Gist of Government Securities their operation and Yields.

 Government Securities are government financial instruments and securities issued to collect a loan from the public. The goal is to collect government securities to fund massive programs and budget deficits. Majority of the G-sec issued by the RBI on behalf of the Indian Government are interest-bearing dated instruments. These government securities come with a fixed maturity period with a half-year interest on such fixed coupon securities. Full G-Sec is issued in de-materialized form but can be issued physically upon request. Physical Government Securities may be issued on the basis of multiple or denominations of ten thousand rupees, and their tenor may be extended for a term of 30 years.

Rewards of trading in G-Sec:

G-Sec offer lower volatility and greater stability than corporate bonds. These securities do not receive a TDS on interest payment. Due to the involvement of NSDL / CSGL, they provide straightforward transactions and streamlined settlement procedures. These investments give investors greater diversification opportunities. Investors are given greater leverage for government securities borrowing.

Risk floating with G-sec:

The interest rate change will affect the value in the secondary market of government securities and it is inversely proportionate to the changes in the interest rate on the bond. G-sec price declines with interest rates rising and price increases as the interest rate falls. Default risk refers to default on due interest and payment of principal amounts. Government securities are backed by a sovereign guarantee and are free of default risk. Nevertheless, since government securities are less uncertain than corporate bonds, they have lower rates of interest than corporate bonds.

Types of G-sec:

Some of the popular G-sec are Treasury Bills, Cash Management bills, Dated Government Securities and State Development Loans which are as follows:

Treasury bills are short-term debt with less than one year tenure. Treasury bills or bonds are given in three separate categories with 91 days, 182 days and 364-days maturity. These instruments are not obliged of any kind of interest payment to Investors. The disparity between the face value and the discounted price of the instrument acts as the investor’s benefit or losses.

Cash management bills are short legal government securities, typically less than 91 days. These are extremely versatile financial vehicles and their tenure relies on the government’s cash requirements. Cash management bills are similar to treasury bills and do not fetch any interest to investors. The disparity between the face value and the discounted price of the instrument acts as the investor’s benefit or losses.

Dated G-sec are securities and bonds issued on behalf of the government by the Reserve Bank of India, which have a predetermined or fixed maturity date. The Reserve Bank of India sells those by means of auction. These bonds may be issued as bonds with fixed and floating rate bond, zero coupon bond or even with call or put options.

In order to meet budget deficits and financial conditions, the State Government offers development loans. Such bonds are released with the aid of the negotiated trading arrangement with the Reserve Bank of India. The interest rate of these loans is higher than dated Government Securities bonds.

How G-sec market is operated?

In India, the government securities market is small and inactive, unlike other nations. These are not so common among general investors are not usually owned by them. The RBI and the financial institutions are the largest G-sec holders. The Indian G-sec market has no adverse impact on the capital market and provides full support to them. The funds it receives is primarily used to reduce operating expenses and expected economic goals. The Reserve Bank of India has hired government securities so that they can establish consistent yield levels and a sound maturity allocation strategy. Reserve Bank was always deemed secure to buy securities before maturity to maintain stability.

The Reserve Bank of India has used free-market operations to provide cheap government funding and has managed to preserve funds to maintain stability in the future. The Reserve Bank of India has always used preserving the reserve ratio, SLR, and moral suasion strategies. This has been achieved to control bank liquidity and meet debt management objectives.

G-Sec – Prices & Yields:

Government securities rates remain steady, even though the bank rate is increasing. In India, the banking rate normally affects security rates in the opposite direction. Nevertheless, the RBI has sought to control government bond rates. Therefore, it is able to do so by refraining from adjusting the buying and sellng prices of various loans on the list. It has also tried to manipulate the sales rate of government bills. The RBI has consistently reduced the surplus funds by rising the selling rate of the Treasury Bills. This is an indicator that the Reserve Bank of India was concerned with the term loan rate and wished to stay stable.

The return on G-sec will be calculated if the investor consistently retains the securities. This will help the investor to observe yearly changes in coupon rate, interest, and the final redemption return. In India, government securities are usually priced well below the face value. This indicates that the redemption return is much higher than the actual rate, this is because the redemption return is similar to the face while at the time of procurements.

Returns put these bonds in an unappealing zone:

In India, government securities have steadily increased their return rate. There has also been no ceiling on G-sec. G-sec displays the returns which are approved by the government even with the continued growth of interest over the years with price stability but they are far below what the investor would hope to earn if he invested his funds in industrial securities. Therefore, G-sec is not an attractive form of investment. G-sec is an essential part of monetary management and fiscal policy in India. It also played an important role in maintaining SLR with the national commercial banks. As previously pointed out, government securities did not build a demand for themselves. These funds are for the country’s intended goals like monetary snags, fiscal problems, and debt management.