What is the first phase of operation?

• The RBI has officially notified that it would conduct the first phase of G-SAP 1.0 operations on April 15, 2021.
• It will begin with the purchase of five dated securities for an amount aggregating to Rs 25,000 crore.
• 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.
• This would be under the LAF, longer-term repo/reverse repo auctions, forex operations and open market operations including special OMOs.
• This is to ensure that the liquidity conditions evolve in consonance with the stance of monetary policy.

What are the concerns?

• Interest rates – For the Government, the RBI keeping the yield down is a good news because the overall borrowing costs go down.
• But, the RBI artificially keeping the interest rates lower in the financial system has caused concerns.
• In healthy economic system, the interest rates pricing should be driven by demand-supply.
• It shouldn’t be artificially suppressed by the central bank; this might lead to distortions and have other consequences.
• Savers – Cheaper rates will be good news to big, top rated companies who can issue bonds to raise money and to the government.
• But low interest rates coupled with high inflation is a systemic worry for savers.
• Already, savers are getting negative returns on their deposits if one takes into account the inflation adjusted rates or real rates.
• Rupee – Government resorting to massive bond purchase to keep the rates low is not good news for the local currency.
• The Indian Rupee, notably, came under pressure after the RBI announced the massive Rs 1 lakh crore bond purchase programme.
• The fear of investors pulling capital out of India in a low interest environment is hurting the local currency.

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