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Dr. SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

Lucknow

Faculty of Law

PROJECT ON

(Government security market)

Submitted by

Harsh Savita

Academic Session: 2019-20

Under the Supervision of

Dr. Malini Argal

Faculty of law
ACKNOWLEDGEMENTS

First and foremost, I am thankful to Dr. Malini Argal for allotting me the topic.

“Government security market” .He has been very kind in providing inputs for

this work, by way of suggestions materials.

I would also like to thank my dear colleagues and friends in the University, who

have helped me with ideas about this work. Last, but not the least I thank the

University Administration for equipping the University with such good library

and internet facilities, without which, no doubt this work would not have taken

the shape in correct time.

Harsh Savita
CONTENT

1. Government securities market

2. The Government Securities Market has Two Segments mainly:-
3. Different methods of sale:-
4. GOVERNMENT (GILT EDGED) SECURITIES MARKET Ownership and Maturity
pattern
Points to Cover - Who invests in gilt-edged securities? What is its maturity? Does it give
investors any tax benefits? If yes, under which section of which act?
5. RECENT DEVELOPMENT
6. READY FORWARD CONTRACTS (REPOS):
7. PRICE AND YIELDS
8. DIFFERENT TYPES OF GILTS
9. Role Of Market In Government Finance.
10. Conclusion
11. Bibliography
Government securities market
The evolution of the government securities market in India has been in line with the
developments in other countries. Slow development of the market in the 1970s and the
1980s was shaped by the need to meet the growing financing requirements of the
Government. This essentially resulted in financial repression as progressively higher
statutory requirements were stipulated, mandating banks to invest in government
securities at administered interest rates. Although this captive financing provided low
cost resources to the Government, it impeded the development of the market and
distorted the interest rate structure. Furthermore, such arrangements, along with
automatic monetisation of Government deficits, hampered the conduct of monetary
policy.

The government securities market is at the core of financial markets in most countries.
It deals with tradable debt instruments issued by the Government for meeting its
financing requirements. The government securities market is also regarded as the
backbone of fixed income securities markets as it provides the benchmark yield and
imparts liquidity to other financial markets. The existence of an efficient government
securities market is seen as an essential precursor,in particular, for development of the
corporate debt market. Furthermore, the government securities market acts as a
channel for integration of various segments of the domestic financial market and helps
in establishing inter-linkages between the domestic and external financial markets.

A market where the government securities are bought and sold is called government
securities market. The securities are bonds, treasury Bills, Special Rupee securities in
payment of India subscriptions in payment of India subscriptions to IMF,
IBRD,ADB,IDA etc. These securities are issued by the Central Government , State
Governments and Semi Governments Authorities which include local Government
authorities like City corporations and Municipalities, Port trusts , State Electricity
Boards Public Sector corporations and other agencies like IDBI, IFCI, NABARD,
SFCS and housing boards. These Agencies are suppliers of Government securities and
banks, Financial institutions and investors demand these securities in the market.
Government securities offer safe avenue of investment through guaranteed payment of
interest and repayment of principal by the government. They offer relatively a lower
fixed rate of interest compared to interest on other securities. These Securities are
issued in the denominations of Rs 100 or Rs 1000. They have Fixed maturity Period.
Interest is paid Half yearly RBI service loans as these are the liabilities og
Government Of India and the State Governments.” THESE SECURITIES ARE
SAFE AND RISK FREE ”. These securities are also eligible Investments. As the
date of Maturity is specified in the securities they are also called “dated Government
Securities ".

The Government Securities Market has Two Segments mainly:-

1. Primary Market
The issuers are Central and State Governments in the Primary Market. The Securities
of Central and State Government are issued in the form of Stock Certificate,
Promissory notes and Bearer bonds. These securities are mainly traded at Bombay
Stock Exchange. In terms of size, the primary market for Government Securities is
much bigger than the Industrial Securities Market.

2. Secondary Market
The Secondary market comprises bank, Financial Institutions, Insurance Companies,
Provident Funds, Trusts, Individuals, Primary Dealers and the RBI.

Different methods of sale:-

An auction may either be yield based or price based.

1:- Yield Based Auction: A yield based auction is generally conducted when a new
Government security is issued. Investors bid in yield terms up to two decimal places
(for example, 8.19 per cent, 8.20 per cent, etc.). Bids are arranged in ascending order
and the cut-off yield is arrived at the yield corresponding to the notified amount of the
auction. The cut-off yield is taken as the coupon rate for the security. Successful
bidders are those who have bid at or below the cut-off yield. Bids which are higher
than the cut-off yield are rejected.

2:- Price Based Auction: A price based auction is conducted when Government of
India re-issues securities issued earlier. Bidders quote in terms of price per Rs.100 of
face value of the security (e.g., Rs.102.00, Rs.101.00, Rs.100.00, Rs.99.00, etc., per
Rs.100/-). Bids are arranged in descending order and the successful bidders are those
who have bid at or above the cut-off price. Bids which are below the cut-off price are
rejected.

Depending upon the method of allocation to successful bidders, auction could be

classified as Uniform Price based and Multiple Price based. In a Uniform Price
auction, all the successful bidders are required to pay for the allotted quantity of
securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate
quoted by them. On the other hand, in a Multiple Price auction, the successful bidders
are required to pay for the allotted quantity of securities at the respective price / yield
at which they have bid. In the example under (ii) above, if the auction was Uniform
Price based, all bidders would get allotment at the cut-off price, i.e., Rs.100.20. On the
other hand, if the auction was Multiple Price based, each bidder would get the
allotment at the price he/ she has bid, i.e., bidder 1 at Rs.100.31, bidder 2 at Rs.100.26
and so on.

3:-Pre-announced coupon rates:-

(i) The coupon on such Securities will be announced before the date of floatation and
the Securities will be issued at par.
 (ii) In case the total subscription exceeds the aggregate amount offered for sale in
respect of a fixed coupon Security, the Reserve Bank of India may make partial
allotment to all the
applicants.

(iii)The Reserve Bank of India will have the discretion to accept excess subscriptions
to theextent as may be specified in the ‘Specific Notification’ pertaining to the issue of
the Security and make allotment of the security accordingly.

(iv) Reserve Bank of India will have the discretion to accept or reject any or all
applications
either wholly or partially, without assigning any reason.

(v) The amount of excess subscription in terms of clause (ii) of this paragraph or
amount of
subscription in case of rejection of application in terms of clause (iv) of this
paragraph, will
be refunded by the Reserve Bank of India to the respective subscribers as soon as
possible
and no interest will be paid on the amount so refunded.

4:-Tap sale:-

No aggregate amount is indicated in the notification in respect of the Securities sold

on tap.
Sale of such Securities may be extended to more than one day and the sale may be
closed at
any time during the banking hours on any day.

5:-Conversion of maturing Treasury Bills/dated securities:-

The holders of Treasury Bills of certain specified maturities and holders of specified
dated
securities are provided an option to convert the respective Treasury Bills/dated
security at
specified prices into new Securities offered for sale. The new Securities could be
issued on an
auction/pre-announced coupon basic

GOVERNMENT (GILT EDGED) SECURITIES MARKET

Ownership and Maturity pattern
Points to Cover - Who invests in gilt-edged securities? What is its
maturity? Does it give investors any tax benefits? If yes, under
which section of which act?

The government needs large amount of money to carry on its welfare

activities.
These activities include:
· Maintaining law & order, justice and national defence
· Central banking & monetary regulations
· Regulation of private sector’s economic activities
· Creation and maintenance of physical infrastructure
Government raises revenue by way of taxes and income from ownership of assets.
Apart from this, it borrows money from banks, financial institutions and public to
meet its expenses. One of the most important sources for government borrowing is the
Government Securities Market (GSM). Government securities are risk free securities
as government guarantees the payment of interest and the repayment of principal
amount. They are also referred to as Gilt-edged Securities. The gilt-edged market
refers to the market for Government and semi-government securities, backed by
the Reserve Bank of India (RBI). Government securities are tradable debt instruments
issued by the Government for meeting its financial requirements. The term gilt-edged
means 'of the best quality'. This is because the Government securities do not suffer
from risk of default and are highly liquid (as they can be easily sold in the market at
their current price). The open market operations of the RBI are also conducted in such
securities. The government securities market in India is the most dominant part of the
debt market, in terms of outstanding securities, trading volume and number of
participants.

Features of Government Securities

· Government securities are sovereign debt obligations of Government of India
either Central or State or any other authority of Government
· Government securities include Central government &
· State government securities, treasury bills and government guaranteed bonds
· The terms of government securities range from two to thirty years
· Coupons / interests offered on government securities
· are either pre-determined by RBI or arrived through
· competitive bidding or auction process
· Coupons are fixed and paid out semi annually to the
· holder of the security

Importance / Benefits of Government

Securities
· Government raises short term as well as long term
· funds by issuing government securities
· It acts as a benchmark for pricing corporate papers of
· various maturities
 · The government securities issues are helpful in
· implementing the fiscal policy of the government
· The working of Open Market Operations (OMO) and
· Statutory Liquidity Ratio (SLR) are closely connected
· with the changes in government securities market
· They are the risk free securities as payment of
· interest and repayment of principal amount is
· guaranteed by government
· Government securities are considered as the best
· collateral at the time of obtaining loans

Issuers of Government Securities

· Central government of India
· State governments
· Semi government authorities consisting of local
· government authorities like Municipalities, City
· Corporations
· Autonomous institutions like Port Trusts, State
· Electricity Boards, Public Sector Enterprises,
· Metropolitan Authorities
· Other government authorities like IDBI, IFCI,NABARD, Housing Boards

Based on the issuers these securities are classified as :

· Central Government Securities
· State Government Securities
· Public Sector Undertaking (PSU) BondsPrimary Issuance Process
· The government securities are issued as per the terms and
· conditions specified in the general notification of the
· Government and also as per the terms and conditions
· specified in the specific notification issued for the specific
· issue of each security

Applicants for the issue:

Firm, Company, Corporate Body, Institution, State Government, Commercial Bank,
Provident Fund, Trust, FIIs registered with SEBI and approved by RBI can submit
offers, including in electronic form, for purchase of government securities. The G S
Act and the G S Regulations do not specify the eligibility criteria for investment in a
G-Sec. The eligibility criteria are specified in the respective Government Notifications

. Usually any person is eligible to invest in Government securities.

Denomination of Government Securities:
1)Central Government Securities – The minimum denomination
is Rs. 10000 and trading takes place in multiples of Rs. 5 crores

2) State Government Securities – The minimum denomination is

Rs. 1000 and trading takes place in multiples of Rs. 1-5 crores

3)Government Agency Bonds – the minimum denomination is

Rs. 5000 and trading takes place in its multiples
Tax Benefit
The Government Securities Act, 2006 (G S Act) is an Act to consolidate and amend
the laws relating to Government securities and its management by the RBI and for
matters connected therewith. As per clause (iv) of Section 193 of the Income Tax Act,
1961, no tax shall be deducted from any interest payable on any security of the Central
Government or a State Government effective from June 1, 1997. However, as per
Finance Act, 2007 and Government of India Notification No. F.4(10)-W&M/2003
dated May 31, 2007, tax has to be deducted at source on the interest exceeding Rupees
ten thousand payable during a financial year on 8% Savings (Taxable) Bonds, 2003
with effect from June 1, 2007.  
maturi
RECENT DEVELOPMENT

Prior to 1991, the Government securities market was not developed because of
inefficient market practices and lack of proper institutional infrastructure. The main
factor that inhibited the development of the sovereign yield curve in India in the pre-
reform period was the prevalence of artificially low administrative coupon rates on
these securities which were out of alignment with other interest rates in the economy.
The coupon rates remained virtually unchanged up to 1979-80. Thereafter, although
coupon rates were revised upwards, especially for the securities of longer tenor, the
yield of a 30-year Government bond remained lower than the maximum bank deposit
rate.
The RBI has undertaken reforms in the Government Securities Market. The RBI has
started providing liquidity support with regard to mutual funds that are dedicated
exclusively to investment in Government Securities to create an enhanced and wider
investor base for such securities. The support is made available to mutual funds to the
extent of 20% of outstanding investment in Government Securities, either by way of
outright purchase or reverse repos. Banks and selected entities are permitted to carry
out Ready Forward (REPO) transactions in Government Securities.
As regards to ‘ Market to Market’ valuation of Government Securities, the ratio of
investment classified in current category for public sector banks has been raised from
40%-50% and for the new private sector banks it has been fixed at 100% of their
investment. With the effect from October 21, 1997 all categories of foreign
Institutional Investors were allowed by the RBI to make Investment in Government
Securities that are registered with and approved by the SEBI for making investments
in gilt-edged securities and has been permitted up to a ceiling of 30% in debt
instruments. As per amended guidelines of June,1998 equity funds were permitted to
invest in dated Government Securities and Treasury Bills, both in primary and
secondary markets within their 30% debt ceiling.
With effect from June 23, 1998, Satellite Dealers were permitted to issue
commercial paper with maturity ranging from 15 days to 1 year. There were
some conditions like:
1. The issue should be made within a period of 2 months of obtaining credit rating
and every renewal is treated as a fresh issue.
2. The issue should be made in the multiple of Rs. 5 lakhs with a minimum of
investment made by a single investor is Rs. 25 lakhs.
3. The aggregate limit is raised within 2 weeks from the date of RBI approval and
the issue is not underwritten or co-accepted in any manner after 2 weeks.

READY FORWARD CONTRACTS (REPOS):

A transaction in which two parties agree to sell and repurchase the same security is
called ‘ready forward contract’ or ‘Repos’. It is also known as buyback deal. This
arrangement provides for the seller to sell specified securities with an agreement to
repurchase the same at a mutually pre-determined future date and price and the buyer
to purchase the securities with an agreement to resell the same at a pre-determined
future date and the price.
Banking finance companies like Commercial Banks, Securities Dealers, DFHI, STCI,
RBI, Cooperative Banks and Non-bank finance companies like LIC, GIC, UTI and
companies are allowed to participate in the repos market. Repo transactions can be
used in respect of CPs, CDs, Treasury Bills and Government dated securities. National
Stock Exchange can also be used for carrying out repo transactions. The Repo contract
provides the seller-bank to get money by parting with its security and the buyer-bank
in turn to get the security by parting with its money. The prices of sale and repurchase
of securities are determined before entering into the deal.
Repos, being collateralized loans, help to reduce counter party risk and fetch a low
interest rate. It is possible to use repos as an effective hedge tool to arrange another
repo or to sell them outright or to deliver them to another party to fulfill a delivery
commitment in respect of a forward or future contract on a short sale. Repo is almost a
risk-free instrument used to even out liquidity changes in the system. It offers safe
short-term outlet for temporary excess cash which is close to market interest rates.
Repos are used to finance securities held in trading and investment accounts of
security dealers to establish short positions, to implement arbitrage activities and
meeting specific customer needs because of low-risk and flexible short-term
instruments. It is possible to enhance the safety of repo transaction by making the
security price to the market and by providing a margin on the security value. The
Repo arrangement serves as a short-term cash management tool. The RBI uses repos
as a tool of liquidity control for absorbing surplus-liquidity from the banking system
in a flexible way and thereby preventing interest rate arbitraging.
A reverse Repo is the opposite of a repo transaction. It is a reverse purchase
agreement. The counter party enters into a reverse repurchase agreement and makes a
short-term collateralized loan to the bank, the primary dealer or the seller of securities.
This is done by providing funds in return for holding securities on the maturity of the
reverse repurchase transaction, the counter party returns the same security to the same
bank and the primary dealer receives back the funds from the buyer is the principal
plus interest. The interest is termed as the repo rate. This arrangement allows banks
to make efficient use of their funds

PRICE AND YIELDS

Gilt-edged securities are bonds issued by certain national governments. The term is
of British origin, and originally referred to the debt securities issued by the Bank of
England, which had a gilt (orgilded) edge. Hence, they are known as gilt-edged
securities, or gilts for short. Today the term is used in the United Kingdom as well
as Ireland and some Commonwealth nations, such as South Africa and India. However
when reference is made to gilts, what is generally meant is UK gilts unless otherwise
specified.
The data collected by the British Office for National Statistics reveal that about two-
thirds of all UK gilts are held by insurance companies and pension funds.[1] Since
2009 large quantities of gilts have been created and repurchased by the Bank of
England under its policy of quantitative easing.
The term "gilt account" is also a term used by the Reserve Bank of India to refer to a
constituent account maintained by a custodian bank for maintenance and servicing of
dematerialized government securities owned by a retail customer.

Trends
The most noticeable trends in the gilt market in recent years have been:

§ a substantial and persistent decline in market yields as the currency has

stabilised compared to the 1970s and more recently UK gilts are seen as a safe
haven compared to certain other government bonds
§ a decline in coupons: several gilts were issued in the 1970s with coupons of
around 15% per annum, but these have now matured
§ a decline in the number of different gilts in issue, as the policy of the
government has been to issue large quantities of each gilt (around £10 billion-30
billion) to maximise liquidity in global markets
§ an increase in the volume of issuance as the Public Sector Borrowing
Requirement has increased
§ a large volume of gilts have been repurchased by central government under
its quantitative easing programme

DIFFERENT TYPES OF GILTS

There are four basic types of Gilt:

1)Conventional Gilt: Interest is paid half yearly on dates which are set at issue, and a
final payment coincides with the final redemption date.

2) Dual-dated Gilt: Similar to a conventional Gilt but with a range of earliest and
latest possible redemption dates, at the Government’s discretion.
3) Index-linked Gilt: Both the interest payment and the redemption amount are
adjusted in line with the Retail Prices Index.

4) Undated Gilts (Irredeemables): These have low interest rates and redemption is at
the discretion of the Government. The best known of these are the War Loan Gilts.

GILT PRICING
Gilt pricing has two components: a quoted‘clean’ price and an ‘accrued
interest’component which reflects the length of time since the last interest payment
went ‘ex-dividend’. This can reduce (if it’s before pay date) or increase the amount
actually paid. Together these two components set the ‘dirty’ price of the Gilt, which is
the price you actually pay.

YIELD
There are two yields quoted to help investors judge what return they’ll receive and
how one Gilt compares with another. The flat yield describes your annual return in
relation to the money you’ve invested (the price paid). It pays no attention to the
redemption date or amount.

Role Of Market In Government Finance.

Gilt Edged Securities.-

The term government securities encompass all Bonds & T-bills issued by the Central
Government, state government. These securities are normally referred to, as "gilt-
edged" as repayments of principal as well as interest are totally secured by sovereign
guarantee.

’Gilt Securities’ are issued by the RBI, the central bank, on behalf of the Government
of India. Being sovereign paper, gilt securities carry absolutely no risk of default.

Government securities are unique and important financial instruments in financial

market.The techniques of open market operations and statutory liquid ratio are closely
connected with the dynamics of the markets for this instruments .The issue of
Government Securities help in implementing the fiscal policies of the
Government.Financial institutions like commercial banks are required to maintain
their secondary reserve requirement in the form of the government securities.These
are secured financial instruments which guarantee the certainty of income as well as
capital. There are 3 types of Central and State Government Securities -

1. Stock Certificates -The physical piece of paper representing ownership in a

company. Stock certificates will include information such as the number of shares
owned, the date, an identification number, usually a corporate seal, and signatures.
They are a bit bigger than normal piece of paper and most of them have intricate
designs to discourage fraudulent replication.
2. Promissory Notes-A written, dated and signed two-party instrument containing an
unconditional promise by the maker to pay a definite sum of money to a payee on
demand or at a specified future date.
3. Bearer Bonds-A fixed-income instrument that is owned by whoever is holding it,
rather than having a registered owner.  
Coupons representing interest payments are likely to be physically attached to the
security and it is the bondholder's responsibility to submit the coupons for
payment.  As with registered bonds, bearer bonds are negotiable instruments with a
stated maturity date and coupon interest rate.  

Types Of Trading.
The RBI practices the dealing in government securities in the following manner.
1. Grooming- It is teh gradual acquisition of securities by the RBI, which are nearing
maturity through the Stock Exchanges. it is done in order to facilitate
redemption.The object is to keep the process of issue and redemption of
Government Securities continuous and thereby facilitate availability of the
securities on ‘tap”.
2. Switching - The Purchases of one security and Sale of another securities carried out
by the RBI in the secondary market operations is known as “Switching”.it helps the
banks and financial institutions to improve the yeild on their investments in
securities.The RBI also fixes an annual quota for the Switch Transactions of the
each institution.
3. Auctioning- It is the method of trading whereby merchants bid against one another
and the securities are sold to the highest bidder..it was introduced in 1992. Under
this method , a number of instruments of wide trading period are sold,ranging from
14 to 264 days . The bidders give written and sealed quotations which are restricted
to notified amounts.There are 2 types- Multiple Auction and Uniform Price auction.
(a) Multiple Price Auction- every bidder gets allocation according to his bid.and the
issuer collect the premium from all the bidders by quoting a rate lower than the
cut-off yield.
(b) Uniform Price Auction-competitive bids are accepted on the basis of minimum
discounted price known as cut off price.The price is determined at the auction . the
minimum price is independent of the bid prices tendered below or at at the cut-off
price.

Trading Mechanism-
1. Direct Sales- Under this method ,Public Debt effect direct sale of securities. The
loan amounts are pre-specified and the dates of opening of subscription for
Governmant loans are also specified.
2. SGL Account Method.- Under this method RBI records the transactions as book
entires only in the Securities General Ledger(SGL). The date and value of
transaction are recorded .The purchasing banker maintains a separate SGL account
for each dealing with the RBI in respect of its purchases of securities .The selling
banker also effects his transactions by filing out the prescribed SGL form ,which is
then lodged with the RBI.it helps to the banks to know their day to day balances.

Banker’s Receipt- The bank selling Government Securities issues a bank receipt
.there are facilities for SGL ,where physical transfer can be avoided. This is done
incase of “repo” or ready forward transactions. it is a sale transaction,which buy back
the securities at the stipulated future date at a price determined onthe date of sale
transaction.Under the ‘repo’ short operations are conducted by banks which sell
government Securities without owning them with a view to neutralising the
transaction by buying them at a later date.

Secondary Market Transaction.

Repo Trade-
A form of short-term borrowing for dealers in government securities. The dealer sells
the government securities to investors, usually on an overnight basis, and buys them
back the following day.

For the party selling the security (and agreeing to repurchase it in the future) it is a
repo; for the party on the other end of the transaction, (buying the security and
agreeing to sell in the future) it is a reverse repurchase agreement.

OTCEI.
Over-The-Counter Exchange Of India.
Definition-An electronic stock exchange based in India that is comprised of small- and
medium-sized firms looking to gain access to the capital markets. Like electronic
exchanges in the U.S. such as the Nasdaq, there is no central place of exchange and all
trading is done through electronic networks.

The first electronic OTC stock exchange in India was established in 1990 to provide
investors and companies with an additional way to trade and issue securities. This was
the first exchange in India to introduce market makers, which are firms that hold
shares in companies and facilitate the trading of securities by buying and selling from
other participants.

Wholesale Debt Market Segment In Gilt-Edged Securities.

What Is Wholesale Debt Market? -
A Segment of the Secondary Market ,where the investors are mostly Banks, Financial
Institutions, the RBI, Primary Dealers, Insurance companies, Provident Funds, MFs,
Corporates and FIIs.The Debt Market is today in the nature of a negotiated deal
market where most of the deals take place through telephones and are reported to the
Exchange for confirmation. It is therefore in the nature of a wholesale market.

Does India Has A Secondary Market?

The activities of buying and selling of securities in a secondary market are carried out
through the mechanism of stock exchanges.There are at present 24 Stock Exchanges
in India , recognized by the government. The first organized stock exchange was
established in the year 1887 at Bombay. When the Securities Contracts(Regulation)
Act was passed in 1956, only 7 stock exchanges in Bombay were recognized . There
Are Three important Stock exchanges In Bombay namely the Bombay Stock
Exchange(BSE) .,National Stock Exchange(NSC) and over the Counter Exchange Of
India(OTCEI).

IMPLICATION OF MONETARY POLICY

An important part of monetary management is the management of Government
securities market. The government securities market, which is often the predominant
segment of the overall debt market in many economies, plays a crucial role in the
monetary policy transmission mechanism. The Reserve Bank of India is responsible
for formulating and implementing Monetary Policy. Essentially, monetary policy
deals with the use of various policy instruments for influencing the cost and
availability of money in the economy. As macroeconomic conditions change, a
central bank may change the choice of instruments in its monetary policy. The overall
goal is to promote economic growth and ensure price stability.

The Reserve Bank of India can execute it, by increasing or decreasing the supply of
currency as well as interest rate, carry out open market operations, control credit and
vary the reserve requirements. The management of government securities market
basically depends on two factors i.e the advances made and liquidity of commercial
bank so as to help the monetary policy.

There are basically four main 'channels' which the RBI looks at:

1. Quantum channel: money supply and credit (affects real output and
price level through changes in reserves money, money supply and
credit aggregates).

2. Interest rate channel.

3. Exchange rate channel (linked to the currency).

4. Asset price.
The Reserve Bank of India plays a special and active role in the purchase and sale of
these securities as a part of its monetary management exercise. There is no
underwriting or guaranteeing required in the sale of government securities, as RBI is
policy-bound to buy a substantial portion of the loan un-subscribed by the public.
Dealing in the government securities takes place through mechanism provided by the
RBI. The brokers and the dealers including banks approved by RBI are eligible to deal
in these securities.

The size of market borrowing has an impact on the interest rates as large-scale pre-
emption of resources by the governments puts pressure on liquidity in the market and
as a result interest rates tend to go up. As the size of debt is a function of macro-
economic policy there is an ongoing dialogue between RBI and the Government on
the issue. However, RBI's exclusive role becomes important in the matter of short-
term liquidity management in the financial system.

World over, central banks operate in the short-term market to influence liquidity
conditions so that short-term interest rates, which instantaneously react to the volatile
liquidity conditions, do not unduly impact the medium and long-term interest rates in
the economy.

RBI acts as a the Governments’ Debt Manager. In this role, it sets policies in
consultation with the government and determine the operational aspects of raising
money to help the government finance its requirements like Determine the size, tenure
and nature (fixed or floating rate)of the loan , Define the issuing process including
holding of auctions , Inform the public and potential investors about upcoming
government loan auctions.
The another function of RBI is it undertakes market development efforts, including
enhanced secondary market trading and settlement mechanisms, authorisation of
primary dealers and improved transparency of issuing process to increase investor
confidence, with the objective of broadening and deepening the government securities
market. Reserve Bank of India plays an important in Developing the market for
government securities to enable the government to raise debt at a reasonable cost,
provide benchmarks for raising resources by other entities and facilitate transmission
of monetary policy actions.

RBI also perform the function of Managing credit expansion: CRR and OMO reduce
liquidity in the system and reduce the ability of banks to create credit. RBI also
controls sector specific expansion of credit by specifying maximum amounts that can
be lent, minimum margins to be maintained and higher risk weights.When RBI feels
that banks have overextended themselves to certain sectors, the flow of credit to
certain sectors is leading to an imbalanced growth of the economy or it wants to
control the price of certain commodities by preventing hoarding by wholesalers with
borrowed funds, RBI makes sector specific or commodity specific interventions.
RBI, as a banker to the government, helps government to borrow from the market by
selling their securities. RBI also determines the timing, size, and rate paid on the
issues. Rates offered by RBI on government securities are both a reflection of the
market and also an indicator to the market on the direction of interest rate movements.

To maintain favorable conditions in the government securities market it also requires

the rejection of the traditional monetary policy which is basically depended on bank
rate variation to influence economic activity. In the free market it is found that
variation in the bank rate ought to cause variation in interest rate on the government
securities and its prices.

Conclusion
One of the significant sources of borrowing funds is the government securities market
(GSM). The government rises short term and long term funds by issuing securities, these
securities do not carry risk and are as good as gold as the government promises the payment
of interest and the repayment of principal.
Bibliography

1.https://indianmoney.com/articles/government-securities-market
2.https://m.rbi.org.in/Scripts/FAQView.aspx?Id=79
3.https://m-economictimes-
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4.http://www.yourarticlelibrary.com/investment/government-securities/top-8-features-of-
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