Question: What are G-Secs? Explain their role as a source for government borrowing. Also highlight the impact of buying/selling of G-Secs on economy.
Answer: G-Secs or government securities are a tradeable instrument issued by the Central Government or the State Governments. The RBI handles the buying and selling of the G-Secs on behalf of the government.
Types of G-Secs
- Treasury bills (T-Bills): Short-term instruments which mature in 91 days, 182 days, or 364 days. They pay zero coupons, but rather work on discounted face value.
- Dated securities: Long-term instruments, which mature anywhere between 5 years and 40 years.
- Cash management Bills: Floated to meet the temporary mismatches in the cash flow of the Government of India.
G-Secs as a source of borrowing
- Mismatch in revenue-expenditure
Whenever the government faces shortage of revenue in comparison to expenditure, it has to look for funds to fill the gap. G-Secs are reliable in this regard.
- Fund capital projects
Many long term projects can be funded by issuing long-term bonds. Borrowing from open-market will prove costly for government and hence it can opt for G-Secs.
Impact of RBI buying G-Secs
- Increase liquidity
Government spends money to buy securities from open market. This will increase liquidity for banks to lend.
- Promote growth
As liquidity in market increases, the loans become cheaper. Banks will lend more money for creation of capital and money-multiplier.
- Create demand
As liquidity increases, cash availability in market increases. This will ensure that public will have enough money to spend on goods.
Impact of selling G-Secs
- Reduce inflation
RBI sells securities when it wants to absorb money from the market. This will reduce demand, increase interest rates and also slow down inflation.
- Contractionary policy
RBI adopts contractionary policies when it wants growth rate stable and inflation under control. It makes use of securities to make that happen.
Thus, G-Secs are indeed a reliable, safe and stable source of investments. They are backed by the government and acts as a tool for monetary policy.