Government Securities Market

Government Securities MarketIntroductionIt deals with tradable debt instruments issued by the government for meeting its financing requirements. Primary market helps manager to raise debt from public resources and Secondary market helps in the effective operation of monetary policy through application of indirect instruments such as open market operations.

Trading in Government SecuritiesTrading government securities is referred to as the gilt-edge market. Mostly over the counter market and trading is confined to banks, financial institutions and PFs. Broker is intermediate between the above institutions through their contacts within the money managers in the banks.

Trading in Government SecuritiesMajor borrowers are Central and State governments, local and municipal agencies and semi-government agencies. Government securities are held by the RBI, and the working two major techniques Open market operations and SLR.

Role of the Government Securities MarketFirst, It may adversely affect private investment by directly competing for the limited resources. Secondly, the government securities market can also have a positive influence on private investment by enabling the development of private bond market by putting in place a basic financial infrastructure. Third, It offers a risk free benchmark.

Fourth, for the central bank, a developed government securities market allows greater application of indirect market-based instruments such as open market operations. Fifth, Central banks take a keen interest in developing strong government securities market because of monetary policy.

Features of Govt. SecuritiesCentral Govt. securities is more liquid and than state. Stock certificates are safer because it is registered in the book of the Public Debt Office. But it is not easily transferable. Promissory Note is easily transferable. It is Issued through Public Debt Office of the RBI. The RBI does have its approved brokers for marketing of G-Sec.It is an over-the counter market and sale and purchase has to be separately negotiated. Normal maturity is ten-years or less than this. It can list on Stock exchanges. Interest on government securities is subject to tax deducted at source.

The Role of the Reserve Bank It introduced the auction system for issuance of government securities. Retail participation has been promoted in the primary market as well as in the secondary market. In an effort to increase liquidity, RBI pursued a strategy of passive consolidation of debt by raising progressively higher share of market borrowings through re-issuances.

Bearer Bonds: A bearer bonds certifies that the bearer is entitled to a certain sum specified in rupees on the date indicated in accordance with the terms of a particular loan to which the bond relates.

Forms of Government Securities Stock Certificate: It held in the form of Stock, and owner get a certificate to the stock. It is not easily transferable. It can be held jointly by more than one person but these will have to be transferred by all surviving joint holders. Promissory Note: This is a promise by the Govt., central/state, to a person named therein, to pay a fixed amount at a specified date and to pay interest at a fixed rate periodical intervals at a particular office of the RBI.

Reforms in G-sec MarketNew auction-based instruments were introduced with varying maturities such as 364-day, 182-day, 91-day and 14-day treasury bills. In the long-term segment, Floating Rate Bonds (FRBs) benchmarked to the 364-day T-bills and 10-year loan with embedded call and put options exercisable on or after 5-years from the date of issue were introduced. A system of Primary Dealers (PDs) was made operational in March 1996.Foreign Institutional Investors were allowed to set up 100% debt funds to invest in G- Securities. The delivery Vs Payment System ( DvP ) were introduced in 1995 for the settlement of transactions in G- Secs . Since timely flow of information is a critical factor in evolving the efficient price discovery mechanism, improvements were brought in transparency of operations and data dissemination. Retail trading in G- Secs at selected stock exchanges commenced in January, 20

ConclusionThe Government securities market in India has evolved and gained importance over the years. The weighted-average cost of market borrowing declined consistently.