What is a Government Security?
A Government security is a tradable instrument issued by the Central Government
or the State Governments. It acknowledges the Government’s debt obligation. Such
securities are short term (usually called treasury bills, with original maturities
of less than one year) or long term (usually called Government bonds or dated securities
with original maturity of one year or more). In India, the Central Government issues
both, treasury bills and bonds or dated securities while the State Governments issue
only bonds or dated securities, which are called the State Development Loans (SDLs).
Government securities carry practically no risk of default and, hence, are called
risk-free gilt-edged instruments.
a. Treasury Bills
Treasury bills or T-bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three
tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities
and pay no interest. They are issued at a discount and redeemed at the face value
b. Dated Government
Dated Government securities are long term securities and carry a fixed or floating
coupon (interest rate) which is paid on the face value, payable at fixed time periods
(usually half-yearly). The tenor of dated securities can be up to 30 years.
c. State Development
(SDLs) State Governments also raise loans from the market. SDLs are dated securities
issued through an auction similar to the auctions conducted for dated securities
issued by the Central Government. Interest is serviced at half-yearly intervals
and the principal is repaid on the maturity date. Like dated securities issued by
the Central Government, SDLs issued by the State Governments qualify for SLR. They
are also eligible as collaterals for borrowing through market repo as well as borrowing
by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).
How are the Government Securities issued?
Government securities are issued through auctions conducted by the RBI. Auctions
are conducted on the electronic platform called the NDS – Auction platform.
Commercial banks, scheduled urban co-operative banks, Primary Dealers, insurance
companies and provident funds, who maintain funds account (current account) and
securities accounts (SGL account) with RBI, are members of this electronic platform.
All members of PDO (Public Debt Office) - NDS can place their bids in the auction
through this electronic platform. All non-NDS members including non-scheduled urban
co-operative banks can participate in the primary auction through scheduled commercial
banks or Primary Dealers. For this purpose, the urban co-operative banks need to
open a securities account with a bank / Primary Dealer – such an account is called
a Gilt Account. A Gilt Account is a dematerialized account maintained by a scheduled
commercial bank or Primary Dealer (e.g., a non-scheduled urban co-operative bank).
What are the Open Market Operations (OMOs)?
OMOs are the market operations conducted by the Reserve Bank of India by way of
sale/ purchase of Government securities to/ from the market with an objective to
adjust the rupee liquidity conditions in the market on a durable basis.
When the RBI feels there is excess liquidity in the market, it resorts to sale of
securities thereby sucking out the rupee liquidity. Similarly, when the liquidity
conditions are tight, the RBI will buy securities from the market, thereby releasing
liquidity into the market.
What is meant by buyback of Government securities?
Buyback of Government securities is a process whereby the Government of India and
State Governments buy back their existing securities from the holders. The objectives
of buyback can be reduction of cost (by buying back high coupon securities), reduction
in the number of outstanding securities and improving liquidity in the Government
securities market (by buying back illiquid securities) and infusion of liquidity
in the system. Governments make provisions in their budget for buying back of existing
securities. Buyback can be done through an auction process or through the secondary
market route, i.e., NDS/NDS-OM.
How does the trading in Government securities take place?
There is an active secondary market in Government securities. The securities can
be bought / sold in the secondary market either
• Over the Counter (OTC) or
• Through the Negotiated Dealing System (NDS) or
• The Negotiated Dealing System-Order Matching (NDS-OM).
Who are the major players in the Government Securities market?
Major players in the Government securities market include commercial banks and primary
dealers besides institutional investors like insurance companies.
Other participants include co-operative banks, regional rural banks, mutual funds,
provident and pension funds.
Foreign Institutional Investors (FIIs) are allowed to participate in the Government
securities market within the quantitative limits prescribed from time to time. Corporate
also buy/ sell the government securities to manage their overall portfolio risk.
What are the options available to the investor for holding government securities?
The options available to the investor for holding G-sec are:
• In the form of physical certificates.
• In the form of book entry i.e. in the form of credit to an account maintained
by the investor at RBI or any other approved entity. This form is known as SGL form
and the approved entity is known as SGL accountholder/ CSGL accountholder. (Subsidiary
General Ledger account holder/Constituents Subsidiary General Ledger accountholder).
Why does the price of Government security change?
The price of a Government security, like other financial instruments, keeps fluctuating
in the secondary market. The price is determined by demand and supply of the securities.
Specifically, the prices of Government securities are influenced by the level and
changes in interest rates in the economy and other macro-economic factors, such
as, expected rate of inflation, liquidity in the market, etc. Developments in other
markets like money, foreign exchange, credit and capital markets also affect the
price of the Government securities. Further, developments in international bond
markets, specifically the US Treasuries affect prices of Government securities in
India. Policy actions by RBI (e.g., announcements regarding changes in policy interest
rates like Repo Rate, Cash Reserve Ratio, Open Market Operations, etc.) can also
affect the prices of Government securities.
Can all types of debt instrument be held in same demat account?