The investment instruments issued by the Government of India in order to fulfil its short-term and long-term borrowing requirements are commonly known as the G- Secs or Government Securities. This market is a crucial part of the Indian Debt Market as it provides funds to the government and serves as a reference point for corporate papers. As the Government issues it, it holds a very minimal amount of risk associated with it because the Government itself guarantees the returns.
What are the Types of G- Secs available in India?
In India, the Central Government uses the Reserve Bank of India (RBI) to issue Bonds and Treasury Bills that have a maturity of less than a year. On the other hand, the State Governments issue State Development Loans (SDLs) to finance their development projects.
The information about the various types of G- Secs in detail is as follows: –
- Treasury Bills – Treasury Bills are short-term money market instruments issued by the government to cover budgetary deficits, with tenures of less than 365 days. They are issued at a discount, redeemed at maturity at par value and do not offer interest payouts, similar to zero coupon bonds. Popular tenors include 91 days, 182 days, and 364 days.
- Cash Management Bills – CMBs, or Cash Management Bills, are comparable to T-bills except for their duration. The maturity period of Cash Management Bills is less than 91 days. In 2010, the Government of India collaborated with RBI to issue CMBs to address temporary cash flow imbalances.
- Dated Government Securities – These are the financial instruments that pay a fixed or floating coupon on their face value twice a year, with a maturity period ranging from 5 to 40 years. These securities are issued at face value and remain unchanged until redemption. Investors who invest in these securities are known as ‘primary dealers.”
What are Dated Government Securities and their types?
- Fixed Rate Bonds – As the name suggests, the interest rate in fixed-rate Bonds is fixed. The constant interest rate provides a predictable income stream to the investors. Fixed-rate bonds are considered less risky than other types of bonds because the interest rate and repayment amount are predetermined and do not fluctuate with market conditions.
- Floating Rate Bonds – Floating Rate Bonds are securities that do not have a fixed coupon rate. On the contrary, it features a flexible coupon rate that is adjusted at predetermined intervals, such as every six months or one year.
- Special Securities – As part of its market borrowing program, the Indian Government occasionally releases special securities to entities such as Oil Marketing Companies, Fertilizer Companies, and the Food Corporation of India. These securities, commonly known as oil, fertiliser, and food bonds, are given to these companies in lieu of cash subsidies. Typically, these securities have a long maturity period and offer a slightly higher coupon rate compared to other securities with a similar maturity period.
- Capital Indexed Bonds – Capital-indexed bonds are a type of bond that is designed to protect investors from inflation. The value of these bonds is linked to an inflation index, such as the Consumer Price Index (CPI), which means that the bond’s interest payments and principal value increase in line with inflation.
- Inflation-indexed Bonds – Inflation-indexed bonds, also known as inflation-linked bonds or simply linkers, provide investors with protection against inflation. These bonds have their principal and interest payments linked to an inflation index, such as the consumer price index (CPI).
- Bonds with Call/Put options – Bonds may also be issued with optional features, allowing the issuer to exercise the option to buy back (call option), or the investor can choose to sell the bond (put option) to the issuer during the tenure of the bond. It may be noted that such a bond may have put only or call only or both options.
The inaugural government security to include both Call and Put options was the “6.72% G-Sec 2012,” which was issued on July 18, 2002, with a 10-year term and a maturity date of July 18, 2012.
- 7.75% Saving (Taxable) Bonds – The issuance of the 7.75% Savings (Taxable) Bonds 2018 was announced by the Indian Government on January 10, 2018. There isn’t any sort of maximum limit for investment in these bonds. The Interest income derived from these Bonds will be taxable under the Income Tax Act 1961.
- Sovereign Gold Bonds (SGB) – Sovereign Gold Bonds are a type of investment instrument issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The main purpose behind issuing Sovereign Gold Bonds (SGB) is to provide an alternative to physical gold investments, which can be subject to security concerns and high storage costs. The value of these bonds is linked to the prevailing market price of gold, and they offer a fixed rate of interest. Investors can also benefit from capital appreciation if the market price of gold rises during the bond’s tenure.
- STRIPS – STRIPS stands for (Separate Trading of Registered Interest and Principal of Securities) is the securities in which the interest and principal payments are separated and treated as individual financial instruments that can be purchased and sold separately.
- State Development Loans – State Development Loans are dated government security issued by the State Government to meet their fund requirement. SDL provides semi-annual interest payments and principal redemption at the time of maturity.
How are Government Securities issued?
The Reserve Bank of India (RBI) conducts auctions for issuing securities through an electronic platform called the NDS (Negotiated Dealing System) – Auction platform. The central bank and the central government work together to create a tentative auction calendar every six months, which includes details such as the borrowing amount, tenor, and the expected period for holding auctions. About a week before the auction date, the government issues a notification or press release providing precise information about the securities and the auction process.
What types of auctions take place while issuing Government Securities?
- Yield-Based – When the Government of India issues any new kind of security, it is called a Yield-based auction.
- Price Based – A price-based auction takes place when the Government of India reissues the securities that were issued previously.
- Uniform Price Based –In a Uniform Price Based auction, the successful Bidders must pay for the specified number of securities at the cut-off rate, irrespective of the rate quoted by them.
- Multiple Price Based – In the case of Multiple Price Based auctions, the Successful Bidders pay the price of the allotted quantity of securities quoted by them.
- Competitive Bidding – In a competitive bidding process, an investor submits a bid at a particular price or yield and will be granted securities only if the quoted price or yield falls within the cut-off range.
- Non-Competitive Bidding – In Non-Competitive bidding variety of entities, including individuals, HUFs (House of Undivided Families), RRBs (Regional Rural Banks), Co-operative Banks, Corporate bodies, Institutions, and Trusts can participate. Eligible investors participating in this auction can apply for a specific number of securities without indicating a particular price or yield. Securities are then allocated at the weighted average price or yield determined through the auction process.
Who are the key participants in the G-Sec market?
The primary participants in these Government securities markets are commercial banks, primary dealers, and institutional investors such as insurance companies. Other significant participants comprise cooperative banks, mutual funds, regional rural banks, as well as provident and pension funds. Foreign Institutional Investors (FIIs) can participate within prescribed quantitative limits.
The Reserve Bank of India (RBI) has introduced a retail direct scheme to help individual investors invest in government securities through an RBI Retail Direct Gilt (RDG) account. Opening and maintaining a retail direct gilt account with RBI is free of cost. Furthermore, the Clearing Corporation of India (CCIL), which acts as the aggregator, does not levy any charges for the submission of bids in primary auctions. However, the investor will have to bear the cost of payment gateway fees and other related charges.
The individual who holds the account is permitted to make non-competitive bids for central government securities like treasury bills (TBs), sovereign gold bonds (SGBs), and state government securities. Additionally, they can use the RBI’s NDS -OM (Negotiated Dealing System – Order Matching), a screen-based electronic order trading system to access the secondary market. The interest and maturity proceeds are deposited automatically into the account holder’s linked bank account on the due date, making the transaction process hassle-free.
What is the role of Clearing Corporation of India Limited (CCIL)?
CCIL is an agency for G-Sec and acts as a central counterparty for all transactions between two counterparties. CCIL offers a range of financial services, including clearing, settlement, and risk management for various financial instruments, including government securities, money markets, and foreign exchange. Additionally, it provides services that are related to trading commodities such as agricultural and industrial products.
Volumes of G-Secs
|Approx Amount (Rs in Trillions)
|Total Outstanding of G-secs + FRB + Special Securities as on 10th March 2023
|Treasury Bills Outstanding as of 10th March 2023
|Yearly Trade Volume (2022-23)
|March 2023 Monthly Trades Volume
|Daily Trades Volume (based on March 2023)
Performance of G- Secs (Government Securities) in the last 15 years
The G-Sec 10-year average rate over 15 years has been 7.448%. The highest (9.484%) and Lowest (5.260%) numbers were seen during the volatile times of 2008. Post that; we saw the last peak of 9.1% in Dec 2014 and the lowest in July 2020 of 5.7% due to the pandemic.
Repo Rate Vs Inflation Rate
Repo Rate – The term “Repo Rate” refers to the interest rate at which the RBI (Reserve Bank of India) provides loans to commercial banks and financial institutions in India in the event of any shortfall of funds. As of 2023, the current Repo Rate is 6.50%.
Inflation Rate – The inflation rate is the rate at which prices rise over time, leading to a fall in the purchasing value of money. As of Feb 2023, the current inflation rate is 6.2%.
In a surprising move, the Reserve Bank of India (RBI) did not raise the Repo Rate in April 2023, despite continuously increasing the repo rate since May 2022. The RBI’s goal is to attain a target inflation rate of 4% (currently around 6.4%), which is why the decision to maintain the rate shocked many. The US Federal Reserve’s decision to increase rates by 25 basis points also led to expectations of a similar move by the Indian Central Bank.
As per the current market scenario, it is assumed that if there is a hike in the Repo Rate, it would be the last of its kind for a while. Because the Repo rate had reached its maximum level, interest rates would be reduced towards the end of this year or early next year.
Is the above scenario bringing new opportunities for the Investors?
The Modified Duration of G-Sec is ~7%. And Price and Yield have an inverse relationship. This means if there is a 50bps change in the G-sec, then the security value will change by 7%*50bps =Rs. 3.5. Thus, any hike in the interest rate can make the government security prices fall further, making it a good entry point for any investor. Once the Central Bank starts slashing rates, the investor will see capital gains arising due to increasing prices. An opportunity to make a capital gain in the fixed return security is scarce. Government Securities are stable and secure; an investor should invest in them intrepidly.
Government securities are always popular among investors for long-term investment purposes as that is the soundest financial decision taken by the investor, especially who has less risk tolerance. And after witnessing the current market scenario where the Repo rate is still constant gives a significant boom in the number of investors who will now look forward to investing in the G- Secs or Government Securities. Along with investing in G- Secs can be a valuable addition to a well-diversified investment portfolio in time of market volatility.