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What are govt securities?

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

What are govt securities?

A government security (G-Sec) is a tradeable instrument issued by the central government or state governments.

Key features:

  • It acknowledges the government’s debt obligations.
  • Such securities can be both short term (treasury bills — with original maturities of less than one year) or long term (government bonds or dated securities — with original maturity of one year or more).
  • The central government issues both: treasury bills and bonds or dated securities.
  • State governments issue only bonds or dated securities, which are called the state development loans.
  • Since they are issued by the government, they carry no risk of default, and hence, are called risk-free gilt-edged instruments.
  • FPIs are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time.

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.
Why in News?

From April 7 to September 22 in this financial year, 27 States and 2 Union Territories have cumulatively raised ₹3.26 lakh crore via State government securities or State development loans (SDLs).

●        This is a 45% increase from the borrowings in the corresponding period of 2019-20.

●        Tamil Nadu, Maharashtra, Andhra Pradesh, Karnataka and Rajasthan have been the top 5 borrowing States, accounting for 54% of total borrowings by States so far.

InstaLinks:

Prelims Link:

  1. What are G-Secs?
  2. Short and long term securities.
  3. Powers of the Centre and states to issue these instruments.
  4. Role of RBI.
  5. Factors which affect the prices of these securities.

Mains Link:

What are G-Secs? Why are they significant? Discuss.

Sources: the Hindu.