Guidelines for Government Securities Lending Directions, 2023 by RBI

  • December 29, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Guidelines for Government Securities Lending Directions, 2023 by RBI

Subject :Economy

Section: Monetary Policy

The Reserve Bank of India (RBI) has issued guidelines to permit lending and borrowing in government securities (G-Secs), excluding Treasury Bills.

  1. Objective:
    • The move aims to deepen the bond market and enhance liquidity in the Government Securities (G-Sec) market.
    • A well-functioning securities lending and borrowing market is expected to contribute to efficient price discovery.
  2. Draft and Finalization:
    • In February, the RBI released the draft RBI (Government Securities Lending) Directions, 2023.
    • The guidelines have been finalized based on the comments received on the draft.
  3. Eligibility Criteria:
    • Government securities issued by the Central Government excluding Treasury Bills shall be eligible for lending/borrowing under a GSL transaction. Securities obtained under a repo transaction, including through Reserve Bank’s Liquidity Adjustment Facility, or borrowed under another GSL transaction shall also be eligible to be lent under a GSL transaction.
    • Government securities issued by the Central Government (including Treasury Bills) and the State Governments shall be eligible for placing as collateral under a GSL transaction. Securities obtained under a repo transaction, including through Reserve Bank’s Liquidity Adjustment Facility, or borrowed under another GSL transaction shall also be eligible to be placed as collateral under a GSL transaction.
  4. Collateral Eligibility:
    • G-Secs, including Treasury Bills and state government bonds, are eligible for placing as collateral under a GSL transaction.
  5. Maturity Tenor:
    • The minimum tenor of a GSL transaction is one day, and the maximum tenor is the maximum period prescribed to cover short sales.
  6. Impact and Purpose:
    • The lending and borrowing of G-Secs are expected to augment the existing market for ‘special repos.‘
    • The system aims to facilitate broader participation in the securities lending market, allowing investors to deploy idle securities and enhance portfolio returns.

The introduction of these guidelines is part of the RBI’s efforts to create a more robust and liquid securities lending and borrowing market, fostering a healthier bond market ecosystem.

Government Securities (G-Secs):

Government Securities (G-Secs) are debt instruments issued by the government to raise funds from the market. These securities are considered one of the safest forms of investment because they are backed by the government’s credit. The government pays periodic interest to the bondholders and repays the principal amount at maturity.

  1. Issued by Government:
    • G-Secs are issued by the central government and state governments to meet their financial needs.
  2. Low Risk:
    • They are considered low-risk investments as they are backed by the government’s commitment to repayment.
  3. Fixed Interest Payments:
    • G-Secs pay periodic interest to bondholders, usually semi-annually or annually.
  4. Fixed Maturity Period:
    • G-Secs have a predetermined maturity period, ranging from a few years to several decades.
  5. Liquidity:
    • They can be traded in the secondary market before maturity, providing liquidity to investors.
  6. Types of G-Secs:
    • G-Secs include Treasury Bills (T-Bills), Government Bonds, and State Development Loans (SDLs).
  7. Primary Issuance and Secondary Market:
    • G-Secs are initially issued through auctions in the primary market and later traded in the secondary market.

Treasury Bills (T-Bills):

Treasury Bills, often referred to as T-Bills, are a specific type of short-term government security. They are issued by the government to meet short-term financing needs. T-Bills are typically issued for maturities of 91 days, 182 days, and 364 days.

  1. Short-Term Debt:
    • T-Bills have short maturities, making them suitable for investors looking for short-term investments.
  2. Discounted Purchase:
    • T-Bills are issued at a discount to their face value. The difference between the issue price and face value represents the investor’s earnings.
  3. No Interest Payments:
    • Unlike other bonds, T-Bills do not pay periodic interest. Instead, investors earn returns by purchasing them at a discount and receiving the face value at maturity.
  4. High Liquidity:
    • T-Bills are highly liquid and can be easily traded in the secondary market.
  5. Risk-Free:
    • T-Bills are considered risk-free because they are backed by the government.
  6. Primary Issuance and Auctions:
    • Like other G-Secs, T-Bills are issued through auctions in the primary market.
  7. Role in Monetary Policy:
    • T-Bills play a role in the implementation of monetary policy by the central bank.

G-Secs encompass a broader category of government debt, including Treasury Bills, Government Bonds, and State Development Loans. Treasury Bills are a specific type of short-term G-Sec with unique characteristics suitable for investors with short-term investment horizons.

economy Guidelines for Government Securities Lending Directions