When the government spends more than it earns, it borrows money. A large part of this borrowing is done by selling government securities (G-Secs) - bonds and bills that promise to pay back the money with interest. The Reserve Bank of India manages this borrowing for the Centre and the States. News about bond yields, T-bill auctions and India joining global bond indices appears often, so the topic is useful for banking and civil services exams. This post explains it in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- G-Secs are of two types: Treasury Bills (short term, under one year) and dated securities (long term).
- T-bills are issued for 91, 182 and 364 days, are zero-coupon and sold at a discount.
- Only the Central Government issues T-bills; State bonds are called State Development Loans (SDLs).
- Bond prices and yields move in opposite directions.
- RBI Retail Direct (November 2021) lets individuals buy G-Secs directly from the RBI.
1. What are government securities?
A government security is a tradable instrument issued by the Central or a State government to borrow money. It is a promise to repay the amount on a fixed date, usually with interest.
- G-Secs carry practically no risk of default, so they are called risk-free or gilt-edged instruments.
- They are issued by the RBI on behalf of the government, mainly through auctions.
- The main law is the Government Securities Act, 2006, which replaced the Public Debt Act, 1944.
- Banks hold G-Secs to meet the Statutory Liquidity Ratio (SLR).
2. Treasury Bills
| Point | Detail |
|---|---|
| Issued by | Central Government only |
| Tenures | 91 days, 182 days and 364 days |
| Interest | Zero-coupon - no interest is paid separately |
| How the investor earns | Bought at a discount, repaid at face value; the difference is the return |
| Market | Part of the money market (short-term) |
Example: A 364-day T-bill with a face value of ₹100 may be sold for about ₹93.5. On maturity, the investor gets ₹100. The gain of ₹6.5 is the return.
The government also issues Cash Management Bills (CMBs), introduced in 2010, for less than 91 days to meet short gaps in cash flow.
3. Dated securities
Dated securities are long-term bonds with tenures from a few years up to 40 or even 50 years. They pay a fixed or floating interest, called the coupon, usually every six months.
| Type | Feature |
|---|---|
| Fixed rate bonds | Same coupon for the whole life of the bond; the most common type |
| Floating Rate Bonds (FRBs) | Coupon resets at set intervals based on a benchmark |
| Inflation Indexed Bonds | Principal or coupon is linked to inflation; issued in 2013 |
| STRIPS | A bond split into separate zero-coupon pieces for each coupon and the principal |
| Sovereign Green Bonds | Money is used only for green projects; first issued in January 2023 |
The 10-year G-Sec is treated as the benchmark; its yield is a key signal of interest rates in the economy. Bonds issued by States are called State Development Loans (SDLs); States cannot issue T-bills.
4. Bond prices and yields
The yield is the return an investor actually earns on a bond at its current market price. The key rule is:
When bond prices rise, yields fall. When bond prices fall, yields rise.
Example: A bond of face value ₹100 pays a coupon of ₹7 a year.
| Market price | Current yield (coupon / price) |
|---|---|
| ₹100 | 7% |
| ₹105 (price up) | about 6.7% (yield down) |
| ₹95 (price down) | about 7.4% (yield up) |
- When the RBI is expected to cut the repo rate, old bonds with higher coupons become attractive, prices rise and yields fall.
- When the government plans to borrow more, supply of bonds rises, prices fall and yields rise.
- A yield curve shows yields for different maturities. Normally, longer bonds have higher yields. An inverted yield curve is often read as a sign of a slowdown.
5. How G-Secs are issued and traded
- Auctions - the RBI announces an issuance calendar and holds auctions on its E-Kuber platform.
- Uniform price and multiple price - in a uniform price auction, all winning bidders pay the same price; in a multiple price auction, each pays the price they bid.
- Primary Dealers - RBI-approved entities that bid in auctions and keep the market active.
- Non-competitive bidding - small investors can get a share of the auction at the average price.
- Secondary market - G-Secs are traded on the RBI's NDS-OM system and settled through the Clearing Corporation of India Ltd (CCIL).
Open Market Operations (OMO) - the RBI buys G-Secs to inject money into the system and sells them to absorb money. This is a tool of monetary policy.
6. Retail investors and foreign investors
- RBI Retail Direct - launched on 12 November 2021; individuals can open a free Retail Direct Gilt (RDG) account with the RBI and buy G-Secs, T-bills and SDLs.
- Small investors can also buy G-Secs through stock exchanges and mutual funds (gilt funds).
- Fully Accessible Route (FAR) - introduced in 2020; foreign investors can buy certain notified G-Secs without any limit.
- Global bond indices - Indian FAR bonds were included in the JP Morgan GBI-EM index from June 2024, and later in Bloomberg and FTSE emerging market indices in a phased manner. This brings steady foreign money into Indian bonds.
7. Why G-Secs matter
| For whom | Why it matters |
|---|---|
| Government | Main source of funds to cover the fiscal deficit |
| RBI | Tool for liquidity management through OMOs |
| Banks | Used to meet SLR and as collateral to borrow from the RBI |
| Economy | The G-Sec yield is the base for pricing corporate bonds and loans |
| Investors | Safe, steady returns for pension funds, insurance companies and individuals |
A very high level of government borrowing can push up yields and make loans costlier for private businesses. This is called crowding out. That is why the FRBM Act sets targets to control the fiscal deficit and public debt.
8. Previous year questions
- What are the two main types of government securities in India? – Treasury Bills and dated securities
- For which tenures are Treasury Bills issued? – 91, 182 and 364 days
- Treasury Bills are issued at a discount and repaid at what value? – Face value
- Who issues Treasury Bills in India? – The Central Government (through the RBI)
- What are bonds issued by State governments called? – State Development Loans (SDLs)
- Which instrument is issued for less than 91 days to meet temporary cash gaps? – Cash Management Bills
- What is the relationship between bond prices and yields? – Inverse - when prices rise, yields fall
- Which G-Sec is treated as the benchmark in India? – 10-year G-Sec
- Which Act replaced the Public Debt Act, 1944? – Government Securities Act, 2006
- When was RBI Retail Direct launched? – 12 November 2021
- What is the RBI's buying and selling of G-Secs to manage liquidity called? – Open Market Operations (OMO)
- Banks hold G-Secs mainly to meet which requirement? – Statutory Liquidity Ratio (SLR)
- In which year did India first issue Sovereign Green Bonds? – 2023
- Indian G-Secs were included in which global bond index from June 2024? – JP Morgan GBI-EM
- What is the route through which foreign investors can buy notified G-Secs without limits? – Fully Accessible Route (FAR)
9. How to revise this topic
Start with the two types: T-bills (91, 182, 364 days, zero-coupon, discount, Centre only) and dated securities (long term, up to 40-50 years, coupon twice a year).
Next, learn the special bonds: CMBs 2010, Inflation Indexed Bonds 2013, FRBs, STRIPS, Sovereign Green Bonds January 2023, SDLs for States.
Then fix the price-yield rule with one example: price up, yield down; rate cut expected, yields fall.
Finally, remember the institutions and dates: Government Securities Act 2006, E-Kuber, NDS-OM, CCIL, Retail Direct 12 November 2021, FAR 2020, JP Morgan index June 2024.
10. Frequently Asked Questions
What is the difference between a T-bill and a dated security?
A T-bill is a short-term instrument of less than one year that pays no coupon and is sold at a discount. A dated security is a long-term bond that pays a coupon, usually every six months.
Why do bond yields fall when prices rise?
The coupon on a bond is fixed. If an investor pays a higher price for the same coupon, the return on the money invested is lower, so the yield falls.
Can States issue Treasury Bills?
No. Only the Central Government issues T-bills. States borrow through State Development Loans (SDLs).
How can an individual buy government securities?
An individual can open a free Retail Direct Gilt account on the RBI Retail Direct portal, launched in November 2021, or buy through stock exchanges and gilt mutual funds.
What is crowding out?
Crowding out happens when heavy government borrowing raises interest rates and reduces the funds available for private investment.
For more Economy topics in simple language, see our Public Debt and FRBM Act, Money Market vs Capital Market and Repo Rate, CRR and SLR posts, or browse the Economy section. Preparing for a bank exam? See the RBI Grade B guide or join the 100 Hour GS Course.