Government securities (G-Secs)

Government securities (G-Secs)

Subject – Economy

Context – G-Secs yield tops 6.5 per cent

Concept –

• Bond yields and prices are inversely correlated and move in opposite directions.

What are government securities, or g-secs?

These are debt instruments issued by the government to borrow money. The two key categories are treasury bills – short-term instruments which mature in 91 days, 182 days, or 364 days, and dated securities – long-term instruments, which mature anywhere between 5 years and 40 years.

Why are G-secs volatile?

G- Sec prices fluctuate sharply in the secondary markets. Factors affecting their prices:

• Demand and supply of the securities.
• Changes in interest rates in the economy and other macro-economic factors, such as, liquidity and inflation.
• Developments in other markets like money, foreign exchange, credit and capital markets.
• Developments in international bond markets, specifically the US Treasuries.
• Policy actions by RBI like change in repo rates, cash-reserve ratio and open-market operations.

Are g-secs tax free? How do they compare with bank FDs?

• Like bank fixed deposits, g-secs are not tax-free.
• They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
• However, they are not completely risk free, since they are subject to fluctuations in interest rates.
• Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

To know more about G-Sec, please refer September 2021 DPN.

To know about RBI Retail Direct platform for Government Securities (G-secs), please refer September 2021 DPN.