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Macroeconomics & Public Policy: RBI's G-SAP 1.0: Open Market Operation With Certain Character'
Macroeconomics & Public Policy: RBI's G-SAP 1.0: Open Market Operation With Certain Character'
Group 07 | Section B
Aditya Kodte (MBA21071) | Akash Kumar Rai (MBA21077) | Kailash Mulchandani (MBA21100) |
Kartikeya Agarwal (MBA21102) | Shruti Sharma (MBA21130) 1
Basic Significance Of Open Market Operation Monetary Policy
Through Open Market Operations, thecRBIcbuys government bonds
from the market on a regular basis (OMOs). The-SAPxis similar to
anxOMOxbut here the central bank commits to the markets that it will
acquire bonds worth a certain amount. The goal is to provide relief to the
bond markets. As per RBI governor “In other words, G-SAP is an OMO
with a ‘distinct character’”
Outcome:
The 10-year G-Sec yields have risen in response to the RBI's statement,
with the benchmark paper's yields falling to 6.03 from 6.08 percent on
To meet the expected government expenditure of FY 2022, Finance April 7.
Minister Nirmala Sitharaman, while presenting the Union Budget
2021-22, announced that the government will borrow about Rs 12 Benefits:
lakh crore in FY 2022
The RBI's goal is to keep the yield low in order to keep the government's
Open Market Operations for Fueling Economic Growth borrowing costs low. For fiscal year 2022, the government has set aside
Rs 12.05 lakh crore for borrowing.
RBI will purchase bonds from banks and other financial institutions
and transfer money into the accounts of bondholders. This increases
the amount of money available to banks and financial organizations,
which they may use to provide loans. With more cash on hand, banks
will decrease interest rates to encourage individuals and companies
to borrow and invest, boosting the economy and creating jobs Source
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Transformations in open market operations
- Two-step OMOs - Managing both the shorter and longer ends of the
yield curve. The short-term yield falls when it buys treasury bills.
- The Reserve Bank of India has decided not to publish the size of such
operations in advance.
- The market continues to speculate on the timing and amount of
OMOs
- The central bank benefits from the flexibility - can always plan its next
move by looking at bond yields, system liquidity, and the risk aversion
of banks.
The RBI governor, Shaktikanta Das, defied precedent by cutting rates by 25
basis points and then following up with "switches," "twists," and even a
clever rate drop without consulting the Monetary Policy Committee.
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Open Market Operation & BOND YIELD
A bond yield is the profit an investor makes
onva bond, and the existing yield, which is
determined by the bond's market price and
couponcorxinterestxpayments. Bond prices
and yields are inversely related
Effect of monetary policy on bond yield:
When the RBI purchases bonds on the open market, it effectively raises
bond demand. These Are usually massive activities that cause bond
prices to rise.
Bond yields fall, lowering borrowing costs for businesses and the
government, resulting in higher spending. Mortgagedrates maydfall,
since house demand is expected to rise.
Source
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Influence (lower) Economy is not in Light High: Demand for
Open interest rate crisis Short-term securities
Market changes in the treasury High: Supply of
Operations debt market securities Money
Low: Interest Rates
Economic
VS AIM Investment Result
Environment
Unemployment
a ra t
m p in
itself, leaving less liquidity in the system.
m ex ec s t
e al
l
l
As a result, demand declines and prices co s to -S er e r
ita
s e s G t ov p
fall throughout the economy. se erv
k in
a s b an of s
e e ir rs Ca
e e h e s
cr re the ric ea
s
s
t ow s ge re
In nk s P r e L e ra
ba low loa
s n
in
c u c
rat o u itu
The Central Bank attempts to purchase d c nd
1 Al eir 2 Re 3 En xpe
(repurchase) government securities th E
Low Rate
6
Impact On Debt Mutual Funds Impact On Stock Market
● The Open Market Operations has a direct impact on the The bullish run in the stock market tends to
Debt Mutual Funds and on the Interest Rates.
increase the bond yield as money moves
● The Open Market Purchase leads to inflow of money into from relatively safer investment bets to
the economy which in turn leads to an increase in the
spending power of the consumers which in turn leads to riskier equities stocks markets, a stock
a decrease in the interest rates. The decreases in the
Interest rates makes the older bonds more attractive than market boom tends to raise bond yields.
the newer bonds.
Bond yields rising may tempt investors
● The Open Market Sale leads to outflow of money from the away from stock markets, since the former
economy which in turn leads to a decrease in the
spending power of the consumers which causes a appears more appealing.
decrease in the interest rates making the older bonds less
attractive.
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