Capital Markets: Challenges and Developments

What are Government Securities (G-Secs)?


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:
  1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
  2. 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.

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).

Who can invest in Corporate Bonds and Government Securities?

  • Pension Funds: Pension funds can also invest in both corporate bonds and government securities to ensure long-term stability and growth in their investment portfolio. .
  • Retail Investors: Retail investors, including individual investors, can invest in both corporate bonds and government securities.
  • Insurance Companies: Insurance companies can invest in both corporate bonds and government securities as part of their investment portfolio. The search results indicate that insurance companies often invest in a mix of low-risk and high-yield assets, with government securities providing lower risk and corporate bonds offering higher returns.

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:

  1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
  2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
  3. 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.

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