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Current Affairs

Government securities

Date: 06 February 2021 Tags: Miscellaneous

Issue

The Reserve Bank of India (RBI) said that it will give small investors direct access to its government securities trading platform.

 

Background

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

 

Details

  • Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.

  • To encourage direct investment, the government and RBI have taken several steps in recent years.

  • Retail investors are allowed to place non-competitive bids in auctions of government bonds through their demat accounts. Stock exchanges act as aggregators and facilitators of retail bids.

 

Need for change

  • The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. 

  • There is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes. 

  • The RBI’s intention is to make the whole process of g-sec trading smoother for small investors.

  • By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments.

 

G-secs to retail investors

  • The RBI is the debt manager for the government. In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.

  • When the government demands so much money, the price of money (i.e, the interest rate) will move up.

  • It is in the government’s and RBI’s interest to bring this down. That can happen by broadening the base of investors and making it easier for them to buy g-secs.

 

G-secs

  • G-secs are debt instruments issued by the government to borrow money. The two key categories are treasury bills and dated securities.

  • Treasury bills short-term instruments which mature in 91 days, 182 days, or 364 days, and dated securities are long-term instruments and may mature anywhere between 5 years and 40 years.

  • They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.

  • They are not completely risk free, since they are subject to fluctuations in interest rates. G-secs are not tax-free.