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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?


Context:

The Reserve Bank of India (RBI) has given small investors direct access to its government securities trading platform.

  • Now, Retail investors can directly open their gilt accounts with RBI, and trade in government securities.

What is the need for the current proposal, then?

  • The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
  • So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes. In other words, there is no easy way for them to exit their investments.
  • Thus, currently, direct g-secs trading is not popular among retail investors.

What are G- Secs?

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.

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

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

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: Indian Express.