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