ST .

ALOYSIUS COLLEGE

[Document title]

NAME :- SUCHITRA MALLICK

CLASS :- B.COM (HONS) 3RD YEAR
SUBJECT:– BANKING
ADMISSION NO. :- 46449

[Company name] | [Company address]

s
GOVERNMENT SECURITIES
The marketable debt issued by the government and semi- government bodies which represent a
claim on the government is called Government Securities. Government Securities re issued for
the purpose of refunding of securities the maturing securities for advanced refunding of
securities which have not yet matured , and raising fresh cash resources.. Treasury Bills and
bonds are the example of Government Securities. There are three forms of Central and State
Government Securities . Stock certificate , Promissiory note and bearer bond.
MEANING OF GOVERNMENT SECURITIES :-
Government securities are either treasury bonds, bills or dated securities issued by the central
government or bonds and dated securities issued by the state government. This kind of
investment is issued by the government at no risk and it offers fixed interest rate. In the investing
world, "government security" applies to a range of investment products offered by a
governmental body. For most readers, the most common types of government securities are
those items issued by the U.S. Treasury in the form of Treasury bonds, bills, and notes. However,
the governments of many nations will issue these debt instruments to fund necessary ongoing
operations.
Government securities come with a promise of the full repayment of invested principal at
maturity of the security. Some government securities may also pay periodic coupon or interest
payments. These securities are considered conservative investments with low risk since they have
the backing of the government that issued them.
Government securities are debt instruments of a sovereign government. They sell these products
to finance day-to-day governmental operations and provide funding for special infrastructure
and military projects. These investments work in much the same way as a corporate debt issue.
Corporations issue bonds as a way to gain capital for buying equipment, funding expansion, and
paying off other debt. By issuing debt, governments can avoid hiking taxes or cutting other areas
of spending in the budget each time they need additional funds for a project. After issuing
government securities, individual and institutional investors will buy them to either hold until
maturity or sell to other investors on the secondary bond market. Investors buy and sell
previously issued bonds in the market for a variety of reasons. They may be looking to earn
interest income from the bond's periodic coupon payments or to allocate a portion of their
portfolio into conservative risk-free assets. These investments are often considered risk-free
because when it comes the time for redemption at maturity, the government can always print
more money to satisfy the demand.
WHY ARE THEY ISSUED?
Whenever government funds shrink, they issue bonds to the public. Investors can buy
government bonds directly from the market. The current yield for a 10-year government bond is
7.244% as of May 2022. Though these numbers differ over time, they deliver sound returns to
the investors. People buy government bonds to claim interest payments and capital protection.
However, in this case, investors get zero interest from buying the treasury bills. Alternatively
called zero-coupon securities, they are issued at discount and redeemed at par on reaching
maturity.
CHARACTERISTICS OF GOVERNMENT SECURITIES :-
1.No credit risk: -
Credit risk is the possibility of the borrower being unable to repay the loan along with the
interest payments. It is very rare for governments to default on their debt. Defaulting on their
debt would make borrowing funds in the future difficult and expensive. Even when countries go
through major crises, they would try to avoid default. India has never defaulted on its debt.
Hence, g-secs are assumed to have no credit risk.
2.Wide range of products: -
Government securities come in various forms and maturities. There are g-secs that don’t pay
interest and g-secs that pay inflation-indexed interest. Treasury bills, offered at discount to face
value, can have a maturity starting with 14 days, while dated g-secs can have maturities up to 40
years. Through Sovereign Gold Bonds, it is also possible to invest in gold through g-sec
3.Tradeable on the secondary markets :-
Government securities can be bought and sold in the secondary market. Until recently, investing
in g-secs was restricted to banks and large financial institutions. After the roll-out of the Retail
Direct Gilt Scheme, retail investors, too, can invest in g-secs.
4.Subject to price variations due to interest rate changes :-
Bond prices vary inversely with the interest rates. After interest rate hikes, new bonds are issued
with higher interest payments. Old bonds that have lower interest payments would go out of
favour and experience a fall in price.After interest rates cuts, interest rates would fall in bank
savings accounts and fixed deposits. Additionally, new bonds would be issued with lower interest
payments. Old bonds that have higher interest payments would become the preferred commodity
for stable returns in the long term. This causes a rise in the price of old bonds.
5.Coupon payments:-
Interest payments on bonds are called coupon payments. The interest is calculated on the face
value of the government securities. These payments are calculated based on an annual interest
rate and paid at certain intervals (quarterly, semiannually etc.). Investment in government
securities is lucrative for people planning to have a stable income, over a longer maturity in
comparison to other options like fixed deposits. Bonds may also offer better interest rates.
6. Lower returns :-
Investing in any asset carries some amount of risk. To compensate for the risk, investors are
paid a risk premium. Due to the assumed lack of risk, government securities typically do not pay
a risk premium. Due to the lack of a risk premium, the returns on g-secs are lower as compared
to corporate bonds or other securities.
7.Monetary policy tool :-
Central banks buy and sell g-secs to control money supply for controlling inflation or spurring
growth. When a central bank like RBI buys g-secs back from the domestic market, money is
added to the economy. Central banks hope to promote growth by adding money to the economy,
thus increasing liquidity.
When a central bank wants to lower inflation, they try to take out some of the money from the
economy. They do so by selling government securities. This reduces the money supply.
TYPES OF GOVERNMENT SECURITIES :-
Government securities are investment products issued by the both central and state government
of India in the form of bonds, treasury bills, or notes.
They are generally issued for the purpose of refunding maturity securities for advance refunding
of securities that have not yet matured and raising fresh cash resources .However, they carry
minimal risk and are called risk-free gilt-edged instruments. So let’s look at the different types of
government securities in India.
There are several types of government securities offered by the Reserve Bank of India. Let’s look
at the given below:
1.Treasury Bills:-
Treasury bills, also called T-bills, are short term government securities with a maturity period of
less than one year issued by the central government of India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
Several financial instruments pay interest to you on your investment; treasury bills do not pay
interest because they are also called zero-coupon securities.These securities do not pay any
interest; instead, they are issued at a discount rate and redeemed at face value on the date of the
maturity.For example a 91 day T-bill with a face value of Rs. 200 may be issued at Rs.196, with
a discount of RS. 4 and redeemed at face value of Rs. 200.However, RBI performs weekly
auctions to issue treasury bills.
2.Cash Management Bills (CMBs):-
Cash management bills are new securities introduced in the Indian financial market. The
government of India and the Reserve Bank of India introduced this security in the year
2010.Cash management bills are similar to treasury bills because they are short term securities
issued when required.However, one primary difference between both of these is its maturity
period. CMBs are issued for less than 91 days of a maturity period which makes these securities
an ultra-short investment option.Generally, the government of India use these securities to fulfil
temporary cash flow requirements.
3.Dated Government Securities :-
Dated Government securities are a unique type of securities because they either have fixed or a
floating rate of interest also called the coupon rate.They are issued at face value at the time of
issuance and remains constant till redemption.
There are nine different types of dated government securities issued by the Government of India
given below:
1) Capital Indexed Bonds
2) Special Securities
3) 75% Savings (Taxable) Bonds, 2018
4) Bonds with Call/Put Options
5) Floating Rate Bonds
6) Fixed Rate Bonds
7) Special Securities
8) Inflation Indexed Bonds
9) STRIPS
4.State Development Loans :-
State development loans are dated government securities issued by the State government to meet
their budget requirements . The issue is auctioned once every two weeks with the help of the
Negotiated Dealing System .SDL support the same repayment method and features a variety of
investment tenures. But when it comes to rates, SDL is a little higher compared to dated
government securities. The major difference between dated government securities and state
development loans is that G-Securities are issued by the central government while SDL is issued
by the state government of India.
5.Treasury Inflation-Protected Securities (TIPS):-
Treasury Inflation-Protected Securities (TIPS) are available based on five, 10 or 30 year term
periods. These securities deliver interest payments to all users every six months .TIPS are
similar to conventional treasury bonds, but it comes with one major difference. The same
principle is issued during the entire term of the bond in a standard treasury bond.
However, the par value of TIPS will increase gradually to match up with the Consumer Price
Index (CPI) to keep the bond’s principle on track with inflation.
If inflation increases during the year, there will be an increase in the security value during that
year. It means you will have a bond that maintains its value throughout life instead of a bond
that’s worthless after maturity.
6.Zero-Coupon Bonds:-
Zero-coupon bonds are generally issued at a discount to face value and redeemed at par. These
bonds were issued on January 19th 1994. The securities do not carry any coupon or interest rate
as the tenure is fixed for the security. In the end, the security is redeemed at face value on its
maturity date.
7.Capital Indexed Bonds :-
In these securities, the interest comes in a fixed percentage over the wholesale price index,
which offers investors an effective hedge against inflation . The capital indexed bonds were
floated on a tap basis on December 29th 1997.
8.Floating Rate Bonds :-
Floating rate bonds does not come with a fixed coupon rate. They were first issued in September
1995 as floating rate bonds are issued by the government.
ADVANTAGES OF INVESTING IN GOVERNMENT SECURITIES:-
The following are the advantages of investing in government bonds:-
1)Risk-Free -Government bonds promise assured returns and stability of funds to investors.
They have always been an example of risk-free security. Thus, investors looking for a risk-free
investment, government bonds are suitable for them.
2)Returns-The returns from government bonds are generally as good as bank deposits. Also,
there is a guarantee of principal along with fixed interest. Unlike bank deposits, these bonds are
available for a longer duration.
3)Liquidity-One can buy and sell government bonds like equity instruments. The liquidity in
these bonds is as adequate as banks and financial institutions.
4)Portfolio Diversification-Investment in government bonds makes a well-diversified portfolio
for the investor. It mitigates the risk of the overall portfolio since government bonds are risk-free
investments.
5)Regular Income-As per RBI guidelines, the interest accrued on government bonds shall be
disbursed every six months to bondholders. Therefore, it provides an opportunity for the
bondholders to earn regular income by investing their idle funds.
DISADVANTAGES OF INVESTING IN GOVERNMENT BONDS :-
The following are the disadvantages of investing in government bonds.
1)Low Returns
The yield or interest earned on government bonds is relatively lower in comparison to other
investment options like equity, real estate, corporate bonds, etc.
2)Interest Rate Risk
Government bonds are long term investment bonds where the maturity is ranging from 5 years –
40 years. Hence, the bond might lose its value over this period. If inflation rises, the interest rate
is less attractive. Also, higher the bond period, the market risk also increases along with interest
rate risk. Furthermore, the investor remains with an investment which is paying below the
market value.
INITIATIVE TO ALLOW DIRECT RETAIL INVESTMENT IN GOVERNMENT SECURITIES
The Government of India now allows direct retail investments in government securities.
With this, retail investors can access government bonds through both primary and secondary
markets. These products were primarily available to banks and large financial institutions till
recently. Now, even retail investors can invest in them and make the most of attractive and
assured returns.
HOW CAN RETAIL INVESTORS INVEST IN GOVERNMENT SECURITIES?
Retail investors can trade in government securities through stock exchanges using online RBI
platform . They can participate in primary security issuances directly using their Retail Direct
account . Investors can bid in primary auctions to buy and sell securities. No fee will be levied
by RBI for any related service. The transaction payments can be made by investors through
internet-banking and also UPI facility . Investors can avail support facility for this through
phone, email or online
WHY DOES RETAIL INVESTMENT IN GOVERNMENT SECURITIES MATTER?
Small investors are often on the look-out for safety with regards to their investments. As per
RBI’s preliminary analysis carried out in 2020, nearly 56% of household savings are said to be
invested in bank fixed deposits. This means most risk-averse investors are unable to fetch a
decent return on their investments since bank FDs offer very low interest rates in today’s times.
For investors who prefer low-risk and fixed-income investment options, there are many
government securities available in India. These come with exceptionally low risk and they also
provide the advantage of guaranteed returns.
Government securities (G-Sec), for instance, offer a high level of safety through risk-free rate of
return. Therefore, investing in these can offer both safety and guaranteed investment returns.
But , the interest earned on all these securities are taxable as per the slab rate of the investor.
ISSUE OF GOVERNMENT SECURITIES :-
Government Securities are issued through auctions conducted by the RBI . Auctions are
conducted on the electronic platform called the NDS – Auctionplatform . Commercial banks ,
scheduled under co-operative banks , Primary Dealers, Insurance companies and provident
funds , who maintain funds account (current account) and securities (SGL accounts) with RBI ,
are member of this electronic members of this electronic platform . All non -NDS members
including non - scheduled urban co-operative banks can participate in the primary auction
through scheduled commercial banks or Primary Dealers . For this purpose , the urban co-
operative banks need to open a securities account with a bank / Primary Dealer – such an
account is called a Gift Account.
The RBI in consultation with the government of India , issues an indicative half – yearly auction
calendar which contains information about the amount of borrowing , the tenor of securities and
the likely period during which auctions will be held . A Notification and a Press Communique
giving exact particulars of the securities ,viz.., name , amount, type of issued and procedure of
auction are issued by the government of India about a week prior to the actual date of auction .
RBI places the notification and a Press Release on its website (www,rbi.org.in) and also issues
an advertisement in leading English and Hindi newspapers
MAJOR PLAYERS IN GOVERNMENT SECURITIES
Major players in the Government securities market include commercial banks and primary
dealers besides institional invertors like insurance companies . Primary Dealers play an
important role as market markers in Government securities market .Other participants include
co-operative banks , regional rural banks , mutual funds , provident and pension funds . Foreign
Institutional Investor (FIIs) are allowed to participate in the government securities market
within the quantitative limits prescribed from time to time . Corporate also buy / sell the
government securities to manage their overall portfolio risk.
PRICING OF GOVERNMENT SECURITIES
The price of a Government securities , like other financial instruments , keeps fluctuating in the
secondary market . The price is determined by demand and supply of the securities .
Specifically , the prices of Government Securities are influenced by the level and changes in
interest rates in the economy and other macro-economic factors , such as , expected rate of
inflation , liquidity in the market etc.. Development in other market like money , foreign
exchange , credit and capital markets also affect the price of the Government securities . Further
, Policy actions by RBI .
TRADING IN GOVERNMENT SECURITIES Government securities in India are most often sold
by auction where the Reserve Bank of India allows for bidding either based on yield or prices.
This occurs in the primary market where they are newly issued between banks, Central and state
governments, financial institutions and insurance companies. These govt securities then enter
the secondary market where these organizations sell the bonds to mutual funds, trusts,
individuals, companies or to the RBI itself.
The prices are fixed based on those paid at the auction, making it a crucial step in determining
the prices of these bonds. Commercial banks owned the single largest portion of these bonds in
the past although their share of the market has gone down in recent times.

Once allotment is done, afterwards they can be traded like normal securities in exchange or to
any institution or individual of your choosing. It’s fairly similar to most stock trades except that
the minimum investment is Rs. 10,000.
Government bonds are favoured for their relatively risk-free nature. These bonds aren’t affected
by market volatility and still can be traded like regular stocks, thus liquid. Although the return is
less, these are preferred for hedging against risk and lower risk exposure of the portfolio.

There is an active secondary market in government securities. The securities can be bought /
sold in the secondary market
(i) over the counter (OTC),
(ii) through the Negotiated Dealing System (NDS)
(iii) through the Negotiated Dealing System-Order Matching (NDS-OM).
(i)Over the Counter/Telephone Market -
In this market, a participant who wants to buy or sell a government security may contact a
bank / primary dealer/financial institution either directly or through a broker registered with
SEBI or negotiates for a certain amount of a particular security at a certain price. Such
negotiations are usually done over the telephone, and a deal may be struck if both the parties
agree on the amount and rate. In the case of a buyer, such as an urban co-operative bank
wishing to buy a security, the bank’s dealer (who is authorized by the bank to undertake
transactions in government securities) may get in touch with other market participants over the
telephone and obtain quotes . All trades undertaken in the OTC market are reported on the
secondary market module of the Negotiated Dealing System (NDS).
(ii)Negotiated Dealing System-

The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in
government securities was introduced in February 2002. It allows the members to electronically
submit bids or applications for the primary issuance of government securities when auctions are
conducted. The NDS also provides an interface to the Securities Settlement System (SSS) of the
PDO of the RBI, Mumbai, thereby facilitating the settlement of transactions in government
securities (both outright and repos) conducted in the secondary market. Membership to the NDS
is restricted to members holding SGL and/or current accounts with the RBI, Mumbai.
(iii)Negotiated Dealing System-Order Matching-
In August 2005, the RBI introduced an anonymous screen-based order matching module on the
NDS, called the Negotiated Dealing System-Order Matching (NDS-OM). This is an order-driven
electronic system where the participants can trade anonymously by placing their orders on the
system or accepting the orders already placed by other participants. The NDS-OM is operated
by the Clearing Corporation of India Ltd. (CCIL) on behalf of the RBI. Direct access to the
NDS-OM system is currently available only to select financial institutions such as commercial
banks, primary dealers, insurance companies, and mutual funds. Other participants can access
this system through their custodians, i.e., those with whom they maintain Gilt Accounts. The
custodians place the orders on behalf of their customers, like the urban co-operative banks. The
advantages of the NDSOM are price transparency and better price discovery.
Gilt Account holders have been given indirect access to the NDS through custodian institutions.
A member (who has direct access) can report on the NDS the transaction of a Gilt Account
holder in government securities. Similarly, Gilt Account holders have also been given indirect
access to the NDS-OM through the custodians. However, two Gilt Account holders of the same
custodian are currently not permitted to undertake repo transactions between themselves.
(iv)Stock Exchanges
Facilities are also available for trading in government securities on the stock exchanges (NSE,
BSE), which cater to the needs of retail investors. The NSE’s Wholesale Debt Market (WDM)
segment offers a fully automated screen-based trading platform through the National Exchange
for Automated Trading (NEAT) system. The WDM segment, as the name suggests, permits only
high value transactions in debt securities. The trades on the WDM segment can be executed in
the continuous or negotiated market. In the continuous market, orders entered by the trading
members are matched by the trading system. For each order entering the trading system, the
system scans for a probable match in the order books.
On finding a match, a trade takes place. In case the order does not find a suitable counter order
in the order books, it is added to the order books and is called a passive order. This could later
match with any future order entering the order book and result into a trade. This future order,
which results in the matching of an existing order, is called the active order. In the negotiated
market, deals are negotiated outside the exchange between the two counterparties, and are
reported on the trading system for approval.
CONCLUSIONS
The Reserve Bank of India (RBI) recently announced that under the G-sec Acquisition Program
(G-SAP 2.0), it will conduct an open market purchase of government securities worth Rs 25,000
crore. The first purchase of government securities for approximately an amount of Rs. 25,000
crore was conducted under G-SAP 1.0. The objective of the Government Securities is to
establish a stable and orderly yield curve evolution, as well as effective liquidity management in
the economy. The G-Secs are a source of debts for the functioning of the government and meet
the deficits.
Thus, investing in government securities is an excellent opportunity to invest your hard-earned
money as it is secure and generates fixed returns. If you are not a big-shot investor and prefer a
low-risk game, investing in government securities would be the right choice for you. A
diversified portfolio is essential for financial security and stability. It is wise to invest in different
types of government bonds and securities. However, if one intends to build a balanced portfolio,
keeping in mind their goals and risk appetite, one should consult a financial advisor. You can
contact financial advisors through various digital platforms. You can discuss your investment
goals and choices with them and make the right decisions.