G-sec

G-sec

Subject :Economy

Context:

Private banks have bought bonds worth a net of 216.20 billion rupees ($2.61 billion) this month, the highest since March 2020.

Cause:

• Rise in deposit growth-As bank balance sheets expand, more it will keep on the investment book.
• Higher bond yield-with expectations of (interest) rate cuts next year, and gain on the holding period.
• Increased demand to meet statutory liquidity ratio (SLR) requirements.
  • SLR is the minimum percentage of deposits that commercial banks are required to invest in liquid assets, such as government bonds and state debt. The ratio is currently 18%.
• When there is an increase in economic activity, the speed of money going around increases and the need to maintain frictional liquidity (short-term funds) at banks also increases.

Concept:

Government Security (G-Sec):

• It is a tradeable instrument issued by the Central Government or the State Governments.
• It acknowledges the Government’s debt obligation.
• Such securities are short term -usually called treasury bills, with original maturities of less than one year or long term-usually called Government bonds or dated securities with original maturity of one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
• The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of G-Secs and deals with the issue, interest payment and repayment of principal at maturity.
• Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to statutory hold G-Secs.

Types:

• Treasury Bills (T-bills)
  • Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely– 91 day, 182 day and 364 day. 
  • Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
    • For example, a 91 day Treasury bill of ₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the face value of ₹100.
• Cash Management Bills (CMBs)
  • In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India.
  • The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
• Dated G-Secs
  • Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis.
  • Generally, the tenor of dated securities ranges from 5 years to 40 years.
  • Most of the dated securities are fixed coupon securities.
  • Types:
    •  Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life (i.e. till maturity) of the bond. Most Government bonds in India are issued as fixed rate bonds.
    • Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed coupon rate. Instead it has a variable coupon rate which is re-set at pre-announced intervals (say, every six months or one year). FRBs were first issued in September 1995 in India.
    • The Floating Rate Bond can also carry the coupon, which will have a base rate plus a fixed spread, to be decided by way of auction mechanism. The spread will be fixed throughout the tenure of the bond.
    • Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon payments. However, like T- Bills, they are issued at a discount and redeemed at face value. The Government of India had issued such securities in 1996. It has not issued zero coupon bonds after that.
    • Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the Principal amount of the investors from inflation.
    • Inflation Indexed Bonds (IIBs) – IIBs are bonds wherein both coupon flows and Principal amounts are protected against inflation. The inflation index used in IIBs may be Wholesale Price Index (WPI) or Consumer Price Index (CPI).  IIBs were first issued in 1981 in the UK.
    • Bonds with Call/ Put Options – Bonds can also be issued with features of optionality wherein the issuer can have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. It may be noted that such bonds may have put only or call only or both options.
    • Special Securities – Under the market borrowing program, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds respectively) as compensation to these companies in lieu of cash subsidies These securities are usually long dated securities and carry a marginally higher coupon over the yield of the dated securities of comparable maturity. These securities are, however, not eligible as SLR securities but are eligible as collateral for market repo transactions. The beneficiary entities may divest these securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising funds.
    • Bank Recapitalisation Bonds -These securities are named as Special GoI security and are non-transferable and are not eligible investment in pursuance of any statutory provisions or directions applicable to investment banks. These securities can be held under HTM portfolio without any limit.
    • STRIPS – Separate Trading of Registered Interest and Principal of Securities. – STRIPS are the securities created by way of separating the cash flows associated with a regular G-Sec i.e. each semi-annual coupon payment and the final principal payment to be received from the issuer, into separate securities. They are essentially Zero Coupon Bonds (ZCBs). However, they are created out of existing securities only and unlike other securities, are not issued through auctions.
    • Sovereign Gold Bond (SGB): SGBs are unique instruments, prices of which are linked to commodity price viz Gold.
    • Savings (Taxable) Bonds-These Bonds will be exempt from wealth-tax under the Wealth Tax Act, 1957. These Bonds will be issued at par for a minimum amount of ₹1,000 (face value) and in multiples thereof.
•  State Development Loans (SDLs)
  • State Governments also raise loans from the market which are called SDLs.
  • SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government.
  • Like dated securities issued by the Central Government, SDLs issued by the State Governments also qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF) and special repo conducted under market repo by CCIL.
  • State Governments have also issued special securities under “Ujjwal Discom Assurance Yojna (UDAY) Scheme for Operational and Financial Turnaround of Power Distribution Companies (DISCOMs).