Context: Six states have tapped the market for borrowing Rs. 16,000 crore through issuance of state development loans (SDL).
Government Securities
A Government Security (G-Sec) is a tradable instrument issued by Central or State governments. It acknowledges the Government's debt obligation.
RBI as a Debt Manager
- RBI Act mandates RBI to undertake receipts and payments of Central Government and carry out banking and management of public debt of the Union.
- State Government transactions are carried out by RBI in terms of an agreement entered by RBI and State Governments under RBI Act. As of now, such agreements exist between RBI and all State Governments except Sikkim.
- Thus, RBI is the banker and debt manager of the government.
- RBI issues both, treasury bills and bonds or dated securities on behalf of Central Government while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
Types of Government Securities
Short Term Government Securities (maturity less than 1 year)
- Treasury Bills: Money market instruments issued by GoI. Presently, issued in three tenors of 91 days, 182 days and 364 days.
- Cash Management Bills: Issued by GoI to meet temporary mismatches in cash flow of GoI. They are like T-bills but are issued for maturities less than 91 days.
Long Term Government Securities (Maturity more than 1 year):
- Dated G-Secs: They are securities which carry a fixed or floating coupon (interest rate) which is paid on face value, on a half-yearly basis. Tenor ranges between 5 to 40 years.
- Fixed Rate Bonds: These are bonds on which the coupon rate is fixed for the entire life (i.e., till maturity) of the bond. Most Government bonds in India are issued as fixed rate bonds.
- Floating Rate Bonds: FRBs are securities which do not have a fixed coupon rate. Instead, it has a variable coupon rate which is re-set at pre-announced intervals (say, every six months or one year).
Auction of Government Securities
- G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution of RBI.
- Members of e-KUBER: Commercial Banks, Scheduled Urban Cooperative Banks, Primary Dealers, Insurance Companies and Provident Funds, who maintain funds account (Current Account) and securities account (Subsidiary General Ledger account) with RBI.
- All members of E-Kuber can place their bids in the auction through this electronic platform.
Open Market Operations (OMO)
- OMOs are a key monetary policy tool used by the Reserve Bank of India (RBI) to regulate liquidity in the banking system by buying or selling government securities (G-Secs) in the open market.
- When RBI purchases government securities, it injects liquidity into the system. This encourages banks to lend more which can boost economic activity.
- When RBI sells government securities, it absorbs excess liquidity and helps to control inflation by reducing the money supply.
- OMOs are crucial for maintaining stable interest rates, ensuring adequate credit availability, and managing overall financial stability in the economy.