Government Securities

Government securities, or G-secs, are tradable debt instruments through which the Union and state governments borrow from the market. Because sovereign backing gives them very low domestic credit risk, yields on liquid central government securities serve as the principal risk-free benchmark for pricing rupee debt instruments.

Formation of the benchmark yield curve

Yields on government securities of different maturities form the sovereign yield curve, which shows the market's term structure of interest rates.

• Treasury Bills help anchor short-term rates, while dated central government securities provide reference yields across longer maturities.
• The most actively traded, or on-the-run, securities generally provide the clearest benchmark because their prices incorporate market information more readily.
• Movements in G-sec yields reflect expectations concerning inflation, monetary policy, liquidity, fiscal borrowing and future interest rates.

Pricing and mobilisation of debt

Private and public issuers commonly price debt by adding a credit spread and liquidity premium to the yield on a government security of comparable maturity.

• The benchmark enables comparison across corporate bonds, public sector bonds and State Development Loans.
• It supports the valuation and mark-to-market measurement of outstanding debt securities.
• A credible yield curve reduces pricing uncertainty, helping issuers and investors mobilise and allocate long-term funds.
• Government auctions reveal market borrowing costs and assist public debt management.

Wider market and policy role

Government securities form the core of the domestic fixed-income market and provide collateral for repo transactions. The Reserve Bank also buys and sells them through open market operations, linking the G-sec market with liquidity management and monetary-policy transmission.

• A deep G-sec market encourages trading, price discovery and development of related debt-market segments.
• Benchmark quality weakens where securities are illiquid or trading is concentrated in only a few maturities.
• G-secs have low credit risk but remain exposed to interest-rate risk, since their prices fall when market yields rise.

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