Any Questions? info@beandbyias.com /+91 9958826967, 9958294810

For registration call @ 9958294810 or mail at info@beandbyias.com | LAW OPTIONAL fresh batch starting from 19th July 2021 |

Government securities acquisition programme (G-SAP) - Moderate bond yield

Government securities acquisition programme (G-SAP) - Moderate bond yield

CONTEXT:

  • Reserve Bank of India’s decision to step up purchase of government securities under the government securities acquisition programme (G-SAP) led to the low yield on the benchmark 10-year bond falling below 6%.

Raghuram Rajan: Raghuram Rajan hands pretty parting gift to India's  corporate bond market - The Economic Times

G-SAP and Bond Yield:

  • It closed under 6% for the first time since February 12.

  • In April, the RBI launched G-SAP under which it said it would buy Rs 1 lakh crore worth of bonds in the April-June quarter.

  • It has so far bought Rs 25,000 crore worth of government securities (G-secs).  

  • Capital gains or losses: Movements in yields, which depend on trends in interest rates, can result in capital gains or losses for investors.

  • Rise in bond yields: If an individual holds a bond carrying a yield of 6%, a rise in bond yields in the market will bring the price of the bond down.

  • Drop in bond yield: A drop in bond yield below 6% would benefit the investor as the price of the bond will rise, generating capital gains.

Softening of bond yields:

  • The fall in bond yields in India could also be due to:

    • Sharp decline in US Treasury yields or

    • Economic uncertainty caused by Covid-19.

  • G-SAP: But the most important driver of the bond market was RBI interventions. The announcement of a bond-buying programme – G-SAP — played a crucial role in turning the market sentiment.

  • RBI continued to send strong yield signals by cancelling and devolving government debt auctions.

Impact on markets and investors:

  • G-SAP has calmed investors’ nerves and reduced the spread between

    • Repo rate and

    • 10-year government bond yield.

  • Better for equity markets: A decline in yield is also better for the equity markets because money starts flowing out of debt investments to equity investments.

    • That means as bond yields go down, the equity markets tend to outperform by a bigger margin and as bond yields go up equity markets tend to falter.  

  • When bond yields go up, it is a signal that corporates will have to pay a higher interest cost on debt.  

RBI keen on keeping yields in check:

  • The RBI has been aiming to keep yields lower as that reduces borrowing costs for the government while preventing any upward movement in lending rates in the market.

  • A rise in bond yields will put pressure on interest rates in the banking system which will lead to a hike in lending rates. The RBI wants to keep interest rates steady to kick-start investments.

Bonds:

  • Bonds and equities are two important instruments issued by corporate to mobilize funds.

  • Governments issue bonds as part of their borrowing programme.

  • Bonds are debt, whereas stocks are equity.  By purchasing equity (stock), an investor becomes an owner in the issuing entity.

  • Ownership comes with voting rights and the right to share in any future profits.

  • By purchasing a debt instrument like bond, an investor becomes a creditor to the corporation (or government).

  • A bond is a financial security issued by a borrower to avail long term funds.

Government Securities Acquisition Programme (G-SAP)

  • Through G-SAP, RBI will purchase government securities worth Rs 1 lakh crore in the first quarter of FY22.

  • G-SAP aims: It aims to provide more comfort to the bond market.

  • Liquidity Sucking: At the same time, since liquidity is already in a large surplus, RBI will continue with variable rate reverse repos at the short end.

  • Operation Twist: This can be construed as Operation Twist, with liquidity being withdrawn at the short end and injected at the long end

SOURCE: Indian Express