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

Why such move?

• It said that the measure 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.

About G-Sec Acquisition Programme (GSAP)

• It 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

• Treasury bills (T-Bills): short-term instruments which mature in 91 days, 182 days, or 364 days, and
• Dated securities: long-term instruments, which mature anywhere between 5 years and 40 years.

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).

Additional Information
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.

OMOs vs liquidity

• When the central bank wants to infuse liquidity into the monetary system, it will buy government securities in the open market. This way it provides commercial banks with liquidity.
• In contrast, when it sells securities, it curbs liquidity. Thus, the central bank indirectly controls the money supply and influences short-term interest rates.

RBI employs two kinds of OMOs

• Outright Purchase (PEMO) – this is permanent and involves the outright selling or buying of government securities.
• Repurchase Agreement (REPO) – this is short-term and are subject to repurchase.