In today's Indian debt market landscape, government securities stand tall as the primary force driving the financial currents. While Public Sector Units (PSU) bonds and private sector corporate bonds hold their ground as alternative segments but they hold less effective in comparison regarding both volume and liquidity.
Government securities, issued by both the Central and provincial governments play a pivotal role in funding governmental activities. Although state governments utilize them to a lesser extent compared to the central government and they remain a crucial component in managing fiscal deficits.
Reflecting on the debt market's scope in 2002, it comprised around 37% of India's Gross Domestic Product (GDP). Notably, central government-dated securities constituted approximately 23% of GDP, whereas state government securities accounted for only 4.5%. PSU bonds and private corporate bonds collectively made up about 9% of GDP. Thus, government-issued securities are dominated by representing nearly three-quarters of the debt instruments.
While precise figures for subsequent years remain pending, government borrowing relative to GDP surged in 2002-03. This amplification is even more pronounced in the secondary market, where government securities transactions surpass 90% of the total. Notably, the average daily transaction volume for government securities in the secondary market during 2001-02 amounted to Rs. 4,000 crores, significantly covering the range of Rs. 200 to Rs. 400 crores for corporate securities including PSU bonds.
In essence, the dominance of government securities highlights the confidence and reliance placed upon sovereign entities within India's debt market. As the nation's economic landscape continues to evolve, understanding and navigating the dynamics of government securities remain paramount for investors and policymakers.
What are exactly government securities?
Government Securities are essentially issued by the central government to collect money from the financial market. This money is used to cover the gap between what the government earns and what it spends which is known as the fiscal deficit. These securities come in two types: short-term and long-term.
Short-term securities known as Treasury Bills or T-Bills have a maturity period of less than a year. They act like short loans to the government. On the other hand long-term securities called Government Bonds or Dated Securities have a maturity period of a year or more. They are like long-term loans to the government. These securities are considered very safe investments because the government guarantees that investors will get back both the interest and the principal amount.
Another type of government security is the State Development Loans or SDLs. These are issued by state governments and not the central government but they work similarly. SDLs are managed through the Reserve Bank of India (RBI) and are used by state governments to cover their own financial needs. They are an important part of the government securities market by offering investors another option for investing in safe government-backed securities.
How are government securities issued in the market?
G-Secs or government securities are issued through auctions conducted by the Reserve Bank of India (RBI) on a digital platform called E-Kuber which is part of RBI's Core Banking Solution (CBS) platform. Various financial institutions like commercial banks, scheduled UCBs (Urban Cooperative Banks), Primary Dealers, insurance companies and provident funds who have accounts with RBI participate in these auctions. They place their bids electronically through the E-Kuber platform. The auction results are then announced by the RBI at specific times.
Non-E-Kuber members including non-scheduled UCBs, can participate in these auctions through scheduled commercial banks or Primary Dealers. For this, they need to open a Gilt Account, which is a digital account maintained with a bank or Primary Dealer. The transactions in G-Secs undertaken by Primary Members (PMs) are settled through Subsidiary General Ledger (SGL) accounts with RBI while those undertaken by Gilt Account Holders (GAHs) are settled through Constituent Subsidiary General Ledger (CSGL) accounts.
The RBI in coordination with the Government of India releases a half-yearly auction calendar indicating the borrowing amount range of security tenors and auction periods. About a week before each auction, the government issues a Notification and a Press Directive detailing the securities to be auctioned including their name, amount, type, and auction procedure. This information is also published on the RBI website and advertised in leading newspapers. Auctions for dated securities usually take place on Fridays for settlement on the next working day (Monday).
For Treasury bills, auctions are typically held every Wednesday by the RBI. The settlement for these T-bills occurs on the next working day following the trading day (T+1 basis). The RBI releases a quarterly calendar for T-bill issuances in the last week of the preceding quarter by providing investors with ample time to plan their purchases. Details of T-bill issues are announced weekly through press releases on the RBI website.
How to invest in government securities?
Investing in government securities also known as G-Secs is now easier than ever thanks to the RBI Retail Direct Scheme. This scheme allows individual investors to open RBI Direct Gilt accounts which serve as a gateway to investing in these securities.
Opening an account under this scheme is a straightforward process. Any retail investor with a savings bank account and a PAN (Permanent Account Number) can do it. The required documents include your PAN card, details of your savings account, email address and mobile number. Once you have these documents handy, you're all set to open your account and start investing in G-Secs.
Government Announces Auction of Rs 32,000 Crore in Government Securities
The Reserve Bank of India (RBI) is conducting an auction for the sale of Government Securities (G-Secs) worth Rs 32,000 crore. This move aims to manage the government's borrowing program and fulfill its financial needs.
Here's a breakdown of the key details:
- Auction Format: The auction will be conducted electronically on a designated date through a "multiple price-based method." This means participants can submit bids at various prices and successful bids will be determined based on a combination of price and yield.
- Participants: Primary dealers and institutions authorized by the RBI to trade in government securities are eligible to participate. They can submit bids electronically through the E-Kuber System within a designated time window.
- Minimum Participation: Primary dealers are required to fulfill a "Minimum Underwriting Commitment" (MUC) and participate in the “Additional Competitive Underwriting” (ACU) process. This ensures a certain level of participation and helps meet the targeted amount.
- Benefits for Participants: Primary dealers who participate in the auction will receive an underwriting commission credited to their accounts with the RBI. This provides an incentive for them to contribute to the government's borrowing program.
Significance of the Auction
This auction signifies the government's proactive approach to managing its finances. By raising funds through G-Secs, the government can meet its spending requirements without resorting to inflationary measures like printing money. G-Secs are essentially debt instruments issued by the government. They function like loans where investors provide capital to the government in exchange for a fixed interest rate over a set period. These securities are considered highly safe investments due to the low risk of default by the government.
Invitation to Participate
The RBI has invited primary dealers to actively participate in the auction. Their involvement is crucial for the smooth functioning and successful outcome of the auction. This auction presents an opportunity for both the government to raise funds efficiently and for primary dealers to contribute to the financial system while earning returns.
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