DAILY NEWS ANALYSIS

GS-III : Economic Issues Government Budgeting

08 March, 2021
5 Min Read

Lowering Government Yields

Government Security (G-Sec) yields could soften temporarily as the Indian government’s fiscal deficit may undershoot FY2021 Revised Estimate (RE) by Rs.50,000 crore to Rs.90,000 crore.

G-Secs are government debt issuances used to fund daily operations, and special infrastructure and military projects.
They guarantee the full repayment of invested principal at the maturity of the security and often pay periodic coupons or interest payments.
The two key categories are:
- Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
- Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
As they are issued by the government, they are considered to be risk-free.
The trade-off of buying these securities is that they tend to pay a lower rate of interest than corporate bonds.
Investors in G-Sec will either hold them to maturity or sell them to other investors on the secondary bond market.

Why G-Secs?

Like bank fixed deposits, g-secs are not tax-free.
They are generally considered the safest form of investment because they are backed by the government.
However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.
When the government demands so much money, the price of money (i.e., the interest rate) will move up.
It is in the government’s and RBI’s interest to bring this down.
That can only happen by broadening the base of investors and making it easier for them to buy g-secs.

Source: TH

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