Government Securities Acquisition Programme

Why in news?

• The Reserve Bank of India (RBI) 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.

About Government Securities Acquisition Programme (G-SAP):

• It is an unconditional and structured Open Market Operation (OMO) of a larger scale and size with a distinct character.
• The term unconditional refers to the RBI's commitment to buy Government Securities irrespective of the market sentiment.
• It aims to achieve a stable and orderly evolution of the yield curve along with the management of liquidity in the economy.

What is Open Market Operations?

• Open Market Operations (OMOs) are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
• If there is excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity.
• Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
• It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.

Significance of G-SAP:

• By purchasing the government securities, the RBI infuses money into the economy, which in turn, keeps the yield down and lower the borrowing cost of the Government.

Issues associated with the G-SAP:

• Experts are of the opinion that with the announcement of G-SAP, the rupee has already depreciated.
• There is a trade-off between a tumbling rupee and lower borrowing costs. Additionally, too much liquidity will drive up inflation.

PRELIMS QUESTION

Which of the following is/are the best possible outcome of RBI purchasing government securities from the market?

(a) It reduces rupee liquidity in the market

(b) It reduces revenue deficit of the Government

(c) It lowers the borrowing cost of the Government

(d) It increases country's merchandise exports

Answer