Why did the equity markets rise?

• The Sensex at the Bombay Stock Exchange, which had fallen significantly in February and March on account of rising bond yields, rose 460 points or 0.94% to close the day at 49,661. Following the RBIs monetary policy announcements that included the securities acquisition programme, the 10-year GSec bond yield dropped around 0.6%  and was trading at 6.08 as against closing of 6.122.
• While a decline in bond yield is positive for the equities markets, the fact that the RBI has now come out with a structured purchase programme to manage liquidity in the market, and that it will keep bond price volatility in control, is a big positive for market participants.
• The RBI’s commitment towards continuing liquidity support also played a role in lifting market sentiments.
• While a rise in bond yields in February and March led to weakness in the equity markets, a decline or stabilisation in yields will see equity investor sentiment moving up once again. Not only will domestic investors move towards equity, FPI inflow into equities too could regain momentum.

When is the first auction?
A day after the announcement, the RBI has officially notified the first phase of the G-SAP 1.0 on saying it will conduct the first phase of Open Market Purchase on April 15 with the purchase of five dated securities for an amount aggregating to Rs25,000 crore.
The RBI said the first phase of G-SAP purchase will happen using the multiple price method under which the bidders pay at the respective rate they had bid. The RBI has notified four securities for the G-Sec purchase in different maturities. In addition to the G-SAP plan, the RBI will also continue to deploy regular operations under the LAF, longer-term repo/reverse repo auctions, forex operations and open market operations including special OMOs to ensure liquidity conditions evolve in consonance with the stance of monetary policy.

Where G-Secs play important role in market?

• A government security (G-Sec) is a tradeable instrument issued by the central government or state governments. It acknowledges the government’s debt obligations.
• Such securities are short term — called treasury bills — with original maturities of less than one year, or long term — called government bonds or dated securities — with original maturity of one year or more. In India, the central government issues both: treasury bills and bonds or dated securities, while state governments issue only bonds or dated securities, which are called the state development loans. Since they are issued by the government, they carry no risk of default, and hence, are called risk-free gilt-edged instruments.
• G- Sec prices fluctuate sharply in the secondary markets. The price is determined by demand and supply of the securities. The price is influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as, liquidity and inflation. Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the G-Secs. Further, developments in international bond markets, specifically the US Treasuries affect prices of G-Secs in India. Policy actions by RBI like change in repo rates, cash-reserve ratio and open-market operations also affect their prices.

Who dominates the G-sec markets?

• The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
• So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes. In other words, there is no easy way for them to exit their investments.
• Thus, currently, direct g-secs trading is not popular among retail investors.
• Earlier too, the regulators attempted to popularise g-secs among retail investors – for example, the NSE GoBid app or retail debt market (RDM) segment at the Exchange. But the attempts did not have the desired result due to lack of liquidity. So, while the intention is definitely good, we need to see the details on what RBI will do to make it effective and liquid. The RBI’s intention is to make the whole process of g-sec trading smoother for small investors. By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments. The RBI is the debt manager for the government. In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market. When the government demands so much money, the price of money (i.e., the interest rate) will move up.
• It is in the government’s and RBI’s interest to bring this down. That can happen by broadening the base of investors and making it easier for them to buy g-secs.

How G-SAP will benefit the current government?

• Market participants say they have always wanted to know the RBI’s Open Market Operations (OMO) purchase calendar, and the RBI has now provided that to the market through this announcement on GSAP. A report by Edelweiss Mutual Fund states that it will provide certainty to the bond market participants with regard to RBI’s commitment of support to the bond market in FY22.
• “The RBI has purchased ~Rs. 3.13 trillion worth of bonds from the secondary market in FY21. However, it was carried out in an ad hoc manner with the market awaiting RBI OMO purchase announcements with bated breath on weekly basis. A structured purchase program of similar size such as this will definitely calm investors’ nerves and help market participants to bid better in scheduled auctions and reduce volatility in bond prices.
• The report notes that the announcement of this structured programme will help reduce the spread between the repo rate and the 10-year government bond yield. That, in turn, will help to reduce the aggregate cost of borrowing for the Centre and states in FY22.
• The move to introduce G-SAP “would rein in sharp spike in GSec bond yields.”. While introduction of long-term VRRR (variable rate reverse repo) is an extension towards normalising liquidity, “liquidity surplus however will and is likely to continue. We expect the yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end.