G-Secs - ECONOMY
News: RBI
issues draft norms for lending and borrowing of G-secs
What's in the news?
● The
Reserve Bank of India came out with draft norms for lending and borrowing of
government securities with wider participation in the securities lending
market.
Key takeaways:
● Earlier
this month, the RBI proposed introduction of securities lending and borrowing
in government securities (G-secs) with an aim to facilitate wider participation
in the securities lending market by providing investors an avenue to deploy
idle securities and enhance portfolio returns.
Draft Reserve Bank of India (Government Securities
Lending) Directions, 2023:
● Government
Securities Lending (GSL) transactions shall be undertaken for a minimum period of one day and a maximum
period of ninety days.
● It
includes the government securities issued by the central government excluding Treasury Bills that would be
eligible for lending/borrowing under a GSL transaction.
○ Previously,
government securities issued by the central government (including Treasury
Bills) and the state governments would be eligible for placing as collateral
under a GSL transaction.
● An entity eligible to
undertake repo transactions in government
securities, and any other entity approved by the Reserve Bank would be eligible
to participate in GSL transactions as lender of securities.
G-secs:
● G-secs,
or government securities or government bonds, are instruments that governments use to borrow money.
Need of G-secs:
● Governments
routinely keep running into deficits
- that is, they spend more than they earn via taxes. That is why they need to
borrow from the people.
G-secs - Safest investment:
● For
one, G-secs carry the lowest risk of all
investments.
● After
all, the chances of the government not paying back your money are almost zero.
It is thus the safest investment one can make.
How are G-sec yields calculated?
● G-sec
yields change over time; often several times during a single day. This happens
because of the manner in which G-secs are structured.
● Every G-sec has
○ A face value
○ A coupon payment
○ Price.
● The
price of the bond may or may not be equal to the face value of the bond.
● Here’s
an example: Suppose the government floats a 10-year G-sec with a face value of
Rs 100 and a coupon payment of Rs 5.
● If
one were to buy this single G-sec from the government, it would mean that one
will give Rs 100 to the government today and the government will promises
○ to
return the sum of Rs 100 at the end of tenure (10 years) and
○ pay
Rs 5 each year until the end of this tenure.
○ At
this point, the face value of this G-sec is equal to its price, and its yield
(or the effective interest rate) is 5%.
How do G-sec yields go up and down?
● Imagine
a scenario in which the government floats just one G-sec, and two people want
to buy it. Competitive bidding will ensue, and the price of the bond may rise
from Rs 100 (its face value) to Rs 105. Now imagine another lender in the
picture, which pushes the price further up to Rs 110.
● But
here is the crucial thing: the coupon payment on the G-sec is still Rs 5.
● So,
if you bought the bond at Rs 100, then the yield is 5% but if the price of the
bond goes up to Rs 105 then the yield will fall; it will become 4.76% because
the second person will be getting Rs 5 over an investment of Rs 105.
● Further,
if bidding leads to the price going to Rs 110, then the third person (who
finally bought the bond at Rs 110) will find that the yield has fallen further to
4.54%; because the third person would have invested Rs 110 for the same return
of Rs 5
Hence, the Bond Price and Bond Yield are inversely
proportional to each other.