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What is Government Security (G-Sec)?
- It is a tradable instrument issued by the Central Government or the State Governments.
- It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with an original maturity of one year or more).
- In India, the Central Government issues both treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
- G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
Open Market Operations
- It is the sale and purchase of government securities and treasury bills by RBI or the central bank of the country. The objective of OMO is to regulate the money supply in the economy.
- When the central bank wants to infuse liquidity into the monetary system, it will buy government securities in the open market. This way it provides commercial banks with liquidity.
- In contrast, when it sells securities, it curbs liquidity. Thus, the central bank indirectly controls the money supply and influences short-term interest rates.
Liquidity Adjustment Facility (LAF)
- It is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI) that allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements.
- This arrangement is effective in managing liquidity pressures and assuring basic stability in the financial markets.
- In the United States, the Federal Reserve transacts repos and reverse repos under its open market operations.
- The RBI introduced the LAF as a result of the Narasimham Committee on Banking Sector Reforms (1998).
Treasury Bills (T-bills)
- Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 days and 364 days.
- Treasury bills are zero-coupon securities and pay no interest.
Cash Management Bills (CMBs)
- In 2010, the Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India.
- The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
Dated G-Secs
- Dated G-Secs are securities that carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.
- The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry/depository of G-Secs and deals with the issue, interest payment and repayment of principal at maturity.
- Most of the dated securities are fixed coupon securities.
Operation Twist
- RBI’s simultaneous sales and purchases of government securities termed ‘Operation Twist’ and it is a way to manage yields in the market.
- It is a program of quantitative easing used by the RBI that was first introduced by the Federal Reserves in the US in 1961.
- It is designed to induce downward pressure on longer-term interest rates by lowering long-term Treasury yields.
- The central bank buys long-term notes with the proceeds from short-term bills.
- This increases demand for Treasury notes. Just like any other assets, as demand rises, so does the price. But higher bond prices are offset by a lower yield for investors.
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