liquidity to support a speedy and durable economic recovery. The surplus liquidity rose even further to a daily average of Rs 9.5 lakh crore in October so far (up to October 6) compared with about Rs 7 lakh crore in September.