Why in news
The RBI announced it will purchase G-Secs worth ₹1 lakh crore to improve liquidity.
The purchase will happen in two parts: ₹50,000 crore on March 12 and ₹50,000 crore on March 18.
Additionally, the RBI will conduct rupee/U.S. Dollar swaps worth $10 billion for a 36-month period on March 24.
The RBI will keep monitoring market conditions and take necessary actions to ensure liquidity remains stable.
Government Securities (G-Sec)
A G-Sec is a tradable instrument issued by the Central Government or the State Governments.
A G-Sec is a type of debt instrument issued by the government to borrow money from the public to finance its Fiscal Deficit.
A debt instrument is a financial instrument that represents a contractual obligation by the issuer to pay the holder a fixed amount of money, known as principal or face value, on a specified date.
It acknowledges the Government’s debt obligation.
Such securities are short-term (usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91-day, 182 days and 364 days) or
long-term (usually called Government bonds or dated securities with original maturity of one year or more).
In India, the Central Government issues both, treasury bills and bonds or dated securities
while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.
Types of G-Sec:
Treasury Bills (T-bills):
Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
Cash Management Bills (CMBs):
In 2010, the Government of India, in consultation with RBI introduced a new short-term instrument, known as CMBs, to meet the temporary mismatches in the cash flow of the Government of India.
The CMBs have the generic character of T-bills but are issued for maturities of less than 91 days.
Dated G-Secs:
Dated G-Secs are securities that carry a fixed or floating coupon rate (interest rate) which is paid on the face value, on a half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.
State Development Loans (SDLs):
State Governments also raise loans from the market which are called SDLs.
SDLs are dated securities issued through normal auctions similar to the auctions conducted for dated securities issued by the Central Government.
Issue Mechanism:
The RBI conducts Open Market Operations (OMOs) for sale or purchase of G-secs to adjust money supply conditions.
The RBI sells g-secs to remove liquidity from the market and buys back g-secs to infuse liquidity into the market.
These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
RBI carries out the OMO through commercial banks and does not directly deal with the public.
The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
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