Government Securities (G-Secs) are a significant financial instrument issued by the Central Government or the State Governments of India. They hold great value as an alternative investment option for investors. However, recently, a decline in the yield on the benchmark 10-year government security (G-Sec) has raised questions about retail investors’ investment strategy. The Reserve Bank of India (RBI) has opened up the G-Sec market to retail investors, but their participation has been relatively low.
Why did the Yield of G-secs Decline?
In May 2023, the yield on the benchmark 10-year G-Sec fell from 7.4% in early March 2023 to 6.9%. The current trading range is around 6.96-6.99%. This drop occurred due to the changes in debt mutual fund taxation where the benefit of indexation was removed. Other influencing factors were the RBI’s decision on the repo rate and the declining inflation.
Obstacles to Retail Investors’ Participation in G-Secs
One reason that retail investors have had low participation in G-Secs is due to the lack of investor guidance. Investing in G-Secs is complex and requires intermediaries’ guidance. Additionally, the G-Sec market lacks liquidity, causing difficulty for retail investors who want to resell their securities. Retail investors often find the process daunting and prefer more simplified options like fixed deposits.
G-Secs vs. Alternative Investment Options
Retail investors may consider avenues such as fixed deposits, new bonds, Non-Convertible Debentures (NCDs), and post office deposit schemes. Such alternatives offer increased interest rates, thus serving as enticing options for these investors.
Understanding Government Securities
A G-Sec is a tradable instrument issued by the central or state government. These are financial instruments representing a contractual obligation by the issuer to pay the holder a fixed amount of money on a specified date. G-Secs are either short-term, known as treasury bills, or long-term, known as Government bonds or dated securities. They carry little risk of default, making them nearly risk-free.
Role of the Reserve Bank of India in G-Secs
The RBI sells G-secs to remove liquidity from the system and buys back G-secs to infuse liquidity into the system through Open Market Operations (OMOs). This process aids in adjusting money supply conditions in the system.
Understanding Bond Yield
The bond yield is the return realized by an investor on a bond, calculated with a simple mathematical formula: the annual coupon rate divided by the current market price of the bond.
Variety of G-Secs
G-Secs come in diverse forms such as Treasury Bills (T-bills), Cash Management Bills (CMBs), Dated G-Secs, and State Development Loans (SDLs). Each type has its unique characteristics and maturity periods, offering investors a range of options to choose from according to their investment needs.
Previous Year Questions in UPSC Civil Services Examination
In the 2013 UPSC Civil Services Examination, a question was asked about Open Market Operations, and in the 2018 examination, a question about the management of Government Securities was asked, underscoring the importance of understanding G-Secs for these examinations.
