We have given G-SAP 1.0 a distinct character, say RBI's Das & Patra

We are giving up this discretion to give an explicit assurance to the markets that we will assist them in the conduct of the borrowing programme, said Patra

The Monetary Policy Committee (MPC) decided to keep policy rates unchanged in the first bi-monthly monetary policy of 2021-22. Additionally, the Reserve Bank of India (RBI) announced a secondary market G-Sec acquisition programme (G-SAP 1.0), under which the RBI has committed Rs 1 trillion in the first quarter. GOVERNOR SHAKTIKANTA DAS, DEPUTY GOVERNOR MICHAEL DEBABRATA PATRA, DEPUTY GOVERNOR M K JAIN, and EXECUTIVE DIRECTOR T RABI SANKAR took questions from the media. Edited excerpts:

What is the rationale behind G-SAP 1.0?

Das: It is different from the usual open market operation (OMO) calendar. We have given it a distinct character. This programme will run in addition to our normal liquidity adjustment facility (LAF), special OMOs, and other instruments available to us. For the first time, we are giving out a quantum of bond purchase in the secondary market. Earlier, there was a calendar that was given out. But it was not given out for the entire quarter. The signals, communication, and the action have to be weighed together. 

Patra: It is for the first time the RBI is committing its balance sheet to the conduct of the monetary policy. This has not been done by India before. It is different from OMOs because it gives away discretion. Typically, in an OMO auction, we announce the amount and time. We are giving up this discretion to give an explicit assurance to the markets that we will assist them in the conduct of the borrowing programme. Giving out an amount beforehand also helps market participants plan their engagement in the borrowing programme. It is a challenging instrument because it has risks as well. This is a risk the RBI has taken, keeping its commitment to give explicit guidance on liquidity. 

Will the RBI not reject bids in future auctions if yields demanded by the market are higher than what the RBI is happy with?

Das: It will depend on whether the bids are orderly or otherwise. I cannot say we will completely give up the option of rejecting the bids. With the central bank managing so many conflicting objectives, we have to strike the right balance. It depends on whether the bids are orderly or an outlier. 

Will OMOs and Operation Twist continue as before after the introduction of G-SAP?

Patra: G-SAP 1.0 will run alongside our regular operations that include a whole array of instruments, such as LAF, outright OMOs, and Operation Twist. This is built into our liquidity planning programme as a whole. It is not a helicopter use of facilities. 

The CPI forecast is well above 4 per cent for the second year running. Is the MPC missing the inflation target of 4 per cent? Does the accommodative stance extend to the reverse repo?

Das: Inflation target of 4 per cent (+2/-2) has been reiterated by the government. In my statement I have said the inflation-targeting framework is well entrenched and well anchored. I have also said the current framework gives enough policy space to the central bank to act in an extraordinary situation. We have given out certain projections. The outlook is uncertain. We will see how it plays out. At this juncture, growth is of paramount importance. On reverse repo, we have not said anything yet. 

Patra: Whenever the system is in reverse repo, the policy is accommodative. 

What will be the impact of having Rs 1-trillion liquidity surplus in the system? 

Patra: When we are unchanged on the policy rate, we need an instrument to run the monetary policy. In the past, all our actions were directed at moving the interest rate up or down and ensuring that proper transmission of rates happens across the market spectrum. This time we are being more explicit. We are not waiting for the indirect channel of interest rates and prices to operate. Rather we are directly committing an expansion in our balance sheet by a certain specified amount. Irrespective of what the RBI wants, we will give you Rs 1 trillion. This is what we are telling the market. It is not going to be timed to market situations or market movements. There is an upfront assurance. It is like what the central banks are doing across the world where they are buying into assets. By influencing the G-Sec interest rates, we can ensure congenial financial conditions. We have programmed it into our liquidity framework. The governor has delivered on the promise he had made in an earlier statement. When the cash reserve ratio cut was withdrawn, the governor had said he would replenish the liquidity taken away with durable liquidity — he is doing exactly that.