With interest rates near all-time lows, the retail G-Sec market could be a hit

Published: October 4, 2017 5:06:04 PM

G-Secs or Government securities are tradable debt instruments issued by the Central and State Governments in India. They are commonly characterized as risk-free gilt-edged securities and are auctioned by the Reserve Bank of India (RBI) on behalf of the Govt.

G-Secs are mostly purchased by financial institutions, with “Primary Dealers” acting as market makers to the issue. (Image: Reuters)

Nikhil Kamath

G-Secs or Government securities are tradable debt instruments issued by the Central and State Governments in India. These securities are issued to raise public money to fund budget deficits and meeting expenditure on various capital projects undertaken by the Govt. G-Secs carry a fixed or floating interest rate (coupon) which are payable on the face value. Govt. securities are generally risk-free since they are backed by the Govt. They are commonly characterized as risk-free gilt-edged securities and are auctioned by the Reserve Bank of India (RBI) on behalf of the Govt. These securities are issued in two formats which are centred on the time to maturity and comprise off-

1) Short-term or money market securities such as T- bills with maturities less than 1- year.

2) Long-term or dated securities such as bonds which have maturities ranging from 1- 30 years.

Highlighted below are some of the key securities issued by the Central Govt. and their features 

1) T- bills: Are issued in three tenors; 91, 182 and 364 days. These are zero-coupon securities issued at a discount and redeemed at face value. The RBI auctions T- bills on behalf of the Govt. every Wednesday.

2) Cash Management bills (CMB): These bills have a maturity of less than 91 days and are issued to meet the temporary disparity in Govt. cash flows.

Long-term or dated Govt. securities-

a) Fixed rate bonds- The interest or coupon is fixed for the entire tenure of the bond.

b) Floating rate bonds- The coupon is not fixed, but re-set at pre-defined stages.

c) Capital indexed bonds- These bonds protect investors from inflation by hedging the principal to a pre-defined inflation index such as the wholesale price index and the coupon is calculated on the indexed principal.

d) Zero coupon bonds- They are Non-interest paying bonds which are issued at a discount to the face value. The investor profits from the difference between the face value and the discounted value.

State Governments on the other hand auction only dated bonds called State development loans (SDL), where the interest is calculated on a half-yearly basis.

Following are some of the key highlights of Govt. Securities-

G-Secs are mostly purchased by financial institutions, with “Primary Dealers” acting as market makers to the issue. The other major participants include mutual funds, hedge funds, pension funds, provident funds, insurance companies, foreign institutional investors (FII), commercial banks and other institutions. Banks account for more than 60 percent of the total investments made in Government securities. Banks are mandatorily required to hold around 25 percent of their term and demand deposits in the form of in these securities since they are risk free and generate higher returns compared to other investments from similar asset classes With an eye to increase foreign capital inflows into the country, the RBI in July this year raised the limits for FPI’s investing in Govt. securities by 4.7 percent for the July- Sept quarter, bringing the total investments to Rs. 2.42 lakh crores. In addition, foreign portfolio investments in SDL’s was increased by Rs. 6100 crores to total Rs. 33,100 crores for the same period.

The RBI also stated that in future, limits in Central and State Govt. securities will be raised in the proportion of 75 percent in favour of long-term FPI’s and 25 percent for the general category and transfer of unutilised limits from long-term investors to the general category, which was prevalent earlier will be withdrawn. FPI’s in the past have generally utilised between 85 – 95 percent of their permitted limits in Central Government Securities. However, FPI investments in State development loans (SDL’s) are hardly anything to talk about.

The Reserve Bank of India permitted retail investors to participate in the secondary market for Govt. bonds from the second half of 2016 by giving them direct access to the Negotiated Dealing System-Order Matching (NDS-OM) platform, in an attempt to widen the reach of Government Securities within the country. Demat account holders can now trade directly in a market which for long was the forte of Institutional investors, where the minimum lot size was Rs. 5 crore.

Retail investors looking to invest in the G- sec markets also have the option of instructing primary members of the NDS- OM platform or their depository participants to place trades on their behalf. On successful completion of the transaction, the bond will be transferred to the retail investor’s de-mat account by the clearing corporation, which is very similar to investing in the equities markets. In addition, RBI has also allowed retail investors to be a part of the non- competitive bidding process for Treasury bills. Retail participants are allotted 5 percent of the aggregate nominal value of the issue and can start bidding with a minimum amount of Rs. 10,000.

G- Secs offer another avenue for risk-averse retail investors to invest and save. With interest rates in India steadily declining and the tenure of term deposits in banks limited to 5- years, longer-term Govt. securities offer higher interest although all of them may not come with tax exemptions. Individuals looking to invest in these debt securities should consider the pros and cons of all the investments that fall in the same asset class before investing.

The writer is Co-founder & Head of Trading, Zerodha. Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Natco Pharma stock locked in 20% upper circuit on USFDA nod to Mylan for Glatiramer Acetate
2Petrol, diesel prices in Delhi, Mumbai, Bangalore, Chennai fall today; here are new rates
3Four automobile stocks to buy this festive season