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G-SAP 1.0 is a masterstroke by RBI to support government borrowing program: Lakshmi Iyer –

The RBI maintained the status-quo on the key benchmark rates – repo rate at 4% and reverse repo rate at 3.35%.

The MPC stated that an accommodative stance would continue as long as it is necessary to sustain growth on a durable basis and to mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward.

On macro parameters, the inflation forecast for 1HFY22 has been raised very mildly, at 5.2 percent in Q1-Q2 of FY22, 4.4 percent in Q3 and 5.1 percent in Q4, with risks broadly balanced – strong food production output and to be countered by possible cost-push pressures.

The FY22 real GDP growth projection stays unchanged at 10.5 percent.

The key focus of the central bank on the liquidity front over the last year ensures that the government’s borrowing program goes through without much disruption.

Towards that end, the RBI announced a new program, G-SAP 1.0 (Government Security Acquisition Programme) under which it has committed to buy Rs 1 trillion of government securities in the current quarter (Q1 FY 2022).

This is indeed a masterstroke and a much-needed demand lever to support the mammoth government borrowing program.

The RBI has also stated that this will be over and above the OMO bond purchases (open market operations) that they have been conducting.

Given the supply, this comes as soothing music to ears and can aid in cooling off bond yields – especially at the longer end of the yield curve.

The RBI also extended its VRRR (variable rate reverse repo) (currently 14-days) to a longer tenor (details on tenor and amount yet to be announced).

This could mean some pressure on the short end of the yield curve, but the net liquidity in the banking system is still likely to be in surplus mode.

Effectively VRRR at the short end and G-SAP at the mid to long end may mean some yield curve flattening on the way.

How should investors plan fixed income allocation post Wednesday’s announcement?

The most important takeaway from the RBIs policy meeting is they are not in a hurry to raise rates and are mindful of the developments on the pandemic front.

The intent to support bond yields and ensure orderly evolution should offer comfort to bond investors. The current yield curve was pricing in quite a bit of negative news and hence was quite steep (gap between overnight rates and 10 year AAA PSU bond was ~ 3.80%).

With some bit of anxiety out of the way, we could start seeing some spread compression underway. Investors need to plan their allocations to fixed income in line with their intended investment horizon and not get disturbed by near-term volatility.

The current surplus liquidity is here to stay for some time (may reduce gradually), hence investors need to bucket their fixed-income investments and avail the carry available across debt categories.

Stay safe..stay invested

(The author is CIO-Debt & Head-Products, Kotak Mahindra Asset Management Company)

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