Government security (Gsec) can be briefly defined as an investment instrument issued by a governmental body. In India, the central and state-level governments issue a wide range of securities of different types and features to investors. The investors come into a direct contract or agreement where the government becomes responsible for ensuring the return on investment. Government securities are considered among the safest investment instruments due to their sovereign rating.
The past few years have witnessed several important changes in India’s government securities market. Rapid development has been brought about by the emergence of electronic screen-based trading systems, the introduction of dematerialized holding, the foundation of the Clearing Corporation of India Ltd. for settlements, and regulatory changes. Large-size institutions remained the major investors in government securities in India, but the participation of small-scale entities has become more noticeable in recent years.
As the Indian investment market grows and investors look for the most suitable tools for their portfolios, a thorough study of government securities, their mechanisms, categories, and influencing factors is in order!
Understanding Government Securities (G secs) in India
Government securities are tradable instruments that the government issues. They are investments for investors and a debt obligation for the respective government. In simpler terms, government securities mean that the government takes a loan from the investors.
Once the Gsec is issued, the principal amount stays invested for a pre-fixed tenure, through which the government generates periodic interest payments at a pre-decided rate to the investors. On maturity, the investors receive the initial investment amount.
Why are Government Securities issued?
The reason behind any loan application is fund collection. A government can face a liquidity crisis at times. Instead of going to the banks to apply for a loan, the government can issue securities and accumulate the required amount from the public. The government gets access to a wider market, along with the probability of a larger amount than what a bank might be willing to offer. On the other hand, investors get safer investment options and assured returns.
The funds generated through bond allocations can be used to meet expenditure needs, fill in budget deficits, and finance developmental projects.
Features of Government Securities
Certain features can vary based on a specific investment instrument; regardless, here are some basic features of government securities.
Less Risk
The sovereign backing of government securities reduces the chances of default. Despite market situations and events, the investors will receive the returns as and when promised.
Diverse Tenure
Investment goals can be short-term, mid-term, or long-term. Government securities come in various tenures, from a few days to years, allowing investors greater flexibility.
Regular Income
With the semi-annual payout of interests on most government securities, a stable income flow is created. This is beneficial for anyone looking for a regular source of income.
Reliable Regulations
The rules and regulations of government securities, their pricing, tenure, returns, and so on, are transparently specified to ensure completely-informed decision making.
High Liquidity
Government securities are tradable in the secondary market. Investors can enjoy efficient liquidity and trade at their convenience.
Issuance of Government Securities through RBI
The Reserve Bank of India (RBI) issues securities through auctions on behalf of the government. The auctions are conducted on the Core Banking Solution (CBS) platform of RBI E-Kuber. Commercial banks, primary dealers, scheduled UCBs, and other E-Kuber members can place their bids on the securities. The non-competitive bidding segment of the auctions is open to retail investors.
After consulting with the Indian Government, the RBI publishes a half-yearly auction calendar with information on the borrowing amount, tenure, and so on. A notification and a Press Communique containing detailed information about each security are issued a week before the auction. The RBI further publishes a press release on its website and advertisements in leading newspapers.
Note that according to 1934’s Reserve Bank of India Act (Sec. 21A (1) (b)), RBI is to take in the management of state development loans. It will publish press releases and newspaper advertisements and conduct the auctions.
Investing in GSec directly through RBI: Should You?
Retail investors can opt to invest in government securities directly through the RBI’s non-competitive bidding segment. In order to do so, an individual retail investor must open an RBI Direct Gilt account. The RBI Retail Direct Scheme has provisions for the same.
Investing directly through the RBI is possible, but it is important to learn the pros and cons before making any decisions. For instance, a primary benefit of investing through RBI is the reduced associated cost due to the fact that there is no broker expense. On the other hand, since the Retail Direct Scheme is relatively new and not many are aware of it, exiting the investment may not be that easy until more investors join the platform and the schemes gain popularity in the secondary market.
Types of Government Securities in India
In India, both central and state governments can issue government securities. They have been divided into various categories based on their tenure and features.
Treasury Bills (T-bills)
These are short-term government securities with tenures of less than 1 year. The government issues them to meet short-term capital requirements, and investors can consider them short-term investment tools with the less risk. T-bills can come with 4 tenures.
- 14-day
- 91-day
- 182-day
- 364-day
Cash Management Bills (CMBs)
The Government of India introduced another short-term investment instrument in 2010 and named it the Cash Management Bill. Its objective is to provide for the temporary gaps in cash flow. They have features similar to those of T-bills but are available for a tenure of less than 91 days.
Government Bonds (Dated Securities)
Government securities with a tenure of 1 year or more are called G sec bonds. These are wise ranges with diverse features. Here are the sub-categories.
- Fixed Rate Bonds: The bonds generate interest income at the same pre-decided rate throughout the tenure. It makes financial planning more convenient for investors.
- Floating Rate Bonds: The interest rates are adjusted at a preset interval, like 1 year or six months. It will allow the investors to take advantage of the hike in market rates.
- Zero-Coupon Bonds: No interest (coupon) is offered. Instead, the bond is issued at a discounted price, and the original bond price is returned on maturity.
- Capital-Indexed Bonds: The principal investment amount increases or decreases along with the rise and fall of the Consumer Price Index. These can safeguard the investments against inflation.
- Inflation-Indexed Bonds: The principal investment amount, as well as the interest, is influenced by the rise and fall of the Consumer Price Index.
- Bonds with Call/ Put Options: Bonds with a call feature allow the issuer, here the government, to call the security back, as in buying the security back from the investor before maturity. The put feature enables the investors to sell the bond. Bonds can have both options.
- Sovereign Gold Bond: Investors can invest at the rate of gold. These bonds offer benefits like high and steady rates of gold and hedge against inflation. They further eliminate the hassle, and associated cost of the safekeeping of physical gold.
- 7.75% Savings (Taxable) Bonds: These are taxable bonds issued at a fixed rate of 7.75%. Individual investors with Indian citizenship and HUF members are eligible for these bonds.
- Tax-Free Bonds: Tax is not imposed on the interest accumulated under such bonds.
State Development Loans (SDLs)
State governments in India can issue state development loans to meet their capital requirements for development projects. They have fixed interest rates with semi-annual coupon payouts.
Clearing Corporation of India Limited (CCIL)
The risk of default is low in the government securities market in India. Regardless, the presence of an entity is required to ensure efficient clearing and settlement of transactions in the government securities, foreign exchange, and money markets in the country. The objective led to the establishment of CCIL in April 2001 as a central counterparty. It has resulted in advanced transparency, liquidity, market efficiency, and risk management.
Impact of Unchanged Repo Rate on Government Securities 2024
Repo rate is the rate of interest at which RBI lends money to commercial banks. A hike in the repo rate makes borrowing more expensive for the banks, and in return, they tend to increase their lending rates as well. On the other hand, investors can have a sign of relief as the rise in repo rate leads to an increase in the interest rates and therefore, the returns on investment.
If the repo rate goes high, investors will aim to avail of higher rates and returns. However, as existing government securities might offer lower rates than other types of investment or newly issued securities, investors can avoid them. The impact will go the other way around when the repo rates decrease.
The second meeting for FY25 of the RBI has ended with the repo rate remaining unchanged at 6.5% for the eighth consecutive time. This indicates stability in the investment market, including government securities. Furthermore, investors will be willing to hold their investments for a longer period instead of reselling in the secondary market to earn money.
Invest in Government Securities with GoldenPi
Finding a safe and convenient investment platform that has the latest updates is a crucial step in any investment strategy. As you explore government securities, GoldenPi brings an easy to understand platform for you. Its database is up-to-date with the latest issuance from the RBI, along with the prices, interest rates, tenures, and other important information about each security. In addition to details on the current issuance, you can also get notifications on upcoming securities.
How to Invest in Government Securities?
GoldenPI is committed to making the investment as easy and convenient as possible while turning each investment into a well-informed financial decision. You can complete your investment in government securities in 3 simple steps!
- Step 1: Complete your KYC
- Step 2: Choose the right Government Bond
- Step 3: Make payment to Invest
FAQs About Government Securities
1) What is a GSEC?
A GSEC is an investment instrument issued by the government in India. The central government or any state government can issue a bond to gather funds from the public. As investors buy any bond, the government offers fixed and regular interest payouts and returns the primary investment amount on the date of maturity.
2) What is G-sec issued by the RBI?
A G-sec issued by the RBI is a type of government security. The RBI issues it on behalf of the government. The government uses the money invested in these securities and is responsible for paying back the principal and interest. The RBI is responsible for issuance and management only.
3) What is the maturity of GSEC?
The maturity of G-secs can vary depending on its type. For example, T-bills have a maturity period of less than 1 year; it is less than 91 days for CMBs. On the other hand, the maturity periods of the government bonds can be up to 10 years or more.
4) What are G-sec funds?
G-sec funds are the finance collected by a government from investors through government security like government bonds or T-bills. The funds can be used for development projects or budgetary requirements.
5) What are the benefits of GSec?
GSecs have several benefits; the major benefits are:
- Low risk of default due to sovereign guarantee
- Suitable for all short, med, and long-term investment objectives due to the versatile tenures
- Certain returns due to fixed interest rate
- Regular income source due to period coupon payments
- Adequate liquidity due to traceability in the secondary market
6) Who can invest in G Secs?
Large institutional investors have been major participants in the G-Sec market in India. However, smaller entities, like cooperative banks, have also started exploring the market. With the RBI’s Retail Direct Scheme, individual retail investors can now also invest in G secs.
7) What is the 10 year G-SEC yield?
As of June 10, 2024, the 10 year G-SEC yield is 7.032%. It reached its highest benchmark on September 11, 2018, when it was 8.182%, and the lowest yield was recorded at 5.76% on July 10, 2020.
8) What is the interest rate of G-sec?
The interest rate of G-sec depends on various factors, including the type, tenure, market, rates, and so on. The average return on G-secs is 7.5%.
9) What is the minimum investment in G-sec?
The minimum investment cap has been set low to encourage investors and allow them to invest even with a limited budget. You can start investing in G-secs with as little as INR 10,000.
10) What is the maximum tenure of the G SEC securities in India?
One of the key benefits of investing in government securities is the flexible range of tenure. Irrespective of the investment goal, one can find a suitable option. The tenure of government securities can vary. For example:
- The tenure for T-bills can be up to 364 days.
- The tenure for government bonds can be up to 40 years.
- The tenure for state development loans can be up to 35 years.
11) What is the rate of 5-year G-Sec in India?
The 5-year G-SEC yield is 7.032% as of June 10, 2024. It reached its maximum yield so far of 8.232% on September 16, 2018, whereas its minimum yield was 4.84% on July 10, 2020.
12) How to invest in Gsec?
You can participate in the non-competitive bidding segment of RBI’s auctions on E-Kuber. For that, you must open an RBI Direct Gilt account. Moreover, you can invest conveniently by following a few steps on GoldenPi. It has all the necessary information on the latest issuance of government securities. Once you have completed the KYC, which can also be easily done on the same platform, select the security you prefer and make the payment.
13) What is Gsec yield?
The return generated under a G-sec is called its yield. You can calculate the same by dividing the annual coupon rate by the bond’s current market price. There is an inverse relationship between the yield and the bond price. Whenever the price rises, the yield goes south.
14) How are Gsec calculated tax returns?
If it is a bond, the interest is credited to your bank account. The income from the interest is considered other income and is taxed as per the slab rates that you belong to. The appreciation of the bond price, if any, is considered a long-term gain and LTCG tax will be applied at 10% or with indexation, at 20%. If sold in a shorter time, then it is a short-term gain, and STCG is applicable as per the slab rate.
If it’s T-bills, the instrument is usually bought at a discount and sold at par; therefore, the appreciation will be a short-term gain and is subject to STCG tax as the slab rate.
In G-Secs, if the security is held for more than 3 years, it is considered LTCG and less than 3 years will be considered STCG.
