RBI announces Open Market Purchase under G-sec Acquisition Programme 2.0

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Source: The Hindu

What is the News?

Reserve Bank of India(RBI) has announced that it will conduct an open market purchase of government securities worth Rs 25,000 crore under the G-sec Acquisition Programme (G-SAP 2.0).

About G-Sec Acquisition Programme(G-SAP):
  1. G-Sec Acquisition Programme(G-SAP) is basically an unconditional and a structured open market operation (OMO), of a much larger scale and size.
  2. The word ‘unconditional’ here connotes that RBI has committed up front that it will buy G-Secs irrespective of the market sentiment.
Aim of G-SAP:
  1. The aim of G-SAP is to enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions. 
Benefits of G-SAP:
  1. G-SAP is expected to bring down the cost of borrowings for the government. Further, it will counter the upward pressure on yields due to a higher government borrowing programme.
    • Yield: It is the annual percentage rate of return earned on a security. Yield is a function of a security’s purchase price and coupon interest rate. But, the yield fluctuates according to numerous factors, including global markets and the economy.
Concerns:
  1. 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. 
  2. Additionally, too much liquidity will drive up inflation.
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