Generally, in a developing economy, the expenditure of the central government surpasses its earnings, resulting in an outflow of funds that exceeds the inflow, which is known as a fiscal deficit. To address this deficit, the central government can resort to two measures: printing notes or issuing government securities (borrowing money). However, consistently printing notes to bridge the fiscal deficit can result in inflation. Therefore, the government chooses to issue securities instead. This approach allows the government to borrow funds from investors who purchase these securities, which the government is obligated to pay back with interest at a later date. By issuing government securities, the government can bridge the fiscal deficit without causing inflation, where the latter can have detrimental effects on the economy.
Government Securities (G-Secs) refer to fixed-income financial instruments that the central government uses to raise funds from the general public in order to meet its fiscal needs. These securities are considered to be one of the safest investment options as they are backed by the government’s creditworthiness and are relatively free from default risk.
G-Secs are issued in the form of bonds or treasury bills (T-bills) and have a fixed maturity period ranging from 91 days to 40 years. The interest rate on these securities is decided through the auction process conducted by the Reserve Bank of India (RBI) on behalf of the government.
Government securities, commonly referred to as G-secs, usually offer investors higher returns than bank-fixed deposits. Additionally, they are not subject to TDS (Tax Deducted at Source) and can be used as collateral for loans. These securities are traded on both the exchanges and over-the-counter markets, and there is no lock-in period for holding them. Additionally, commercial banks are mandated to hold up to a minimum of 18% of their deposit base in the form of G-secs to meet their liquidity requirements.
In addition to equity, foreign portfolio investors (FPIs) also invest in the debt market through the use of G-secs. When combined with the emergence of technology-enabled online platforms, all these factors make G-secs a highly liquid and desirable fixed-income product for non-institutional investors.
India boasts a highly developed market for government debt, and as a result, government securities remain the most easily tradable financial instruments in the country. According to data from the Reserve Bank of India, the total outstanding value of government securities in February 2023 stood at a whopping ₹90.74 trillion.
State Guaranteed bonds are debt securities issued by state-owned entities, with the backing of a payment guarantee from the corresponding state government. These bonds are backed by a guarantee from the state government, which means that if the bond issuer defaults, the state government will step in to repay the bondholders. They’re a popular choice for conservative investors who are looking for a stable source of income.
State government-guaranteed bonds can be used for a variety of reasons such as funding for fresh initiatives, enlarging operations and repayment of existing liabilities. The proceeds from the bond issue are used to finance the project and the interest payments on the bond provide a steady source of income to the bondholders. State government enterprises can secure financing for their development projects and expenses through bonds, which offer a more cost-effective alternative to bank loans and other sources of funding. Consequently, these bonds are highly liquid as they are backed by state governments, making them tradable both in exchanges and over the counter.
Over the past two decades, the fixed-income market in India has witnessed a significant shift with the government bond market emerging as its largest segment. However, the involvement of non-institutional investors in this sector has remained low with only financial institutions being active participants. To address this issue, IndiaBonds – an innovative online fintech platform looks at offering ease and convenience to investors who are looking to participate in government securities.
With the IndiaBonds platform, you have access to government securities that can be purchased in a few easy steps:
• Review detailed issue details, including interest payment frequency, by clicking the “Read More” button.
• Calculate your investment against the final payout.
• To purchase this bond, simply click on the “Buy Now”, enter your information, and finalize your order by submitting your request. The Bond Managers will handle the rest for you.
Government bonds are one of the best ways to invest if you have low risk appetite. Because of the government’s backing, these bonds are among India’s safest investment options.
A. Government securities are issued by the central government, while state-guaranteed bonds are issued by state-owned enterprises, but with a guarantee from the state government. Consequently, Government securities are more liquid than state-guaranteed bonds, as they have a larger market. State-Guaranteed bonds may be less liquid on a relative basis, depending on the size of the issuing entity and the demand for the bonds.
A. Central government issues G-Secs or Government Securities as a means to raise funds from the public by offering debt instruments. On the other hand, Sovereign Gold Bonds (SGBs) are government-backed bonds that allow investors to invest in gold without physically owning it. While G-Secs offer fixed interest rates, SGBs offer a much lower fixed return plus the benefit of potential gold price appreciation.
Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.
