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Draft RBI (Government Securities Lending) Directions 2023

Context:

Recently, the Reserve Bank of India released Draft Reserve Bank of India (Government Securities Lending) Directions, 2023.

Relevance:

GS II: Indian Economy

Dimensions of the Article:

  1. About Draft Reserve Bank of India (Government Securities Lending) Directions, 2023
  2. What are G-Sec yields?

About Draft Reserve Bank of India (Government Securities Lending) Directions, 2023

  • The Reserve Bank of India (RBI) has proposed the introduction of securities lending and borrowing for Government Securities (G-sec) in order to provide investors with an opportunity to earn returns by deploying their idle securities in the securities lending market.
  • This move is expected to encourage wider participation in the market.
  • Under the proposed scheme, Government Securities Lending (GSL) transactions can be conducted for a minimum of one day and a maximum of 90 days.
  • Only government securities issued by the central government, excluding Treasury Bills, would be eligible for lending/borrowing in a GSL transaction.
  • Both Central and state government securities, including Treasury Bills, would be eligible for use as collateral in a GSL transaction.
  • Lenders of securities can include entities that are eligible to undertake repo transactions in government securities, as well as any other entity approved by the Reserve Bank.

What are G-Sec yields?

  • G-secs, or government securities or government bonds, are instruments that governments use to borrow money. Governments routinely keep running into deficits — that is, they spend more than they earn via taxes. That is why they need to borrow from the people.
  • But G-secs are different from everyday lending between two private individuals or entities.
  • For one, G-secs carry the lowest risk of all investments.
  • After all, the chances of the government not paying back your money are almost zero. It is thus the safest investment one can make.
  • The other ways in which G-Secs are different are in the manner in which they are structured, and how their effective interest rates (also called yields) are calculated.

-Source: Economic Times


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