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DAILY NEWS ANALYSIS

  • 08 March, 2021

  • 5 Min Read

Lowering Government Yields

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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