Thursday Trivia ~ Understanding the basics of India’s Government Securities Market

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Thursday Trivia ~ Understanding the basics of India’s Government Securities Market

This is not a product note and do not consider this article as a recommendation of buy or sell of government security of any sort. This article is meant for educational purposes only. 

It’s often said that a country’s financial development hinges around the existence of deep and liquid government securities market. In simple words, it means that if retail investors participate actively in buying government securities, then financial development of India will happen multi-fold. I’m sure, you would be thinking – HOW?

First let’s look at Why these government securities are issued in the first place!

It’s actually quite simple. When Government of India needs money (or loans), it approaches the Reserve Bank of India (RBI). The reason is not because RBI Governor and Prime Minister are best friends but RBI (India’s Central Bank) is also banker to the Government. Since RBI is not primarily in the business of saving and lending like HDFC Bank or SBI, RBI will borrow from other entities such as insurance companies or commercial banks.

When insurance companies or a commercial bank lends money to RBI for the above mentioned purpose, RBI issues securities such as bonds. These bonds can also be subscribed by retail investors by purchasing them directly or via mutual funds. For purchasing these bonds directly, a retail investor can simply go to a bank or nearby post office and buy a Government of India bond or a RBI Bond. 

However, if an investor wants to purchase a basket of bonds, then they can opt for mutual fund route under the GILT fund. We will cover this in our next week’s Thursday Trivia in detail.

However, unlike equity markets, the market for government securities is yet to be fully accepted by retail investors. One of the primary reason for this has been lack of understanding available on the subject. 

First one being, when are these bonds issued? 

This problem was solved when transparency was enhanced through the introduction of issuance calendars for auctions in government securities since April 2002. Dated securities such as Treasury Bills (T-Bills) and Cash Management Bills (CMBs) are issued as discounted instruments. Niche investment products targeted at retail investors include sovereign gold bonds (a government security denominated in gold) and savings bonds. 

In recent years, detailed half-yearly borrowing calendars are announced, setting out weekly schedules of issuances, including the maturity period and amount of securities to be issued.

Since there is very little knowledge about these securities in the retail investor’s domain, RBI in its recent bulletin has talked about some steps taken to encourage direct retail investment.

The bulletin notes, “As is the case globally, retail investment in government securities in India is primarily routed through collective investment schemes like insurance, pension and mutual funds. Small savings schemes with associated tax benefits and fixed deposits with public sector banks also compete with government securities for retail interest.

      I.         As retail investors may not have the expertise to appropriately price government securities, a non-competitive bidding facility in primary auctions was introduced for them with securities issued at the weighted average price discovered in auctions; 

     II.         A separate limit of 5 per cent of notified amount is set aside for retail investment in all primary issuances; 

   III.         Retail investors can use alternate aggregator/ facilitator channels such as banks, PDs and stock exchanges; 

   IV.         Sovereign gold bonds have been launched for the retail investors and secondary market trading in the same has been enabled through exchanges; 

    V.         A separate odd-lot segment with a minimum market lot size of ` 10,000 against a standard lot size of ` 5 crore has been created in Negotiated Dealing System Order Matching (NDS-OM) since 2007; 

   VI.         Constituents’ Subsidiary General Ledger (CSGL) account holders like Securities and Exchange Board of India (SEBI)- regulated depositories have been permitted to undertake value free transfer (VFT) of government securities directly on the Reserve Bank’s Core Banking Solution (e-Kuber) portal in respect of trades on exchanges between demat holders of different depositories. A facility of direct file upload on e-Kuber is being developed for the benefit of the CSGL account holders. “

These are welcome steps to increase transparency and liquidity in these securities. These baby steps will definitely go a long way in building a robust infrastructure for government debt market.

How we are stacked against similar Emerging Market Economies 

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On comparison with size of government bond market as a percentage of gross domestic product (GDP), India is in line with China. 

In simple terms, it means India’s total spending which is represented as GDP and how much debt the government can raise to eventually spend. In a developing country like India where we have to constantly work on our infrastructure, power, water, etc.. 60% is a good enough number. Comparing India to Hong Kong won’t be a good bet because both countries hugely differ in area of land and population.

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Yield volatility which in simple terms mean difference in expected returns while investing versus upon maturity. Taking the benchmark 10-year government security as base, India’s volatility has more or less stabilized since last 3 years. China has one of the lowest along with Malasiya showing a sharp rise this year. As most countries has shown a massive yield volatility this year due to the pandemic of COVID-19, India has more or less been immune. This means a stable government bond market and plenty of liquidity available.

In a more complex term, Yield volatility is generally defined as standard deviation of daily yield changes over the previous 21 trading days (a proxy for calendar month). 

Lastly, let’s look at the ownership pattern in government securities as on March 2020

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Commercial banks and insurance companies form close to 66% of the ownership pattern. RBI taking up another 15% odd is a result of limited participation from Mutual Funds, Foreign Portfolio Investors (FPIs) and Others (direct retail investors). The plus side to lower participation of FPIs has made the yield movement less vulnerable to their sudden investing or pulling money out of India. 

Another benefit to a retail investor is that commercial banks + insurance companies +RBI = 81% of these ownership pattern is a long only purchase. These institutions hold these securities to its maturity thus stabilizing any impact on the price of the security during the interest rate rise or fall. Upside and downside, both are limited making it a safe investment bet.


By purchasing bonds or securities issued government of India, an investor practically eliminates credit risk. Yet, the investor must remember that there is an inherent interest rate risk on their heads. To put it simply, when interest rates fall, there is a rise in prices of these bonds where investors make money but when interest rates rise, prices of these bonds tend to fall. Hence, taking a short term view in these securities is harmful for an investor’s financial health. We will cover this in detail when we talk about GILT funds in our next Thursday Trivia.


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