This document provides an overview of the Government Securities Market (GSM) in India. It discusses:
- What government securities are and how they are issued by the government to fund its activities.
- The key types of government securities including treasury bills, cash management bills, treasury notes, bonds, and zero coupon bonds.
- The major holders of government securities like commercial banks, insurance companies, and the Reserve Bank of India.
- The strengths of the GSM like its large size, well-regulated primary dealers, and sound depository system.
- Some weaknesses like potential for fiscal dominance outpacing demand and a skewed investor base.
3. INTRODUCTION :
A Government security is a tradable instrument issued
by the Central Government or the State Government. It
acknowledges the Government’s debt obligation. Such
securities are issued for short term or long term.
Government needs large amount to carry on its welfare
activities.
4. MEANING :
A government security is a bond or other type
of debt obligation that is issued by a
government with a promise of repayment upon
the security's maturity date. Government
securities are usually considered low-risk
investments because they are backed by the
taxing power of a government.
5. OBJECTIVES/FEATURES OF GOVT. SECURITIES :
Govt. securities are sovereign debt obligations
of govt. of India either central or any other
authority of govt.
Govt. securities include central govt. & state
govt. securities, Treasury Bill & Govt.
guaranteed bonds.
The terms of govt. securities range from 92
days to 30 years.
6. HOW ARE THE GOVT. SECURITIES ISSUED :
Govt. securities are issued through auctions
conducted by the RBI. Auctions are conducted
on the electronic platform called the NDS-
Auction platform. Commercial Banks,
Scheduled Co-operative Banks, Primary
Dealers, Insurance Companies & Provident
Funds, who maintain finds accounts (Current
account) & Securities account (SGL account)
with RBI. Are the members of this electronic
platform.
7. 38%
9%
0%
22%
1%
3%
0%
3%
1%
7%
12%
4%
Holder Profile in Central Govt. securities as on end Mar 2010
1. Commercial Banks
2. Bank- Primary Dealers
3. Non-Bank PDs
4. Insurance Companies
5. Mutual Funds
6. Co-operative Banks
7. Financial Institutions
8. Corporates
9. FIIs
10. Provident Funds
11. RBI
12. Others
8. TYPES OF GOVERNMENT SECURITIES :
Treasury Bills or T-bills :
issued on a discount basis.
maturities up to 52 weeks and lesser than it.
Treasury bills or T-bills, which are money market
instruments, are short term debt instruments issued by the
Government of India and are presently issued in three
tenors, namely, 91 day, 182 day and 364 day. Treasury
bills are zero coupon securities and pay no interest. They
are issued at a discount and redeemed at the face value at
maturity. For example, a 91 day Treasury bill of Rs.100/-
(face value) may be issued at say Rs. 98.20, that is, at a
discount of say, Rs.1.80 and would be redeemed at the
face value of Rs.100/-.
9. TYPES OF GOVERNMENT SECURITIES :
Cash Management Bills (CMBs) :
Government of India, in consultation with the Reserve Bank
of India, has decided to issue a new short-term instrument,
known as Cash Management Bills (CMBs), to meet the
temporary mismatches in the cash flow of the Government.
The CMBs have the generic character of T-bills but are
issued for maturities less than 91 days. Like T-bills, they
are also issued at a discount and redeemed at face value at
maturity. The tenure, notified amount and date of issue of
the CMBs depends upon the temporary cash requirement of
the Government.
10. TYPES OF GOVERNMENT SECURITIES :
Treasury Notes :
longer term than T-bills.
from one to ten years.
semiannual coupon payments.
current owners are registered.
issued in denominations of ₹.1000 or more.
active secondary market.
11. TYPES OF GOVERNMENT SECURITIES :
Treasury Bonds :
maturities greater than ten years.
denominations in ₹.1,000 or more .
some have call provisions.
Savings Bonds :
nonmarketable and offered only to individuals.
pure discount bonds.
mature in 20 years with semiannual coupon payments.
12. TYPES OF GOVERNMENT SECURITIES :
Dated Government Securities :
Dated Government securities are long term securities and carry a
fixed or floating coupon (interest rate) which is paid on the face
value, payable at fixed time periods (usually half-yearly). The tenor of
dated securities can be up to 30 years.
Zero Coupon Treasury Security Receipts or Coupon stripping :
Treasury bonds are purchased and placed in trust with a custodian.
sets of receipts issued for each coupon date.
another set of receipts issued for certain maturity dates.
Zero coupon means no interest.
Issued at a discount price.
13. GSM- STRENGTHS (1)
Large supply of securities
Enabling creation of benchmark securities with sufficient
outstanding stock.
Issuances across the yield curve.
‘State of the Art’ primary issuance process.
Electronic bidding.
Faster processing.
Flexibility to dispose of securities on the same day.
Well capitalized and efficient Primary Dealer
System
100% of the notified amount underwritten
14. GSM-STRENGTHS (2)
Sound Depository system
Proprietary and custodial accounts
Complete dematerialization
‘State of the Art’ market infrastructure
Mandatory reporting –NDS
Trading systems – NDS-OM (above 80 percent of trades)
Real time price dissemination
Clearing and settlement,
Guaranteed settlement.
Availability of instruments and processes
Short sale
‘When Issued’
STRIPS
Security Financing
Repo
15. GSM-STRENGTHS (4)
• Predominant holding by residents
– No default risk perception – a sovereign will not
default on debt in its own currency
– marginal susceptibility to exchange rate volatilities
• Sophisticated participants
– Enabling adoption of advanced techniques and
processes
• Non participation of RBI in primary market
– Facilitating market based price discovery
• Close coordination between
– debt and monetary managements
– monetary and fiscal policies
17. GSM-WEAKNESSES (1)
• Fiscal dominance
– Supply outstripping demand
• Illiquidity
– HTM regime for SLR securities. Any alternative?
• Skewed investor base
– banks, Insurance Companies and RBI account for
sizeable portion of outstanding stock
• Active participants with similar IR exposures
– Herding.
18. GSM-WEAKNESSES (2)
• Absence of Term Money market
• Lack of retail interest
• Absence of market making
• Not much activity in
– Short selling
• Participants’ inertia – Lazy treasuries?
– Participants do not come in till liquidity improves
– Liquidity will not improve till participants come
– Chicken and Egg problem
19. GSM OPPORTUNITIES (1)
Latecomer’s advantage - development can be
based on wider experience
Tap latent investor base
Nascent pension sector- a potential large investor
Market G-secs as another investment product,
not as a mandated product
Enhance liquidity
Increase policy Scope.
20. GSM OPPORTUNITIES (2)
Innovate and introduce new products
To suit diverse investor interests
• Inflation Indexed Bonds
• Interest Rate Options
Scope for calibrated increase in FII
participation
Reduce the load on domestic investors and free
domestic resources
To be considered in light of other implications-
interest rate and exchange rate volatility.
21. GSM THREATS (1)
Low volume markets vulnerable to
manipulation
Underdeveloped domestic markets for hedging
products may encourage migration off-shore
Opacity of off-shore markets and difficulty of
monitoring and regulation
Lack of sophistication by certain participants
Shallowness of the market
Rapid opening may cause excessive volatility
Slower opening results in losses due to missed
opportunities.
22. GSM THREATS (2)
Pressure for rapid opening of rupee debt
market to foreign participation
Sovereign insulated from exchange risk
But the market exposed to Interest Rate and
Exchange Rate volatility
Migration to IFRS – implications for valuation
and recognition of P & L.
