G-Secs are tradable government securities. They recognize the government’s debt. These are either short-term (called treasury bills) or long-term (typically government bonds or dated securities with a maturity of a year or more) securities. G-Secs are risk-free gilt-edged securities since they never default.
Features of Government Bonds
How Do Government Bonds Work?
By buying a government bond, you lend money for a set period of time. In return, the government promises to repay you at regular intervals with a fixed coupon rate. The principal amount is refunded when the bond matures.
Benefits of Government Bonds
Government bonds offer investors stable yields and profits. They've always been safe and risk-free for investors.
Bondholders get interest every six months as per RBI rules. It lets bondholders invest idle funds to earn a steady income.
The investor's portfolio is well-diversified with government bonds. It reduces portfolio risk since government bonds are risk-free.
Government bonds are traded like stocks. They have the same level of liquidity as banks and other financial institutions.
Who issues Government Bonds?
In India, the central government issues treasury bills and bonds, while state governments only issue bonds, called State Development Loans (SDLs).
Types of Government Bonds
The following are the different types of Government Bonds.
Treasury bills or T-bills are money market instruments issued by the Government of India for the tenors of 91, 182, and 364 days. They are zero coupon instruments and pay no interest.
Cash Management Bills
The Indian government and RBI created Cash Management Bills (CMBs) to meet cash flow deficits. CMBs are similar to T-bills but mature in less than 91 days.
State Development Loans (SDLS)
State governments in India issue SDLs to fund their activities and budgetary needs. These are like dated G-Secs and have the same repayment methods and investment terms.
Capital Gain Bonds (54 EC)
Capital gain bonds, or 54EC bonds, protect investors from capital gains tax under section 54EC. Since these bonds aren't listed, they can't be sold but are redeemable before maturity. Buying 54EC bonds reduces the tax on long-term capital gains from selling property.
Dated Government Securities
The coupon (interest rate) on dated G-Secs is either fixed or floating, and it is paid half yearly on the face value of the security. Dated securities typically have a 5 to 40 year tenor.
Banks, dealers, and insurers trade government securities. Cooperative banks, rural banks, mutual funds, provident, and pension funds also participate.
Foreign institutions can buy limited government assets. Corporate risk management involves the buying and selling of government bonds.
G-Sec prices change like other products. Demand and supply affect its price. Its prices are also affected by currency, credit, commodities, capital markets, repo rates, cash reserve ratio, open market operations, interest rates, market liquidity, and other factors. US Treasuries also affect Indian G-Sec pricing.
NRIs can buy G-Sec's or T bills on a repatriation or non-repatriation basis. NRE/NRO account can be held for purchase. The NRE (PIS) Account is used to buy or sell listed Indian business capital instruments. Participants should consult Foreign Exchange Management Regulations for information.
Bidding will begin with a minimum of Rs. 10,000 (face value) and increase in multiples of Rs. 10,000 from there. A single non-aggressive bid for GOI-dated securities must now not exceed Rs. 2,000,000 (face value) according to the auction. T-bill reserves 5% of the issue size for non-competitive bidding.