Call Us Now

+91 9606900005 / 04

For Enquiry

Decreasing Yield on Government Securities


The yield on the benchmark 10-year government security (G-sec) in India has experienced a decline, prompting retail investors to reassess their investment strategies.

  • Although the Reserve Bank of India (RBI) has allowed retail investors to participate in the government securities market, their involvement has been comparatively limited.


GS III: Indian Economy

Dimensions of the Article:

  1. Factors Influencing the Decline in G-sec Yield
  2. Reasons for Low Participation of Retail Investors in G-Secs
  3. Government Securities (G-Secs)

Factors Influencing the Decline in G-sec Yield

The yield on the benchmark 10-year government security (G-sec) has experienced a decline, with various factors contributing to this trend.

Changes in Debt Mutual Fund Taxation:

  • The yield decline can be attributed to changes in debt mutual fund taxation.
  • The removal of the benefit of indexation in the calculation of long-term capital gains on debt mutual funds has played a role in this decline.
  • These changes have impacted investor sentiment and affected the demand for government securities.

RBI’s Repo Rate Decision:

  • The Reserve Bank of India’s (RBI) decision on the repo rate has also influenced the movement of G-sec yields.
  • Changes in the repo rate, which is the rate at which the RBI lends to commercial banks, can impact the overall interest rate environment.
  • The RBI’s decisions regarding the repo rate can affect the demand and pricing of government securities, leading to changes in their yields.

Declining Inflation:

  • Another factor contributing to the decline in G-sec yields is the trend of declining inflation.
  • Lower inflation rates reduce the expectation of future interest rate hikes, resulting in lower yields on government securities.
  • Declining inflation can impact the market perception of inflationary risks, affecting investor demand for G-secs.

Current G-sec Yield Levels:

  • As of May 2023, the G-sec yield stands at around 6.9% after experiencing a decline from 7.4% in early March 2023.
  • Presently, G-secs are trading at approximately 6.96-6.99%.
  • The yield levels are reflective of the aforementioned factors and market dynamics, influencing investor decisions in the government securities market.

Reasons for Low Participation of Retail Investors in G-Secs

Complicated Investment Process:

  • Retail investors often find it challenging to invest in government bonds and require guidance, potentially through intermediaries, to navigate the complex investment process.
  • The intricacies of investing in G-secs can deter retail investors who prefer more simplified investment options.

Lack of Liquidity:

  • The G-Sec market suffers from a lack of liquidity, making it difficult for retail investors to find buyers in the secondary market when they want to sell their securities.
  • This lack of liquidity can result in investors being stuck with their investments, reducing their willingness to participate.

Daunting Investment Process:

  • Retail investors, particularly those who are uninformed, may find the investment process in G-Secs daunting.
  • This may lead them to prefer more straightforward investment options, such as fixed deposits, that do not require as much knowledge or expertise.

RBI Retail Direct Platform Limitations:

  • The RBI Retail Direct platform, while beneficial for informed investors, may not cater to uninformed participants who require a simpler investment process.
  • This limitation can hinder retail investor participation in the G-Sec market.

Low Traded Volume:

  • The traded volume in the secondary market for G-Secs has been relatively low.
  • This further reduces the attractiveness of G-Secs for retail investors, as it may limit their ability to enter or exit positions in a timely manner.

Alternative Investment Avenues:

  • Retail investors may consider alternative investment avenues, such as fixed deposits, that have seen increased interest rates.
  • Exploring new bonds, NCDs (Non-Convertible Debentures), and post office deposit schemes could also divert retail investor attention away from 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.


  • 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:  Indian Express

April 2024