Government Securities Market

The Reserve Bank of India (RBI) defines government securities as “tradable instruments issued by the Central Government or State Governments.” These securities carry a minimum risk of default and are sometimes called “risk-free gilt-edged instruments.” The following are some securities offered by the RBI:

Treasury Bills

These are short-term government securities with maturities of up to one year. They are currently issued in three different types, that is, the ninety-one day, the one hundred and eighty-two day, and the three hundred and sixty-four day bills. Since they do not pay interest, the investor’s profit is the difference between the discounted issue price and the face value. The RBI performs weekly auctions to issue the treasury bills.

Cash Management Bills

These are short-term securities that are highly flexible since they can be issued when needed. Their tenure and date of issue are based on the temporary cash needs of the government; however, the chosen tenure must still be less than 91 days. Like Treasury Bills, they are given at discounts on the face value via RBI auctions.

Dated Government Securities

These are long-term securities that have either a fixed or floating rate of interest. The investor benefits from the interest paid (coupon) on each bond. These securities are termed “dated” because of the explicitly stated date of maturity; for instance, a January 1st, 2019 security will mature on January 1st of 2019. The RBI sells these securities via auctions. The main investors in dated securities are primary dealers such as commercial banks and insurance companies. Examples of dated securities are fixed and floating rate bonds, zero coupon bonds, capital indexed bonds, and bonds with call or put options.

State Development Loans

These are dated securities that are issued by state governments for purposes of meeting their budgetary requirements. The RBI facilitates the issuance of these security types via auctions through the Negotiated Dealing System. These auctions are usually done once every two weeks. The rates of interest for these securities are determined at the time of auction, though their rates are often slightly higher than for the Dated Government Securities.