Demystifying Government Bonds in India: Your Path to Secure Investments

Introduction

Government Securities (G-Secs) are a critical component of the financial market, offering a safe and secure investment avenue for individuals and institutions. They are issued by the Central Government or State Governments, acknowledging the Government’s debt obligation. This comprehensive guide aims to provide an in-depth understanding of G-Secs, their types, benefits, and the dynamics of the G-Secs market in India.

What are Government Securities (G-Secs)?

G-Secs are tradable instruments issued by the Central Government or the State Governments. They are 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). G-Secs carry practically no risk of default and hence are referred to as risk-free gilt-edged instruments.

Types of G-Secs

1. Treasury Bills (T-bills): These are short-term debt instruments issued by the Government of India, available in three tenors – 91 day, 182 day, and 364 day. T-bills are zero-coupon securities issued at a discount and redeemed at face value at maturity.
2. Cash Management Bills (CMBs): Introduced in 2010, CMBs are short-term instruments issued to meet the temporary mismatches in the cash flow of the Government of India. They have the generic character of T-bills but are issued for maturities less than 91 days.
3. Dated G-Secs: These are securities that carry a fixed or floating coupon (interest rate) paid on the face value, half-yearly. The tenor of dated securities ranges from 5 years to 40 years.
4. Fixed Rate Bonds: These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds in India are issued as fixed-rate bonds.
5. Floating Rate Bonds (FRB): FRBs are securities that do not have a fixed coupon rate. Instead, it has a variable coupon rate which is re-set at pre-announced intervals.
6. Zero Coupon Bonds: These are bonds with no coupon payments. Like T-Bills, they are issued at a discount and redeemed at face value.
7. Capital Indexed Bonds: These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the Principal amount of the investors from inflation.
8. Inflation Indexed Bonds (IIBs): IIBs are bonds wherein both coupon flows and Principal amounts are protected against inflation. The inflation index used in IIBs may be Whole Sale Price Index (WPI) or Consumer Price Index (CPI).
9. Bonds with Call/Put Options: Bonds can also be issued with features of optionality wherein the issuer can have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond.
10. Special Securities: Under the market borrowing program, the Government of India also issues special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc., as compensation to these companies in lieu of cash subsidies.
11. STRIPS (Separate Trading of Registered Interest and Principal of Securities): STRIPS are the securities created by way of separating the cash flows associated with a regular G-Sec into separate securities. They are essentially Zero Coupon Bonds (ZCBs).
12. Sovereign Gold Bond (SGB): SGBs are unique instruments, prices of which are linked to commodity price viz Gold. SGBs are also budgeted in lieu of market borrowing.
13. 7.75% Savings (Taxable) Bonds, 2018: These bonds may be held by an individual, not being a Non-Resident Indian-in his or her individual capacity, or in individual capacity on joint basis, or in individual capacity on any one or survivor basis, or on behalf of a minor as father/mother/legal guardian and a Hindu Undivided Family.
14. State Development Loans (SDLs): State Governments also raise loans from the market which are called SDLs. SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government.

Why Invest in G-Secs?

Holding G-Secs offers several advantages:

1. Safety: G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
2. Ease of Holding: They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. They can also be held in physical form.
3. Wide Range of Maturities: G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.
4. Liquidity: G-Secs can be sold easily in the secondary market to meet cash requirements.
5. Collateral: G-Secs can also be used as collateral to borrow funds in the repo market.

Conclusion

Investing in G-Secs is a safe and secure option for individuals and institutions. It provides a guaranteed return and is backed by the Government’s commitment. Understanding the dynamics of the G-Sec market can help investors make informed decisions and maximize their returns.