The term ‘gilt edged’ means the ‘best quality’. Since Government Securities are of best quality in the sense of liquidity and zero degree of the risk of default, so these are called gilt-edged securities. In the Gilt-edged Market, the securities of the Government of India and of the State Governments are traded in. The securities guaranteed (as to both principal and interest) by the Government are also traded in this market.
The importance of Government Securities Market, that is, Gilt-edged Market, as a segment of the capital market, emanates from the fact that this market provides a mechanism for the management of public debt and open market operations to the Reserve Bank of India (RBI). It is, therefore, imperative to emphasize that this market has a strong bearing on the formulation of the fiscal policy of the Government of India and the monetary policy of RBI. The Gilt-edged Market has two segments: Treasury Bill Market and Government Bond Market.
The Treasury Bill Market is a source of short term funds for the Government. A Treasury Bill is a promissory note, that is, a liability of the Government of India. The Treasury Bills are of the maturity period of 91 days, 182 days and 364 days. The RBI sells Treasury Bills on behalf of the Government of India. It is important to point out that RBI is the chief holder of these bills. Outside it, commercial banks hold these bills. Thus, the Treasury Bills Market is a captive market.
The Indian Treasury Bills Market is underdeveloped as compared to U.S.A. and U.K. However, recently RBI has initiated certain reforms in the Treasury Bill Market to transform its captivity character to broad-based market character. The RBI reduces its holdings of Treasury Bills by converting them into dated-Government Securities at market-related interest rates.
The 364 days Treasury Bills are entirely held by the market. The Government of India’s borrowings from RBI through Treasury Bills to cover budget deficit is called monetisation of deficit. In order to contain direct and automatic monetisation of budget deficit, the Finance Secretary, Government of India and the Governor, Reserve Bank of India signed an agreement on September 9, 1994 to limit borrowing through ad hoc Treasury Bills to Rs. 6000 crore in 1994-95. It is an important step to strengthen the efficacy of monetary management by RBI. It would also help to control inflation in the economy.
‘The Government Bond Market is a source of long-term funds to the Government of India and State Governments. The Government bonds are dated securities which are floated to raise medium and long-term loans in the open market. It is significant to note that it is generally the institutions, instead of individuals, that are the buyers of Government bonds.
It is due to relatively lower interest rate, long maturity period and face value in high denominations that the individuals are found to be reluctant to invest their funds in Government bonds. The institutions like commercial banks, LIC and G1C buy the Government bonds to build up their asset portfolio.
These institutions invest in Government bonds as they are required by law to invest a certain minimum proportion of their total funds in these bonds. Left to themselves, they would not like to buy these bonds owing to low interest rate on them. The RBI, as a manager of public debt, operates on the supply side of the Government bond market. At the end of the subscription period, RBI holds the stock of unsold Government bonds and keeps them selling on its own account.
The Government bond market is a captive market. The RBI is launching a system of primary dealers for deepening and expanding the Government bond market. The Securities Trading Corporation of India was set up in 1993-94 to develop the secondary market in Government securities.
Growth of Central Government’s Securities:
The growth of Securities Market is an integral part of the process of economic growth in a free market economy. Of late, the RBI and the Government of India have pursued certain measures to reform the Securities market. These reforms have been introduced in both the New Issue Market and the Secondary Market of industrial securities and Government securities.
Average Daily Volume and 10-Year Weighted Average
The average daily trading volume of central government securities in the secondary market increased to around Rs.570 billion during Q1 of 2013-14 from Rs. 376 billion during Q4 of 2012-13. The traded volume in G-secs generally varied inversely with G-sec yields.
The gross market borrowings of the central government through dated securities during 2013-14 were to the tune of Rs.2,100 billion (net borrowings of Rs. 1,972 billion) up to July 26, 2013 compared with Rs. 2,340 billion (net borrowings of Rs.1, 594 billion) during the corresponding period of the previous year.
The weighted average maturity of the dated securities increased to 14.96 years from 13.62 years during the corresponding period of the previous year. The weighted average yield during the primary auctions eased to 7.64 per cent from 8.52 per cent during the corresponding period of the previous year.
The weighted average yield during the primary auctions eased to 7.64 per cent from 8.52 per cent during the corresponding period of the previous year (Table 40.9). The bid-cover ratio stood in the range of 1.41-6.09 as against 1.47-3.59 during the corresponding period of the previous year. The government availed of ways and means advances (WMA) on three occasions up to end-June 2013. As on July 16, 2013 the outstanding WMA position of the government was Rs. 3.06 billion.
Issuances of Central and State Government Dated Securities
During 2013-2014 (up to July 16, 2013), 18 states have raised Rs. 401.2 billion on a gross basis (net amount of Rs. 252.3 billion) compared with Rs. 419.8 billion (net amount of Rs. 369.6 billion) raised by 20 states during the corresponding period of the previous year. The weighted average yield eased to 7.98 per cent up to July 16, 2013 from 9.01 per cent during the corresponding period of the previous year.