G-Sec :- FAQ’s

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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 (T-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 at maturity.

b. Dated Government Securities:

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 Loans

(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?