The Reserve Bank of India (RBI) recently released the Draft Reserve Bank of India (Government Securities Lending) Directions, 2023. The purpose behind this move is to stimulate more participation in securities lending by offering investors a means to utilize idle securities and boost portfolio returns.
Draft Norms on Lending and Borrowing of G-Secs
According to the draft directions, Government Securities Lending (GSL) transactions should have a minimum duration of one day and can extend up to 90 days. The guidelines suggest that all securities issued by the central government, except Treasury Bills, are eligible for lending/borrowing under a GSL operation.
Conversely, any security issued by the central or state governments, including Treasury Bills, can serve as collateral in a GSL transaction. Entities eligible to conduct repo transactions in government securities and those approved by the RBI can engage in GSL operations as lenders of securities.
Understanding Government Securities
A Government Security (G-Sec) is a tradable instrument that central or state governments issue. It serves as a debt instrument permitting the government to borrow money from the public to cover its Fiscal Deficit. Essentially, these debt instruments symbolize a contractual obligation between the issuer and holder where the government must repay a fixed amount, known as the principal, at a predetermined date.
Government securities can be short-term like treasury bills (with maturity less than a year) or long-term like government bonds (with original maturity of one year or more). G-Secs carry minimal risk of default and hence are termed as risk-free gilt-edged instruments.
Types of Government Securities
1. Treasury Bills (T-bills): These are zero coupon securities issued at a discount and redeemed at face value upon maturity.
2. Cash Management Bills (CMBs): Introduced in 2010 by the Indian Government to manage temporary mismatches in cash flow.
3. Dated G-Secs: These carry fixed or floating coupon (interest rate), paid on the face value semi-annually. The tenor usually ranges between 5-40 years.
4. State Development Loans (SDLs): These are loans raised by state governments from the market.
Role of Open Market Operations (OMOs)
The RBI maintains money supply conditions via OMOs, which involves the sale or purchase of G-Secs. Selling G-Secs allows the RBI to remove liquidity from the system, while buying them infuses liquidity. The RBI uses OMOs and other monetary policy tools, such as repo rate, cash reserve ratio, and statutory liquidity ratio, to manage the amount and price of money in the system.
Review of UPSC Civil Services Examination Questions
In the 2013 question about ‘Open Market Operations’, it pertains to the purchase and sale of government securities by the RBI. For the 2020 query regarding non-financial debt, it includes housing loans owed by households, outstanding amounts on credit cards, and treasury bills. In the question from 2018, it is stated that the Reserve Bank of India manages and services Government of India Securities but not State Government Securities; no treasury bills are issued by State Governments and that treasury bills are issued at a discount from the par value.
