RBI Notifications

RBI suspends G-Sec Acquisition Programme (GSAP)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Open Market Operations (OMO)

Mains level: NA

The Reserve Bank of India (RBI) has decided to halt its bond-buying under the G-Sec Acquisition Programme (GSAP).

Why such move?

  • The GSAP had succeeded in ensuring adequate liquidity and stabilising financial markets.
  • Coupled with other liquidity measures, it facilitated congenial and orderly financing conditions and a conducive environment for the recovery.

What is GSAP?

  • The G-Sec Acquisition Programme (G-SAP) is basically an unconditional and a structured Open Market Operation (OMO), of a much larger scale and size.
  • G-SAP is an OMO with a ‘distinct character’.
  • The word ‘unconditional’ here connotes that RBI has committed upfront that it will buy G-Secs irrespective of the market sentiment.

What are Government Securities?

  • These are debt instruments issued by the government to borrow money.
  • The two key categories are:
  1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
  2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years

Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.

Why G-Secs?

  • Like bank fixed deposits, g-secs are not tax-free.
  • They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
  • However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
  • Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Other decisions

  • The RBI, however, remained ready to undertake G-SAP as and when warranted by liquidity conditions.
  • It would also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs).

Answer this PYQ in the comment box:

Q.Consider the following statements:

  1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
  2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
  3. Treasury bills offer are issued at a discount from the par value.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 3 Only

(c) 2 and 3 only

(d) 1, 2 and 3

 

Post your answers here:
2
Please leave a feedback on thisx

 

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Back2Basics: Open Market Operations (OMO)

  • OMOs is one of the quantitative monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
  • It is a part of the Market Stabilization Scheme (MSS) by the RBI.
  • OMOs are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
  • The central bank sells g-secs to remove liquidity from the system and buys back g-secs to infuse liquidity into the system.

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2 years ago
Post your answers here:" Read more »

D 1,2and 3

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P M
2 years ago
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c

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