Government securities (G-Sec) market, which has so far been in its infancy, finally seems to be expanding rapidly with the increase in number of players and optimistic outlook for the interest rates in the country.
G-Secs are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of government of India (GOI), in lieu of the Central government's market borrowing programme to finance its fiscal deficit. In layman's language, these can be referred to as certificates issued by GOI through the RBI, acknowledging receipt of money in the form of debt. This instrument bears a fixed interest rate with interest payable semi-annually. The term G-Secs include government-dated securities (central government securities), state government securities and treasury bills.
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G-Sec dominates the overall activity of the debt market. The activity in the G-Sec market is primarily linked to the governmentís borrowing programme. The government has already completed Rs 708 bn of its borrowings constituting around 60% of its gross budged borrowings of Rs 1,189 bn. Currently, liquidity in the system is comfortable with huge deposit accretion of banks coupled with limited investment opportunities. With a slowdown in the economy and weakness in the industrial activity, the demand for credit is not expected to pick up significantly. This could result in banks raising their exposure to the government securities, eventually increasing volumes of the markets.
Total G-Sec market turnover in FY01 jumped by 24% to Rs 5,670 bn. In the first quarter of FY02, volumes stood at Rs 2,740 bn compared to Rs 1,030 bn in the same period last year. The turnover is expected to spurt to the level of Rs 10,000 bn in FY02. The breathtaking growth in the turnover would be on account of a likely increase in the governmentís borrowing programme. Dismal tax collections and the measures to accelerate public spending could result in the government overshooting its budgeted borrowings in the current year. This is already evident from the grim first quarter data. In the first quarter of FY02, the gross fiscal deficit at Rs 422 bn was almost double compared to Rs 251 bn in the corresponding period in the previous year. The increase in fiscal deficit was due to over 40% drop in revenue receipts. The decline in revenue receipts was caused by a 54% dip in corporate tax collections, clearly pointing to the slowing economy. Also, the actual expenditure of the government at Rs 651 bn was higher by 14% compared to 1QFY01. These factors have forced the RBI to point towards softer interest rates scenario going forward, which perked up sentiment in the debt market (with a cut in interest rate, bond prices rise resulting in gains in investment portfolio).
Uptrend in G-Sec volumes
In addition to the dated securities and state govt. securities, treasury bills (T-bill) of 14 days, 91 days and 182 days are issued for managing the short-term cash requirement of the government. These do not form part of the borrowing programme of the central government. Unlike G-Secís, these are discounted securities and are issued at a discount to face value. Difference between the maturity value and issue price is return to the investor. For example, a T-bill with a face value of Rs 100 issued for Rs 94.5 gets redeemed at the end of its tenure at Rs 100. The price difference of Rs 5.5 is the income to the investor.
A T-bill can be purchased directly from the primary market as well as from the secondary market commensurate with the short-term period for which the funds are available. The most active participants in this market are scheduled banks, financial institutions, primary dealers, mutual funds, insurance companies and corporate treasuries.
T-bills offer the ideal opportunity for fund management for short-term tenures of less than 15 days. An average return of about 7% - 8% on this instrument is comparatively higher than the bank fixed deposits. Even funds, which are kept in current accounts, can be deployed in treasury bills to maximize the returns. Further, since every week there is a 14 days & 91 days T-bill maturing and every fortnight a 182 days & 364 days T-bill maturing, one can purchase T-bills of different maturities as per requirements. Volumes in the secondary T-bills market during the first fortnight of August soared to Rs 26 bn against Rs 15 bn in the previous fortnight.
At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits, even for longer term.
Another major advantage of investing in T-bill is that it is free from TDS (tax deducted at source) unlike bank fixed deposits where interest above Rs 2,500 is taxable. It is the highly liquid money market instrument and being a sovereign paper, carries zero default risk.
However, the yield movement of both the T-bills and G-Secs are likely to get impacted by the several factors such as government borrowing programme, monetary policies, liquidity in the financial systems, forex fluctuations and economic & political scenario. Market price of these instruments is determined through interplay of demand and supply factors. Banks statutory requirements (SLR investment) and overall liquidity position in the markets drives demand for these securities. On the other hand, the supply generally emanates from the borrowing requirements of the government. Also, as a result of regulatory actions of RBI occasional supply could arise.
Both G-Sec and T-bills control major volumes of the debt market. However, compared to the daily transaction of US$ 185 bn a day in the US (in 1999), the volumes in the Indian markets are way behind. This is due to lack of awareness amongst the retail investors, as they do not understand the mechanics of the markets as regard to pricing of instrument. Among the other factors, which have hindered the growth, is the lack of infrastructure for price discovery.
In order to increase participation as well as enhance transparency in the secondary debt market, the government has already announced certain measures in the Union Budget 2001-02. These include setting up of clearing corporation, screen based trading system, an electronic negotiated dealing system, introduction of electronic fund transfer (EFT) and real time gross settlement (RTGS). These measures would not only help integrate the forex and debt market but will also for increase retail participation. The market is poised for a big leap, once the depth and vibrancy in the debt market improves.