From UPSC perspective, the following things are important :
Prelims level : Government Securities (G-Secs), T-Bills etc
Mains level : Government Securities (G-Secs)
The RBI has said that it would allow retail investors and other small investors direct access to its government securities trading platform.
What are G-Secs?
- 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
Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.
- 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).
Retail investors and G-Secs
- Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
- To encourage direct investment, the government and RBI have taken several steps in recent years.
- Retail investors are allowed to place non-competitive bids in auctions of government bonds through their Demat accounts.
- Stock exchanges act as aggregators and facilitators of retail bids.
Try this PYQ:
Consider the following statements:
- The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
- Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
- Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 Only
(c) 2 and 3 only
(d) 1, 2 and 3
Why the current proposal?
- The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
- So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes.
- In other words, there is no easy way for them to exit their investments.
- Thus, currently, direct g-secs trading is not popular among retail investors.
What will the current proposal do?
- The details are not out yet. However, the RBI’s intention is to make the whole process of g-sec trading smoother for small investors.
- By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments.
Why such a move?
- The RBI is the debt manager for the government.
- In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.
- When the government demands so much money, the price of money (i.e., the interest rate) will move up.
- It is in the government’s and RBI’s interest to bring this down.
- That can only happen by broadening the base of investors and making it easier for them to buy g-secs.