Context:
State governments have recently raised a record Rs 50,206 crore via the auction of State Development Loan (SDL) Bonds, representing the largest weekly borrowing in history. This significant achievement surpassed the Reserve Bank of India’s indicative borrowing target of Rs 27,810 crore for the period, underscoring robust demand for state government securities in the financial markets. SDLs are a part of Government Securities (G-Sec), allowing state governments to raise loans from the market through dated securities issued in auctions, similar to those conducted for Central Government securities.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Government Securities (G-Secs)
- Types of Government Securities (G-Secs)
Government Securities (G-Secs)
Government Securities, often referred to as G-Secs, are tradable instruments issued by the Central Government or State Governments to borrow money from the public and finance their fiscal deficit. They are a type of debt instrument.
Debt Instrument:
- A debt instrument represents a contractual obligation by the issuer (government) to pay the holder a fixed amount of money, known as the principal or face value, on a specified date.
- G-Secs acknowledge the government’s debt obligation and serve as a means for the government to borrow funds.
Short-Term and Long-Term:
- G-Secs can be categorized as short-term or long-term securities.
- Short-term securities, known as treasury bills, have original maturities of less than one year, commonly issued in tenors of 91 days, 182 days, and 364 days.
- Long-term securities, called government bonds or dated securities, have original maturities of one year or more.
Central and State Government Issuance:
- The Central Government in India issues both treasury bills and bonds or dated securities.
- State Governments, on the other hand, issue bonds or dated securities known as State Development Loans (SDLs).
Risk Profile:
- G-Secs are considered risk-free gilt-edged instruments, meaning they carry minimal risk of default.
- These securities are considered safe investments due to the backing of the government.
Gilt-Edged Securities:
- Gilt-edged securities are high-grade investment bonds offered by governments and large corporations to borrow funds.
- G-Secs fall under this category as they are considered secure investments.
Role of RBI:
- The Reserve Bank of India (RBI) conducts Open Market Operations (OMOs) involving the sale or purchase of G-Secs to adjust money supply conditions.
- The RBI sells G-Secs to remove liquidity from the system and buys them back to infuse liquidity.
Bond Yield:
- Bond yield refers to the return an investor realizes on a bond.
- The yield is calculated by dividing the annual coupon rate (interest paid by bond issuers on the bond’s face value) by the current market price of the bond.
- Bond prices and yields have an inverse relationship: when bond prices rise, yields fall, and vice versa.
Bonds:
- A bond is an instrument used to borrow money, which can be issued by a government or a company to raise funds.
- G-Secs are a type of bond issued by the government to raise funds.
Coupon Rate:
- The coupon rate represents the interest rate paid by bond issuers on the bond’s face value.
Types of Government Securities (G-Secs)
Treasury Bills (T-bills):
- Treasury bills are short-term government securities with maturities of less than one year (commonly 91 days, 182 days, and 364 days).
- T-bills are issued at a discount to their face value and do not pay any interest. Instead, they are redeemed at the face value upon maturity.
Cash Management Bills (CMBs):
- CMBs were introduced by the Government of India in 2010 to address temporary cash flow mismatches.
- Similar to T-bills, CMBs are short-term instruments with maturities of less than 91 days.
- They serve the purpose of meeting the immediate funding requirements of the government.
Dated G-Secs:
- Dated G-Secs are long-term government securities that carry a fixed or floating coupon (interest rate).
- These securities pay interest on the face value on a half-yearly basis.
- The maturity period of dated G-Secs typically ranges from 5 years to 40 years, providing investors with long-term investment options.
State Development Loans (SDLs):
- State Governments also raise funds from the market by issuing securities known as State Development Loans (SDLs).
- SDLs are similar to dated G-Secs and are issued through auctions conducted by the state governments.
- These securities help state governments finance their developmental and expenditure requirements.
-Source: The Hindu
