Government Securities Market in India – A Primer

1. What is a Bond?

A bond is a debt instrument in which an investor loans money to an entity (typically

corporate or government) which borrows the funds for a defined period of time at a variable
or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign
governments to raise money to finance a variety of projects and activities. Owners of bonds
are debt holders, or creditors, of the issuer.

What is a Government Security (G-Sec)?

A Government Security (G-Sec) is a tradable instrument issued by the Central Government or

the State Governments. It acknowledges the Government’s debt obligation. Such securities
are short term (usually called treasury bills, with original maturities of less than one year) 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.

a. Treasury Bills (T-bills)

Treasury bills or T-bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three tenors,
namely, 91 day, 182 day and 364 day. 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. For
example, a 91 day Treasury bill of ₹100/- (face value) may be issued at say 98.20, that is, at
a discount of say, ₹1.80 and would be redeemed at the face value of 100/-. The return to the
investors is the difference between the maturity value or the face value (that is 100) and the
issue price.

b. Cash Management Bills (CMBs)

1.4 In 2010, Government of India, in consultation with RBI introduced a new short-term
instrument, known as Cash Management Bills (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 less than 91 days.

c. Dated G-Secs

1.5 Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is
paid on the face value, on half-yearly basis. Generally, the tenor of dated securities ranges
from 5 years to 40 years.

The Public Debt Office (PDO) of the Reserve Bank of India acts as
the registry / depository of G-Secs and deals with the issue, interest
payment and repayment of principal at maturity. Most of the dated
securities are fixed coupon securities.
The nomenclature of a typical dated fixed coupon G-Sec contains the following features -
coupon, name of the issuer, maturity year. For example, - 7.17% GS 2028 would mean:

Coupon : 7.17% paid on face value

Name of Issuer : Government of India
Date of Issue : January 8, 2018
Maturity : January 8, 2028
: Half-yearly (July 08 and January 08)
Coupon Payment Dates
every year
Minimum Amount of issue/
: ₹10,000
sale

In case, there are two securities with the same coupon and are maturing in the same year, then
one of the securities will have the month attached as suffix in the nomenclature. eg. 6.05%
GS 2019 FEB, would mean that G-Sec having coupon 6.05% that mature in February 2019
along with the other similar security having the same coupon. In this case, there is another
paper viz. 6.05%GS2019 which bears same coupon rate and is also maturing in 2019 but in
the month of June. Each security is assigned a unique number called ISIN (International
Security Identification Number) at the time of issuance itself to avoid any misunderstanding
among the traders.

If the coupon payment date falls on a Sunday or any other holiday, the coupon payment is
made on the next working day. However, if the maturity date falls on a Sunday or a holiday,
the redemption proceeds are paid on the previous working day.

1.6 Instruments:

i) Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life
(i.e. till maturity) of the bond. Most Government bonds in India are issued as fixed rate
bonds.

For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years maturing
on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly
payment being half of the annual coupon of 8.24%) of the face value on October 22 and April
22 of each year.

ii) Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed coupon rate.
Instead it has a variable coupon rate which is re-set at pre-announced intervals (say, every six
months or one year). FRBs were first issued in September 1995 in India. For example, a FRB
was issued on November 07, 2016 for a tenor of 8 years, thus maturing on November 07,
2024. The variable coupon rate for payment of interest on this FRB 2024 was decided to be
the average rate rounded off up to two decimal places, of the implicit yields at the cut-off
prices of the last three auctions of 182 day T- Bills, held before the date of notification. The
coupon rate for payment of interest on subsequent semi-annual periods was announced to be
the average rate (rounded off up to two decimal places) of the implicit yields at the cut-off
prices of the last three auctions of 182 day T-Bills held up to the commencement of the
respective semi-annual coupon periods.

iii) The Floating Rate Bond can also carry the coupon, which will have a base rate plus a
fixed spread, to be decided by way of auction mechanism. The spread will be fixed
throughout the tenure of the bond. For example, FRB 2031 (auctioned on May 4, 2018) carry
the coupon with base rate equivalent to Weighted Average Yield (WAY) of last 3 auctions
(from the rate fixing day) of 182 Day T-Bills plus a fixed spread decided by way of auction.
Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon payments. However,
like T- Bills, they are issued at a discount and redeemed at face value. The Government of
India had issued such securities in 1996. It has not issued zero coupon bonds after that.

iv) Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted
index of inflation with a view to protecting the Principal amount of the investors from
inflation. A 5 year Capital Indexed Bond, was first issued in December 1997 which matured
in 2002.

v) Inflation Indexed Bonds (IIBs) - IIBs are bonds wherein both coupon flows and Principal
amounts are protected against inflation. The inflation index used in IIBs may be Whole Sale
Price Index (WPI) or Consumer Price Index (CPI). Globally, IIBs were first issued in 1981 in
UK. In India, Government of India through RBI issued IIBs (linked to WPI) in June 2013.
Since then, they were issued on monthly basis (on last Tuesday of each month) till December
2013. Based on the success of these IIBs, Government of India in consultation with RBI
issued the IIBs (CPI based) exclusively for the retail customers in December 2013. Further
details on IIBs are available on RBI website under FAQs.

vi) Bonds with Call/ Put Options – Bonds can also be issued with features of optionality
wherein the issuer can have the option to buy-back (call option) or the investor can have
the option to sell the bond (put option) to the issuer during the currency of the bond. It may
be noted that such bond may have put only or call only or both options. The first G-Sec with
both call and put option viz. 6.72% GS 2012 was issued on July 18, 2002 for a maturity of 10
years maturing on July 18, 2012. The optionality on the bond could be exercised after
completion of five years tenure from the date of issuance on any coupon date falling
thereafter. The Government has the right to buy-back the bond (call option) at par value
(equal to the face value) while the investor had the right to sell the bond (put option) to the
Government at par value on any of the half-yearly coupon dates starting from July 18, 2007.

vii) Special Securities - Under the market borrowing program, the Government of India also
issues, from time to time, special securities to entities like Oil Marketing Companies,
Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds,
fertiliser bonds and food bonds respectively) as compensation to these companies in lieu of
cash subsidies These securities are usually long dated securities and carry a marginally higher
coupon over the yield of the dated securities of comparable maturity. These securities are,
however, not eligible as SLR securities but are eligible as collateral for market repo
transactions. The beneficiary entities may divest these securities in the secondary market to
banks, insurance companies / Primary Dealers, etc., for raising funds.

Government of India has also issued Bank Recapitalisation Bonds to specific Public Sector
Banks in 2018. These securities are named as Special GoI security and are non-transferable
and are not eligible investment in pursuance of any statutory provisions or directions
applicable to investing banks. These securities can be held under HTM portfolio without any
limit.

viii) STRIPS – Separate Trading of Registered Interest and Principal of Securities. - STRIPS
are the securities created by way of separating the cash flows associated with a regular G-Sec
i.e. each semi-annual coupon payment and the final principal payment to be received from the
issuer, into separate securities. They are essentially Zero Coupon Bonds (ZCBs). However,
they are created out of existing securities only and unlike other securities, are not issued
through auctions. Stripped securities represent future cash flows (periodic interest and
principal repayment) of an underlying coupon bearing bond. Being G-Secs, STRIPS are
eligible for SLR. All fixed coupon securities issued by Government of India, irrespective of
the year of maturity, are eligible for Stripping/Reconstitution, provided that the securities are
reckoned as eligible investment for the purpose of Statutory Liquidity Ratio (SLR) and the
securities are transferable.

The detailed guidelines of stripping/reconstitution of government securities is available in

RBI notification IDMD.GBD.2783/08.08.016/2018-19 dated May 3, 2018. For example,
when ₹100 of the 8.60% GS 2028 is stripped, each cash flow of coupon ( ₹ 4.30 each half
year) will become a coupon STRIP and the principal payment (₹100 at maturity) will become
a principal STRIP. These cash flows are traded separately as independent securities in the
secondary market. STRIPS in G-Secs ensure availability of sovereign zero coupon bonds,
which facilitate the development of a market determined zero coupon yield curve (ZCYC).
STRIPS also provide institutional investors with an additional instrument for their asset
liability management (ALM). Further, as STRIPS have zero reinvestment risk, being zero
coupon bonds, they can be attractive to retail/non-institutional investors. Market participants,
having an SGL account with RBI can place requests directly in e-kuber for
stripping/reconstitution of eligible securities (not special securities). Requests for
stripping/reconstitution by Gilt Account Holders (GAH) shall be placed with the respective
Custodian maintaining the CSGL account, who in turn, will place the requests on behalf of its
constituents in e-kuber.

ix) Sovereign Gold Bond (SGB): SGBs are unique instruments, prices of which are linked to
commodity price viz Gold. SGBs are also budgeted in lieu of market borrowing. The calendar
of issuance is published indicating tranche description, date of subscription and date of
issuance. The Bonds shall be denominated in units of one gram of gold and multiples thereof.
Minimum investment in the Bonds shall be one gram with a maximum limit of subscription
per fiscal year of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for
trusts and similar entities notified by the Government from time to time, provided that (a) in
case of joint holding, the above limits shall be applicable to the first applicant only; (b)
annual ceiling will include bonds subscribed under different tranches during initial issuance
by Government and those purchased from the secondary market; and (c) the ceiling on
investment will not include the holdings as collateral by banks and other Financial
Institutions.

The Bonds shall be repayable on the expiration of eight years from the date of issue of the
Bonds. Pre-mature redemption of the Bond is permitted after fifth year of the date of issue of
the Bonds and such repayments shall be made on the next interest payment date. The bonds
under SGB Scheme may be held by a person resident in India, being an individual, in his
capacity as an individual, or on behalf of minor child, or jointly with any other individual.
The bonds may also be held by a Trust, HUFs, Charitable Institution and University. Nominal
Value of the bonds shall be fixed in Indian Rupees on the basis of simple average of closing
price of gold of 999 purity published by the India Bullion and Jewelers Association Limited
for the last three business days of the week preceding the subscription period. The issue price
of the Gold Bonds will be ₹ 50 per gram less than the nominal value to those investors
applying online and the payment against the application is made through digital mode. The
 Bonds shall bear interest at the rate of 2.50 percent (fixed rate) per annum on the nominal
value. Interest shall be paid in half-yearly rests and the last interest shall be payable on
maturity along with the principal. The redemption price shall be fixed in Indian Rupees and
the redemption price shall be based on simple average of closing price of gold of 999 purity
of previous 3 business days from the date of repayment, published by the India Bullion and
Jewelers Association Limited. SGBs acquired by the banks through the process of invoking
lien/hypothecation/pledge alone shall be counted towards Statutory Liquidity Ratio. The
above subscription limits, interest rate discount etc. are as per the current scheme and are
liable to change going forward.

d. State Development Loans (SDLs)

1.7 State Governments also raise loans from the market which are called SDLs. SDLs are
dated securities issued through normal auction similar to the auctions conducted for dated
securities issued by the Central Government (please see question 3). Interest is serviced at
half-yearly intervals and the principal is repaid on the maturity date. Like dated securities
issued by the Central Government, SDLs issued by the State Governments also qualify for
SLR. They are also eligible as collaterals for borrowing through market repo as well as
borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF)
and special repo conducted under market repo by CCIL. State Governments have also issued
special securities under “Ujjwal Discom Assurance Yojna (UDAY) Scheme for Operational
and Financial Turnaround of Power Distribution Companies (DISCOMs)” notified by
Ministry of Power vide Office Memorandum (No 06/02/2015-NEF/FRP) dated November
20, 2015.

2. Why should one invest in G-Secs?

2.1 Holding of cash in excess of the day-to-day needs (idle funds) does not give any return.
Investment in gold has attendant problems in regard to appraising its purity, valuation,
warehousing and safe custody, etc. In comparison, investing in G-Secs has the following
advantages:

 Besides providing a return in the form of coupons (interest), G-Secs offer the maximum
safety as they carry the Sovereign’s commitment for payment of interest and repayment of
principal.
 They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need
for safekeeping. They can also be held in physical form.
 G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit
the duration of varied liability structure of various institutions.
 G-Secs can be sold easily in the secondary market to meet cash requirements.
 G-Secs can also be used as collateral to borrow funds in the repo market.
 Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds,
UDAY bonds etc) provide attractive yields.
 The settlement system for trading in G-Secs, which is based on Delivery versus Payment
(DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures
transfer of securities by the seller of securities simultaneously with transfer of funds from the
buyer of the securities, thereby mitigating the settlement risk.
 G-Sec prices are readily available due to a liquid and active secondary market and a
transparent price dissemination mechanism.
 Besides banks, insurance companies and other large investors, smaller investors like Co-
operative banks, Regional Rural Banks, Provident Funds are also required to statutory hold
G-Secs as indicated below:

A. Primary (Urban) Co-operative Banks (UCBs)

2.2 Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to co-operative
societies) provides that every primary (urban) cooperative bank shall maintain liquid assets,
the value of which shall not be less than such percentage as may be specified by Reserve
Bank in the Official Gazette from time to time and not exceeding 40% of its DTL in India as
on the last Friday of the second preceding fortnight (in addition to the minimum cash reserve
ratio (CRR) requirement). Such liquid assets shall be in the form of cash, gold or
unencumbered investment in approved securities. This is referred to as the Statutory
Liquidity Ratio (SLR) requirement. It may be noted that balances kept with State Co-
operative Banks / District Central Co-operative Banks as also term deposits with public
sector banks are now not eligible for being reckoned for SLR purpose w.e.f April 1, 2015.

B. Rural Co-operative Banks

2.3 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative Banks
(SCBs) and the District Central Co-operative Banks (DCCBs) are required to maintain assets
as part of the SLR requirement in cash, gold or unencumbered investment in approved
securities the value of which shall not, at the close of business on any day, be less than such
per cent, as prescribed by RBI, of its total net demand and time liabilities. DCCBs are
allowed to meet their SLR requirement by maintaining cash balances with their respective
State Co-operative Bank.

C. Regional Rural Banks (RRBs)

2.4 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity
Ratio (SLR) holdings in Government and other approved securities.

D. Provident funds and other entities

2.5 The non- Government provident funds, superannuation funds and gratuity funds are
required by the Central Government, effective from January 24, 2005, to invest 40% of their
incremental accretions in Central and State G-Secs, and/or units of gilt funds regulated by the
Securities and Exchange Board of India (SEBI) and any other negotiable security fully and
unconditionally guaranteed by the Central/State Governments. The exposure of a trust to any
individual gilt fund, however, should not exceed five per cent of its total portfolio at any
point of time. The investment guidelines for non- Government PFs have been recently revised
in terms of which minimum 45% and up to 50% of investments are permitted in a basket of
instruments consisting of (a) G-Secs, (b) Other securities (not in excess of 10% of total
portfolio) the principal whereof and interest whereon is fully and unconditionally guaranteed
by the Central Government or any State Government SDLs and (c) units of mutual funds set
up as dedicated funds for investment in G-Secs (not more than 5% of the total portfolio at any
point of time and fresh investments made in them shall not exceed 5% of the fresh accretions
in the year), effective from April 2015.

3. How are the G-Secs issued?

3.1 G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the
electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI.
Commercial banks, scheduled UCBs, Primary Dealers (a list of Primary Dealers with their
contact details is given in Annex 2), insurance companies and provident funds, who maintain
funds account (current account) and securities accounts (Subsidiary General Ledger (SGL)
account) with RBI, are members of this electronic platform. All members of E-Kuber can
place their bids in the auction through this electronic platform. The results of the auction are
published by RBI at stipulated time (For Treasury bills at 1:30 PM and for GoI dated
securities at 2:00 PM or at half hourly intervals thereafter in case of delay). All non-E-Kuber
members including non-scheduled UCBs can participate in the primary auction through
scheduled commercial banks or PDs (called as Primary Members-PMs). For this purpose, the
UCBs need to open a securities account with a bank / PD – such an account is called a Gilt
Account. A Gilt Account is a dematerialized account maintained with a scheduled
commercial bank or PD. The proprietary transactions in G-Secs undertaken by PMs are
settled through SGL account maintained by them with RBI at PDO. The transactions in G-
Secs undertaken by Gilt Account Holders (GAHs) through their PMs are settled through
Constituent Subsidiary General Ledger (CSGL) account maintained by PMs with RBI at
PDO for its constituent (e.g., a non-scheduled UCB).

3.2 The RBI, in consultation with the Government of India, issues an indicative half-yearly
auction calendar which contains information about the amount of borrowing, the range of the
tenor of securities and the period during which auctions will be held. A Notification and a
Press Communique giving exact particulars of the securities, viz., name, amount, type of
issue and procedure of auction are issued by the Government of India about a week prior to
the actual date of auction. RBI places the notification and a Press Release on its website
(www.rbi.org.in) and also issues advertisements in leading English and Hindi newspapers.
Auction for dated securities is conducted on Friday for settlement on T+1 basis (i.e. securities
are issued on next working day i.e. Monday). The investors are thus given adequate time to
plan for the purchase of G-Secs through such auctions. A specimen of a dated security in
physical form is

3.3 The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills of
91day, 182 day and 364 day tenors. Settlement for the T-bills auctioned is made on T+1 day
i.e. on the working day following the trade day. The Reserve Bank releases a quarterly
calendar of T-bill issuances for the upcoming quarter in the last week of the preceding
quarter. e.g. calendar for April-June period is notified in the last week of March. The Reserve
Bank of India announces the issue details of T-bills through a press release on its website
every week.

3.4 Like T-bills, Cash Management Bills (CMBs) are also issued at a discount and redeemed
at face value on maturity. The tenor, notified amount and date of issue of the CMBs depend
upon the temporary cash requirement of the Government. The tenors of CMBs is generally
less than 91 days. The announcement of their auction is made by Reserve Bank of India
through a Press Release on its website. The non-competitive bidding scheme has not been
extended to CMBs. However, these instruments are tradable and qualify for ready forward
facility. Investment in CMBs is also reckoned as an eligible investment in G-Secs by banks
for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of CMB
was issued on May 12, 2010.
3.5 Floatation of State Government Loans (State Development Loans)

In terms of Sec. 21A (1) (b) of the Reserve Bank of India Act, 1934, the RBI may, by
agreement with any State Government undertake the management of the public debt of that
State. Accordingly, the RBI has entered into agreements with 29 State Governments and one
Union Territory (UT of Puducherry) for management of their public debt. Under Article
293(3) of the Constitution of India (Under section 48A of Union territories Act, in case of
Union Territory), a State Government has to obtain the permission of the Central Government
for any borrowing as long as there is any outstanding loan that the State Government may
have from the Centre.

Market borrowings are raised by the RBI on behalf of the State Governments to the extent of
the allocations under the Market Borrowing Program as approved by the Ministry of Finance
in consultation with the Planning Commission.

RBI, in consultation with State Governments announces the indicative quantum of borrowing
on a quarterly basis. All State Governments have issued General notifications which specify
the terms and conditions for issue of SDL. Before every auction, respective state
governments issue specific notifications indicating details of the securities being issued in the
particular auction. RBI places a press release on its website and also issues advertisements in
leading English and vernacular newspapers of the respective states.

Currently, SDL auctions are held generally on Tuesdays every week. As in case of Central
Government securities, auction is held on the E-Kuber Platform. 10% of the notified amount
is reserved for the retail investors under the non-competitive bidding.

4. What are the different types of auctions used for issue of securities? What is
switch/conversion of Government Securities through auction?

Prior to introduction of auctions as the method of issuance, the interest rates were
administratively fixed by the Government. With the introduction of auctions, the rate of
interest (coupon rate) gets fixed through a market-based price discovery process.

4.1 An auction may either be yield based or price based.

i. Yield Based Auction: A yield-based auction is generally conducted when a new G-Sec
is issued. Investors bid in yield terms up to two decimal places (e.g., 8.19%, 8.20%, 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 then fixed 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. An illustrative example of
the yield-based auction is given below:

Yield based auction of a new security

Maturity Date: January 11, 2026

Coupon: It is determined in the auction (8.22% as shown in the
illustration below)
Auction date: January 08, 2016
Auction settlement date/Issue date: January 11, 2016*
Notified Amount: ₹1000 crore

* January 9 and 10 being holidays (Saturday and Sunday),

settlement is done on January 11, 2016 (T+1 settlement).

Details of bids received in the increasing order of bid yields

Cumulative Price* with
Bid Amount of bid
Bid Yield amount coupon as
No. (₹ Cr)
(₹ Cr) 8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
The issuer would get the notified amount by accepting bids up to bid at sl. no.
5. Since the bid number 6 also is at the same yield, bid numbers 5 and 6 would
get allotment on pro-rata basis so that the notified amount is not exceeded. In
the above case each of bidder at sl. no. 5 and 6 would get ₹ 50 crore. Bid
numbers 7 and 8 are rejected as the yields are higher than the cut-off yield.
*Price corresponding to the yield is determined as per the relationship given
under YTM calculation in question 24.

ii. Price Based Auction: A price based auction is conducted when Government of India
re-issues securities which have already been issued earlier. Bidders quote in terms of price
per ₹100 of face value of the security (e.g., ₹102.00, ₹101.00, 100.00, ₹ 99.00, etc., per
₹100/-). Bids are arranged in descending order of price offered 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. An illustrative example of price based auction is given below:

Price based auction of an existing security 8.22% GS

2026

Maturity Date: January 11, 2026

Coupon: 8.22%
Auction date: January 08, 2016
Auction settlement date: January 11, 2016*
Notified Amount: ₹1000 crore

* January 9 and 10 being holidays (Saturday and Sunday),

settlement is done on January 11, 2016 under T+1 cycle.

Details of bids received in the decreasing order of bid price

Cumulative
Bid Price of Amount of bid
Implicit yield amount
no. bid (₹ Cr)
(₹ Cr)
1 100.19 300 8.19% 300
 2 100.14 200 8.20% 500
3 100.13 250 8.20% 750
4 100.09 150 8.21% 900
5 100 100 8.22% 1000
6 100 100 8.22% 1100
7 99.93 150 8.23% 1250
8 99.87 100 8.24% 1350
The issuer would get the notified amount by accepting bids up to 5. Since the
bid number 6 also is at the same price, bid numbers 5 and 6 would get
allotment in proportion so that the notified amount is not exceeded. In the
above case each of bidders at sl. no. 5 and 6 would get securities worth ₹ 50
crore. Bid numbers 7 and 8 are rejected as the price quoted is less than the cut-
off price.

4.2 Depending upon the method of allocation to successful bidders, auction may be
conducted on Uniform Price basis or Multiple Price basis. 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., ₹100.00. 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 ₹100.19,
bidder 2 at ₹100.14 and so on.

4.3 An investor, depending upon his eligibility, may bid in an auction under either of the
following categories:

Competitive Bidding: In a competitive bidding, an investor bids at a specific price / yield

and is allotted securities if the price / yield quoted is within the cut-off price / yield.
Competitive bids are made by well-informed institutional investors such as banks, financial
institutions, PDs, mutual funds, and insurance companies. The minimum bid amount is
₹10,000 and in multiples of ₹10,000 in dated securities and minimum ₹ 10,000 in case of T-
Bills and in multiples of ₹ 10,000 thereafter. Multiple bidding is also allowed, i.e., an
investor may put in multiple bids at various prices/ yield levels.

Non-Competitive Bidding (NCB):

With a view to encouraging wider participation and retail holding of Government securities,
retail investors are allowed participation on “non-competitive” basis in select auctions of
dated Government of India (GoI) securities and Treasury Bills. Participation on a non-
competitive basis in the auctions will be open to a retail investor who (a) does not maintain
current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank of
India; and (b) submits the bid indirectly through an Aggregator/Facilitator permitted under
the scheme. Retail investor, for the purpose of scheme of NCB, is any person, including
individuals, firms, companies, corporate bodies, institutions, provident funds, trusts, and any
other entity as may be prescribed by RBI. Regional Rural Banks (RRBs) and Cooperative
Banks shall be covered under this Scheme only in the auctions of dated securities in view of
their statutory obligations and shall be eligible to submit their non-competitive bids directly.
State Governments, eligible provident funds in India, the Nepal Rashtra Bank, Royal
Monetary Authority of Bhutan and any Person or Institution, specified by the Bank, with the
approval of Government, shall be covered under this scheme only in the auctions of Treasury
Bills without any restriction on the maximum amount of bid for these entities and their bids
will be outside the notified amount. Under the Scheme, an investor can make only a single
bid in an auction.

Allocation of non-competitive bids from retail investors except as specified above will be
restricted to a maximum of five percent of the aggregate nominal amount of the issue within
the notified amount as specified by the Government of India, or any other percentage
determined by Reserve Bank of India. The minimum amount for bidding will be ₹10,000
(face value) and thereafter in multiples in ₹10,000 as hitherto. In the auctions of GoI dated
securities, the retail investors can make a single bid for an amount not more than Rupees Two
crore (face value) per security per auction.

In addition to scheduled banks and primary dealers, specified stock exchanges are also
permitted to act as aggregators/facilitators. These stock exchanges submit a single
consolidated non-competitive bid in the auction process and will have to put in place
necessary processes to transfer the securities so allotted in the primary auction to their
members/clients.

Allotment under the non-competitive segment will be at the weighted average rate of
yield/price that will emerge in the auction on the basis of the competitive bidding. The
Aggregator/Facilitator can recover up to six paise per ₹100 as brokerage/commission/service
charges for rendering this service to their clients. Such costs may be built into the sale price
or recovered separately from the clients. It may be noted that no other costs, such as funding
costs, should be built into the price or recovered from the client. In case the aggregate amount
of bid is more than the reserved amount (5% of notified amount), pro rata allotment would be
made. In case of partial allotments, it will be the responsibility of the Aggregator/Facilitator
to appropriately allocate securities to their clients in a transparent manner. In case the
aggregate amount of bids is less than the reserved amount, the shortfall will be taken to
competitive portion.

4.4 NCB scheme has been introduced in SDLs from August 2009. The aggregate amount
reserved for the purpose in the case of SDLs is 10% of the notified amount (e.g. ₹100 Crore
for a notified amount of ₹1000 Crore) subject to a maximum limit of 1% of notified amount
for a single bid per stock. The bidding and allotment procedure is similar to that of G-Secs.

5. What are Open Market Operations (OMOs)?

OMOs are the market operations conducted by the RBI by way of sale/ purchase of G-Secs
to/ from the market with an objective to adjust the rupee liquidity conditions in the market on
a durable basis. When the RBI feels that there is excess liquidity in the market, it resorts to
sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity
conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into
the market.

5 (b) What is meant by repurchase (buyback) of G-Secs?

Repurchase (buyback) of G-Secs is a process whereby the Government of India and State
Governments buy back their existing securities, by redeeming them prematurely, from the
holders. The objectives of buyback can be reduction of cost (by buying back high coupon
securities), reduction in the number of outstanding securities and improving liquidity in the
G-Secs market (by buying back illiquid securities) and infusion of liquidity in the system.
The repurchase by the Government of India is also undertaken for effective cash management
by utilising the surplus cash balances.

6. What is Liquidity Adjustment Facility (LAF) and whether Re-repo in

Government Securities Market is allowed?

LAF is a facility extended by RBI to the scheduled commercial banks (excluding RRBs) and
PDs to avail of liquidity in case of requirement or park excess funds with RBI in case of
excess liquidity on an overnight basis against the collateral of G-Secs including SDLs.
Basically, LAF enables liquidity management on a day to day basis. The operations of LAF
are conducted by way of repurchase agreements (repos and reverse repos – please refer to
paragraph numbers 30.4 to 30.8 under question no. 30 for more details) with RBI being the
counter-party to all the transactions. The interest rate in LAF is fixed by RBI from time to
time. LAF is an important tool of monetary policy and liquidity management. The
substitution of collateral (security) by the market participants during the tenor of the term
repo is allowed from April 17, 2017 subject to various conditions and guidelines prescribed
by RBI from time to time. The accounting norms to be followed by market participants for
repo/reverse repo transactions under LAF and MSF (Marginal Standing Facility) of RBI are
aligned with the accounting guidelines prescribed for market repo transactions. In order to
distinguish repo/reverse repo transactions with RBI from market repo transactions, a parallel
set of accounts similar to those maintained for market repo transactions but prefixed with
‘RBI’ may be maintained. Further market value of collateral securities (instead of face value)
will be reckoned for calculating haircut and securities acquired by banks under reverse repo
with RBI will be bestowed SLR status.

Scheduled commercial banks, Primary Dealers along with Mutual Funds and Insurance
Companies (subject to the approval of the regulators concerned) maintaining Subsidiary
General Ledger account with RBI are permitted to re-repo the government securities,
including SDLs and Treasury Bills, acquired under reverse repo, subject to various conditions
and guidelines prescribed by RBI time to time.

7. How and in what form can G-Secs be held?

7.1 The Public Debt Office (PDO) of RBI, acts as the registry and central depository for G-
Secs. They may be held by investors either as physical stock or in dematerialized
(demat/electronic) form. From May 20, 2002, it is mandatory for all the RBI regulated
entities to hold and transact in G-Secs only in dematerialized (SGL) form.

a. Physical form: G-Secs may be held in the form of stock certificates. A stock certificate
is registered in the books of PDO. Ownership in stock certificates cannot be transferred by
way of endorsement and delivery. They are transferred by executing a transfer form as the
ownership and transfer details are recorded in the books of PDO. The transfer of a stock
certificate is final and valid only when the same is registered in the books of PDO.
 b. Demat form: Holding G-Secs in the electronic or scripless form is the safest and the most
convenient alternative as it eliminates the problems relating to their custody, viz., loss of
security. Besides, transfers and servicing of securities in electronic form is hassle free. The
holders can maintain their securities in dematerialsed form in either of the two ways:

i. SGL Account: Reserve Bank of India offers SGL Account facility to select entities who can
hold their securities in SGL accounts maintained with the Public Debt Offices of the RBI.
Only financially strong entities viz. Banks, PDs, select UCBs and NBFCs which meet RBI
guidelines (please see RBI circular IDMD.DOD.No. 13/10.25.66/2011-12 dt Nov 18, 2011)
are allowed to maintain SGL with RBI.
ii. Gilt Account: As the eligibility to open and maintain an SGL account with the RBI is
restricted, an investor has the option of opening a Gilt Account with a bank or a PD which is
eligible to open a CSGL account with the RBI. Under this arrangement, the bank or the PD,
as a custodian of the Gilt Account holders, would maintain the holdings of its constituents in
a CSGL account (which is also known as SGL II account) with the RBI. The servicing of
securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and
maintenance of the securities. Receipt of maturity proceeds and periodic interest is also faster
as the proceeds are credited to the current account of the custodian bank / PD with the RBI
and the custodian (CSGL account holder) immediately passes on the credit to the Gilt
Account Holders (GAH).

7.2 Investors also have the option of holding G-Secs in a dematerialized account with a
depository (NSDL / CDSL, etc.). This facilitates trading of G-Secs on the stock exchanges.

8. How does the trading in G-Secs take place and what regulations are
applicable to prevent abuse? Whether value free transfer of G-Secs is
allowed?

8.1 There is an active secondary market in G-Secs. The securities can be bought / sold in the
secondary market either through (i) Negotiated Dealing System-Order Matching (NDS-OM)
(anonymous online trading) or through (ii) Over the Counter (OTC) and reported on NDS-
OM or (iii) NDS-OM-Web (para 8.5) and (iv) Stock exchanges (para 8.6)

i. NDS-OM

In August 2005, RBI introduced an anonymous screen-based order matching module called
NDS-OM. This is an order driven electronic system, where the participants can trade
anonymously by placing their orders on the system or accepting the orders already placed by
other participants. Anonymity ensures a level playing field for various categories of
participants. NDS-OM is operated by the CCIL on behalf of the RBI (Please see answer to
the question no.19 about CCIL). Direct access to the NDS-OM system is currently available
only to select financial institutions like Commercial Banks, Primary Dealers, well managed
and financially sound UCBs and NBFCs, etc. Other participants can access this system
through their custodians i.e. with whom they maintain Gilt Accounts. The custodians place
the orders on behalf of their customers. The advantages of NDS-OM are price transparency
and better price discovery.

8.2 Gilt Account holders have been given indirect access to the reporting module of NDS-
OM through custodian institutions.
8.3 Access to NDS-OM by the retail segment, comprising of individual investors having
demat account with depositories viz. NSDL and/or CDSL, desirous of participating in the G-
Sec market is facilitated by allowing them to use their demat accounts for their transactions
and holdings in G-Sec. This access would be facilitated through any of the existing NDS-OM
primary members, who also act as Depository Participants for NSDL and/or CDSL. The
scheme seeks to facilitate efficient access to retail individual investor to the same G-Sec
market being used by the large institutional investor in a seamless manner.

ii. Over the Counter (OTC)/ Telephone Market

8.4 In the G-Sec market, a participant, who wants to buy or sell a G-Sec, may contact a bank /
PD/financial institution either directly or through a broker registered with SEBI and negotiate
price and quantity of security. Such negotiations are usually done on telephone and a deal
may be struck if both counterparties agree on the amount and rate. In the case of a buyer, like
an UCB wishing to buy a security, the bank's dealer (who is authorized by the bank to
undertake transactions in G-Secs) may get in touch with other market participants over
telephone and obtain quotes. Should a deal be struck, the bank should record the details of the
trade in a deal slip (specimen given at Annex 5). The dealer must exercise due diligence with
regard to the price quoted by verifying with available sources (See question number 14 for
information on ascertaining the price of G-Secs). All trades undertaken in OTC market are
reported on the Reported segment of NDS-OM within 15 minutes, the details of which are
given under the question number 15.

iii. NDS-OM-Web

8.5 RBI has launched NDS-OM-Web on June 29, 2012 for facilitating direct participation of
gilt account holders (GAH) on NDS-OM through their primary members (PM) (as risk
controller only and not having any role in pricing of trade). The GAH have access to the same
order book of NDS-OM as the PM. GAH are in a better position to control their orders
(place/modify/cancel/hold/release) and have access to real time live quotes in the market.
Since notifications of orders executed as well as various queries are available online to the
GAH, they are better placed to manage their positions. Web based interface that leverages on
the gilt accounts already maintained with the custodian Banks/PDs provides an operationally
efficient system to retail participants. NDS OM Web is provided at no additional cost to its
users. PMs, however, may recover the actual charges paid by them to CCIL for settlement of
trades or any other charges like transaction cost, annual maintenance charges (AMC) etc. It
has been made obligatory for the Primary Members to offer the NDS-OM-Web module to
their constituent GAHs (excluding individual) for online trading in G-sec in the secondary
market. Constituents not desirous of availing this facility may do so by opting out in writing.
On the other hand, individual GAHs desirous of the NDS-OM-Web facility may be provided
the web access only on specific request.

iv. Stock Exchanges

8.6 As advised by SEBI, the stock exchanges (like NSE, BSE, MCX) have been asked to
create dedicated debt segment in their trading platforms. In compliance to this, stock
exchanges have launched debt trading (G-Secs as also corporate bonds) segment which
generally cater to the needs of retail investors. The process involved in trading of G-Secs in
Demat form in stock exchanges is as follows:
a. The Gilt Account Holder (GAH), say XYZ provident fund, approaches his custodian bank,
(say ABC), to convert its holding held by custodian bank in their CSGL account (to the
extent he wishes to trade, say ₹ 10,000), into Demat form.

b. ABC reduces the GAH’s security balance by ₹ 10,000 and advises the depository of stock
exchange (NSDL/CSDL) to increase XYZ’s Demat account by ₹ 10,000. ABC also advises
to PDO, Mumbai to reduce its CSGL balance by ₹ 10,000 and increase the CSGL balance of
NSDL/CSDL by ₹ 10,000.

c. NSDL/CSDL increases the Demat balance of XYZ by ₹ 10,000.

d. XYZ can now trade in G-Sec on stock exchange.

v. Regulations applicable to prevent abuse

8.7 RBI vide FMRD.FMSD.11/11.01.012/2018-19 dated March 15, 2019 issued directions to
prevent abuse in markets regulated by RBI. The directions are applicable to all persons
dealing in securities, money market instruments, foreign exchange instruments, derivatives or
other instruments of like nature as specified from time to time.

vi. Guidelines for Value free transfer (VFT) of Government Securities

8.8 VFT of the government securities shall mean transfer of securities from one SGL/CSGL
to another SGL/CSGL account, without consideration. Such transfers could be on account of
posting of margins, inter-depository transfers of government securities arising from trades in
exchanges between demat account holders of different depositories, gift/inheritance and
change of custodians etc. VFT would also be required in the case of distribution of securities
to the beneficiary demat/gilt accounts on allotment after participation in the non-competitive
segment of the primary auction.

RBI vide notification IDMD.CDD.No.1241/11.02.001/2018-19 dated November 16,

2018 issued separate guidelines for VFT to enable more efficient operations in the
Government securities market. Value Free Transfers between SGL/CSGL accounts not
covered by these guidelines will require specific approval of the Reserve Bank. The
guidelines prescribes list of permitted transactions for VFT and application for permission for
VFT for any other purpose may be submitted to Public Debt Office, Mumbai Regional
Office, RBI, Fort, Mumbai

9. Who are the major players in the G-Secs market?

Major players in the G-Secs market include commercial banks and PDs besides institutional
investors like insurance companies. PDs play an important role as market makers in G-Secs
market. A market maker provides firm two way quotes in the market i.e. both buy and sell
executable quotes for the concerned securities. Other participants include co-operative banks,
regional rural banks, mutual funds, provident and pension funds. Foreign Portfolio Investors
(FPIs) are allowed to participate in the G-Secs market within the quantitative limits
prescribed from time to time. Corporates also buy/ sell the G-Secs to manage their overall
portfolio.
10. What are the Do's and Don’ts prescribed by RBI for the Co-operative banks
dealing in G-Secs?

While undertaking transactions in securities, UCBs should adhere to the instructions issued
by the RBI. The guidelines on transactions in G-Secs by the UCBs have been codified in the
master circular DCBR. BPD (PCB).MC.No. 4/16.20.000/2015-16 dated July 1, 2015 which is
updated from time to time. This circular can also be accessed from the RBI website under the
Notifications – Master circulars section. The important guidelines to be kept in view by the
UCBs relate to formulation of an investment policy duly approved by their Board of
Directors, defining objectives of the policy, authorities and procedures to put through deals,
dealings through brokers, preparing panel of brokers and review thereof at annual intervals,
and adherence to the prudential ceilings fixed for transacting through each of the brokers, etc.

The important Do’s & Don’ts are summarized in the Box I below.

BOX I

Do’s & Don’ts for Dealing in G-Secs

Do’s

Segregate dealing and back-office functions. Officials deciding about purchase and sale
transactions should be separate from those responsible for settlement and accounting.
Monitor all transactions to see that delivery takes place on settlement day. The funds
account and investment account should be reconciled on the same day before close of
business.
Keep a proper record of the SGL forms received/issued to facilitate counter-checking
by their internal control systems/RBI inspectors/other auditors.
Seek a Scheduled Commercial Bank (SCB), a PD or a Financial Institution (FI) as
counterparty for transactions.
Give preference for direct deals with counter parties.
Insist on Delivery versus Payment for all transactions.
Take advantage of the NCB facility for acquiring G-Secs in the primary auctions
conducted by the RBI.
Restrict the role of the broker only to that of bringing the two parties to the deal
together, if a deal is put through with the help of broker.
Have a list of approved brokers. Utilize only brokers registered with NSE or BSE or
OTCEI for acting as intermediary.
Place a limit of 5% of total transactions (both purchases and sales) entered into by a
bank during a year as the aggregate upper contract limit for each of the approved
brokers. A disproportionate part of the business should not be transacted with or
through one or a few brokers.
Maintain and transact in G-Secs only in dematerialized form in SGL Account or Gilt
Account maintained with the CSGL Account holder.
Open and maintain Gilt account or dematerialized account
Open a funds account for securities transactions with the same Scheduled Commercial
bank or the State Cooperative bank with whom the Gilt Account is maintained.
Ensure availability of clear funds in the designated funds accounts for purchases and
sufficient securities in the Gilt Account for sales before putting through the transactions.
Observe prudential limits and abide by restrictions for investment in permitted non-SLR
 securities (Prudential limit : shall not exceed 10% of the total deposits of bank as on
March 31 of the preceding financial year) ( Instruments : (i) “A” or equivalent and
higher rated CPs, debentures and bonds, (ii) units of debt mutual funds and money
market mutual funds, (iii) shares of market infrastructure companies eg. CCIL, NPCI,
SWIFT).
The Board of Directors to peruse all investment transactions at least once a month

Don’ts

Do not undertake any purchase/sale transactions with broking firms or other

intermediaries on principal to principal basis.
Do not use brokers in the settlement process at all, i.e., both funds settlement and
delivery of securities should be done with the counter-parties directly.
Do not give power of attorney or any other authorisation under any circumstances to
brokers/intermediaries to deal on your behalf in the money and securities markets.
Do not undertake G-Secs transaction in the physical form with any broker.
Do not routinely make investments in non-SLR securities (e.g., corporate bonds, etc)
issued by companies or bodies.

11. How are the dealing transactions recorded by the dealing desk?

11.1 For every transaction entered into by the trading desk, a deal slip should be generated
which should contain data relating to nature of the deal, name of the counter-party, whether it
is a direct deal or through a broker (if it is through a broker, name of the broker), details of
security, amount, price, contract date and time and settlement date. The deal slips should be
serially numbered and verified separately to ensure that each deal slip has been properly
accounted for. Once the deal is concluded, the deal slip should be immediately passed on to
the back office (it should be separate and distinct from the front office) for recording and
processing. For each deal, there must be a system of issue of confirmation to the counter-
party. The timely receipt of requisite written confirmation from the counter-party, which must
include all essential details of the contract, should be monitored by the back office. The need
for counterparty confirmation of deals matched on NDS-OM will not arise, as NDS-OM is an
anonymous automated order matching system. In case of trades finalized in the OTC market
and reported on NDS-OM reported segment, both the buying and selling counter parties
report the trade particulars separately on the reporting platform which should match for the
trade to be settled.

11.2 Once a deal has been concluded through a broker, there should not be any substitution of
the counterparty by the broker. Similarly, the security sold / purchased in a deal should not be
substituted by another security under any circumstances.

11.3 On the basis of vouchers passed by the back office (which should be done after
verification of actual contract notes received from the broker / counter party and confirmation
of the deal by the counter party), the books of account should be independently prepared.

information on traded prices and take informed decisions while buying / selling G-Secs. The
screenshots of the above webpage are given below:
Bills). In addition, there is a screen for odd lot trading also essentially for facilitating trading
by small participants in smaller lots of less than ₹ 5 crore. The minimum amount that can be
traded in odd lot is ₹ 10,000 in dated securities, T-Bills and CMBs. The NDS-OM platform is
an anonymous platform wherein the participants will not know the counterparty to the trade.
Once an order is matched, the deal ticket gets generated automatically and the trade details
flow to the CCIL. Due to anonymity offered by the system, the pricing is not influenced by
the participants’ size and standing.

16. How do the G-Sec transactions settle?

Primary Market

16.1 Once the allotment process in the primary auction is finalized, the successful
participants are advised of the consideration amounts that they need to pay to the Government
on settlement day. The settlement cycle for auctions of all kind of G-Secs i.e. dated securities,
T-Bills, CMBs or SDLs, is T+1, i.e. funds and securities are settled on next working day from
the conclusion of the trade. On the settlement date, the fund accounts of the participants are
debited by their respective consideration amounts and their securities accounts (SGL
accounts) are credited with the amount of securities allotted to them.

Secondary Market

16.2 The transactions relating to G-Secs are settled through the member’s securities / current
accounts maintained with the RBI. The securities and funds are settled on a net basis i.e.
Delivery versus Payment System-III (DvP-III). CCIL guarantees settlement of trades on the
settlement date by becoming a central counter-party (CCP) to every trade through the process
of novation, i.e., it becomes seller to the buyer and buyer to the seller. 16.3 All outright
secondary market transactions in G-Secs are settled on a T+1 basis. However, in case of repo
transactions in G-Secs, the market participants have the choice of settling the first leg on
either T+0 basis or T+1 basis as per their requirement. RBI
vide FMRD.DIRD.05/14.03.007/2017-18 dated November 16, 2017 had permitted FPIs to
settle OTC secondary market transactions in Government Securities either on T+1 or on T+2
basis and in such cases, It may be ensured that all trades are reported on the trade date itself.

17. What is shut period?

‘Shut period’ means the period for which the securities cannot be traded. During the period
under shut, no trading of the security which is under shut is allowed. The main purpose of
having a shut period is to facilitate finalizing of the payment of maturity redemption proceeds
and to avoid any change in ownership of securities during this process. Currently, the shut
period for the securities held in SGL accounts is one day.

18. What is Delivery versus Payment (DvP) Settlement?

Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of
securities and funds happen simultaneously. This ensures that unless the funds are paid, the
securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in
transactions. There are three types of DvP settlements, viz., DvP I, II and III which are
explained below:
i. DvP I – The securities and funds legs of the transactions are settled on a gross basis, that is,
the settlements occur transaction by transaction without netting the payables and receivables
of the participant.

ii. DvP II – In this method, the securities are settled on gross basis whereas the funds are
settled on a net basis, that is, the funds payable and receivable of all transactions of a party
are netted to arrive at the final payable or receivable position which is settled.

iii. DvP III – In this method, both the securities and the funds legs are settled on a net basis
and only the final net position of all transactions undertaken by a participant is settled.

Liquidity requirement in a gross mode is higher than that of a net mode since the payables
and receivables are set off against each other in the net mode.

19. What is the role of the Clearing Corporation of India Limited (CCIL)?

The CCIL is the clearing agency for G-Secs. It acts as a Central Counter Party (CCP) for all
transactions in G-Secs by interposing itself between two counterparties. In effect, during
settlement, the CCP becomes the seller to the buyer and buyer to the seller of the actual
transaction. All outright trades undertaken in the OTC market and on the NDS-OM platform
are cleared through the CCIL. Once CCIL receives the trade information, it works out
participant-wise net obligations on both the securities and the funds leg. The payable /
receivable position of the constituents (gilt account holders) is reflected against their
respective custodians. CCIL forwards the settlement file containing net position of
participants to the RBI where settlement takes place by simultaneous transfer of funds and
securities under the ‘Delivery versus Payment’ system. CCIL also guarantees settlement of
all trades in G-Secs. That means, during the settlement process, if any participant fails to
provide funds/ securities, CCIL will make the same available from its own means. For this
purpose, CCIL collects margins from all participants and maintains ‘Settlement Guarantee
Fund’.

20. What is the ‘When Issued’ market and “Short Sale”?

"When, as and if issued" (commonly known as ‘When Issued’) security refers to a

security that has been authorized for issuance but not yet actually issued. When Issued
trading takes place between the time a Government Security is announced for issuance and
the time it is actually issued. All 'When Issued' transactions are on an 'if' basis, to be settled if
and when the actual security is issued. RBI vide its notification
FMRD.DIRD.03/14.03.007/2018-19 dated July 24, 2018 has issued When Issued
Transactions (Reserve Bank) Directions, 2018 applicable to ‘When Issued’ transactions in
Central Government securities.

Both new and reissued Government securities issued by the Central Government are eligible
for ‘When Issued’ transactions. Eligibility of an issue for ‘When Issue’ trades would be
indicated in the respective specific auction notification. Participants eligible to undertake both
net long and short position in ‘When Issued’ market are (a) All entities which are eligible to
participate in the primary auction of Central Government securities,(b) However, resident
individuals, Hindu Undivided Families (HUF), Non-Resident Indians (NRI) and Overseas
Citizens of India (OCI) are eligible to undertake only long position in ‘When Issued’
securities. (c) Entities other than scheduled commercial banks and Primary Dealers (PDs),
shall close their short positions, if any, by the close of trading on the date of auction of the
underlying Central Government security.

When Issued transactions would commence after the issue of a security is notified by the
Central Government and it would cease at the close of trading on the date of auction. All
‘When Issued’ transactions for all trade dates shall be contracted for settlement on the date of
issue. When Issued’ transactions shall be undertaken only on the Negotiated Dealing System-
Order Matching (NDS-OM) platform. However, an existing position in a ‘When Issued’
security may be closed either on the NDS-OM platform or outside the NDS-OM platform,
i.e., through Over-the-Counter (OTC) market. The open position limits are prescribed in the
directions. All NDS-OM members participating in the ‘When Issued’ market are required to
have in place a written policy on ‘When Issued’ trading which should be approved by the
Board of Directors or equivalent body.

"Short sale" means sale of a security one does not own.

22. How is the Price of a bond calculated? What is the total consideration
amount of a trade and what is accrued interest?

The price of a bond is nothing but the sum of present value of all future cash flows of the
bond. The interest rate used for discounting the cash flows is the Yield to Maturity (YTM)
(explained in detail in question no. 24) of the bond. Price can be calculated using the excel
function ‘Price’ (please refer to Annex 6).

Accrued interest is the interest calculated for the broken period from the last coupon day till a
day prior to the settlement date of the trade. Since the seller of the security is holding the
security for the period up to the day prior to the settlement date of the trade, he is entitled to
receive the coupon for the period held. During settlement of the trade, the buyer of security
will pay the accrued interest in addition to the agreed price and pays the ‘consideration
amount’.

An illustration is given below;

For a trade of ₹ 5 crore (face value) of security 8.83% 2023 for settlement date Jan 30, 2014
at a price of ₹100.50, the consideration amount payable to the seller of the security is worked
out below:

Here the price quoted is called ‘clean price’ as the ‘accrued interest’ component is not
added to it.

Accrued interest:

The last coupon date being Nov 25, 2013, the number of days in broken period till Jan 29,
2014 (one day prior to settlement date i.e. on trade day) are 65.

The accrued interest on = 8.83 x (65/360)

 ₹100 face value for 65 days
= ₹1.5943

When we add the accrued interest component to the ‘clean price’, the resultant price is called
the ‘dirty price’. In the instant case, it is 100.50+1.5943 = ₹102.0943

The total consideration = Face value of trade x

amount dirty price
= 5,00,00,000 x
(102.0943/100)
= ₹ 5,10,47,150

23. What is the relationship between yield and price of a bond?

If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or
market yields decline, the price of the bond rises. In other words, the yield of a bond is
inversely related to its price. The relationship between yield to maturity and coupon rate of
bond may be stated as follows:

 When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM > > coupon yield.
 When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield > > YTM.
 i) Coupon Yield

24.2 The coupon yield is simply the coupon payment as a percentage of the face value.
Coupon yield refers to nominal interest payable on a fixed income security like G-Sec. This is
the fixed return the Government (i.e., the issuer) commits to pay to the investor. Coupon
yield thus does not reflect the impact of interest rate movement and inflation on the nominal
interest that the Government pays.

Coupon yield = Coupon Payment / Face Value

Illustration:

Coupon: 8.24
Face Value: ₹100
Market Value: ₹103.00
Coupon yield = 8.24/100 = 8.24%

ii) Current Yield

24.3 The current yield is simply the coupon payment as a percentage of the bond’s purchase
price; in other words, it is the return a holder of the bond gets against its purchase price which
may be more or less than the face value or the par value. The current yield does not take into
account the reinvestment of the interest income received periodically.

Current yield = (Annual coupon rate / Purchase price) X100

Illustration:
The current yield for a 10 year 8.24% coupon bond selling for ₹103.00 per ₹100 par value is
calculated below:

Annual coupon interest = 8.24% x ₹100 = ₹8.24

Current yield = (8.24/103) X 100 = 8.00%

The current yield considers only the coupon interest and ignores other sources of return that
will affect an investor’s return.

iii) Yield to Maturity

24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its
maturity. The price of a bond is simply the sum of the present values of all its remaining cash
flows. Present value is calculated by discounting each cash flow at a rate; this rate is the
YTM. Thus, YTM is the discount rate which equates the present value of the future cash
flows from a bond to its current market price. In other words, it is the internal rate of return
on the bond. The calculation of YTM involves a trial-and-error procedure. A calculator or
software can be used to obtain a bond’s YTM easily (please see the Box III).

25. What is the day count conventions used in calculating bond yields?

Day count convention refers to the method used for arriving at the holding period (number of
days) of a bond to calculate the accrued interest. As the use of different day count
conventions can result in different accrued interest amounts, it is appropriate that all the
participants in the market follow a uniform day count convention.

For example, the conventions followed in Indian market are given below.

Bond market: The day count convention followed is 30/360, which means that irrespective of
the actual number of days in a month, the number of days in a month is taken as 30 and the
number of days in a year is taken as 360.

Money market: The day count convention followed is actual/365, which means that the actual
number of days in a month is taken for number of days (numerator) whereas the number of
days in a year is taken as 365 days. Hence, in the case of T-Bills, which are essentially money
market instruments, money market convention is followed.

In some countries, participants use actual/actual, some countries use actual/360 while some
use 30/actual. Hence the convention changes in different countries and in different markets
within the same country (eg. Money market convention is different than the bond market
convention in India).

26. How is the yield of a T- Bill calculated?

It is calculated as per the following formula

27. What is Duration?

27.1 Duration (also known as Macaulay Duration) of a bond is a measure of the time taken to
recover the initial investment in present value terms. In simplest form, duration refers to the
payback period of a bond to break even, i.e., the time taken for a bond to repay its own
purchase price. Duration is expressed in number of years. A step by step approach for
working out duration is given in the Box IV below.

Box: IV

Calculation for Duration

First, each of the future cash flows is discounted to its respective present value for each
period. Since the coupons are paid out every six months, a single period is equal to six
months and a bond with two years maturity will have four time periods.

Second, the present values of future cash flows are multiplied with their respective
time periods (these are the weights). That is the PV of the first coupon is multiplied by
1, PV of second coupon by 2 and so on.

Third, the above weighted PVs of all cash flows is added and the sum is divided by the
current price (total of the PVs in step 1) of the bond. The resultant value is the duration
in no. of periods. Since one period equals to six months, to get the duration in no. of
year, divide it by two. This is the time period within which the bond is expected to pay
back its own value if held till maturity.
 Illustration:

Taking a bond having 2 years maturity, and 10% coupon, and current price of ₹101.79,
the cash flows will be (prevailing 2 year yield being 9%):

Time period (half year) 1 2 3 4

Total
Inflows (₹) 5 5 5 105
PV at a yield of 9% 4.78 4.58 4.38 88.05 101.79
PV*time 4.78 9.16 13.14 352.20 379.28
Duration in number of periods = 379.28/101.79 = 3.73

Duration in years = 3.73/2 = 1.86 years

More formally, duration refers to:

a. The weighted average term (time from now to payment) of a bond's cash flows or of any
series of linked cash flows.
b. The higher the coupon rate of a bond, the shorter the duration (if the term of the bond is kept
constant).
c. Duration is always less than or equal to the overall life (to maturity) of the bond.
d. Only a zero coupon bond (a bond with no coupons) will have duration equal to its maturity.

29. What are the risks involved in holding G-Secs? What are the techniques for
mitigating such risks?

G-Secs are generally referred to as risk free instruments as sovereigns rarely default on their
payments. However, as is the case with any financial instrument, there are risks associated
with holding the G-Secs. Hence, it is important to identify and understand such risks and take
appropriate measures for mitigation of the same. The following are the major risks associated
with holding G-Secs:

29.1 Market risk – Market risk arises out of adverse movement of prices of the securities
due to changes in interest rates. This will result in valuation losses on marking to market or
realizing a loss if the securities are sold at adverse prices. Small investors, to some extent, can
mitigate market risk by holding the bonds till maturity so that they can realize the yield at
which the securities were actually bought.

29.2 Reinvestment risk – Cash flows on a G-Sec includes a coupon every half year and
repayment of principal at maturity. These cash flows need to be reinvested whenever they are
paid. Hence there is a risk that the investor may not be able to reinvest these proceeds at yield
prevalent at the time of making investment due to decrease in interest rates prevailing at the
time of receipt of cash flows by investors.

29.3 Liquidity risk – Liquidity in G-Secs is referred to as the ease with which security can
be bought and sold i.e. availability of buy-sell quotes with narrow spreads. Liquidity risk
refers to the inability of an investor to liquidate (sell) his holdings due to non-availability of
buyers for the security, i.e., no trading activity in that particular security or circumstances
resulting in distressed sale (selling at a much lower price than its holding cost) causing loss to
the seller. Usually, when a liquid bond of fixed maturity is bought, its tenor gets reduced due
to time decay. For example, a 10-year security will become 8 year security after 2 years due
to which it may become illiquid. The bonds also become illiquid when there are no frequent
reissuances by the issuer (RBI) in those bonds. Bonds are generally reissued till a sizeable
amount becomes outstanding under that bond. However, issuer and sovereign have to ensure
that there is no excess burden on Government at the time of maturity of the bond as very
large amount maturing on a single day may affect the fiscal position of Government. Hence,
reissuances for securities are generally stopped after outstanding under that bond touches a
particular limit. Due to illiquidity, the investor may need to sell at adverse prices in case of
urgent funds requirement. However, in such cases, eligible investors can participate in market
repo and borrow the money against the collateral of such securities.

Risk Mitigation

29.4 Holding securities till maturity could be a strategy through which one could avoid
market risk. Rebalancing the portfolio wherein the securities are sold once they become short
term and new securities of longer tenor are bought could be followed to manage the portfolio
risk. However, rebalancing involves transaction and other costs and hence needs to be used
judiciously. Market risk and reinvestment risk could also be managed through Asset Liability
Management (ALM) by matching the cash flows with liabilities. ALM could also be
undertaken by matching the duration of the assets and liabilities.

Advanced risk management techniques involve use of derivatives like Interest Rate Swaps
(IRS) through which the nature of cash flows could be altered. However, these are complex
instruments requiring advanced level of expertise for proper understanding. Adequate
caution, therefore, need to be observed for undertaking the derivatives transactions and such
transactions should be undertaken only after having complete understanding of the associated
risks and complexities.

30. What is Money Market?

30.1 While the G-Secs market generally caters to the investors with a long-term investment
horizon, the money market provides investment avenues of short term tenor. Money market
transactions are generally used for funding the transactions in other markets including G-Secs
market and meeting short term liquidity mismatches. By definition, money market is for a
maximum tenor of one year. Within the one year, depending upon the tenors, money market
is classified into:

i. Overnight market - The tenor of transactions is one working day.

ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.

iii. Term money market – The tenor of the transactions is from 15 days to one year.

What are the different money market instruments?

30.2 Money market instruments include call money, repos, T- Bills (for details refer para
1.3), Cash Management Bills (for details refer para 1.4), Commercial Paper, Certificate of
Deposit and Collateralized Borrowing and Lending Obligations (CBLO).

Call money market

30.3 Call money market is a market for uncollateralized lending and borrowing of funds. This
market is predominantly overnight and is open for participation only to scheduled
commercial banks and the primary dealers.

Repo market

30.4 Repo or ready forward contact is an instrument for borrowing funds by selling securities
with an agreement to repurchase the said securities on a mutually agreed future date at an
agreed price which includes interest for the funds borrowed.

30.5 The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds
against buying of securities with an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent.

30.6 It can be seen from the definition above that there are two legs to the same transaction in
a repo/ reverse repo. The duration between the two legs is called the ‘repo period’.
Predominantly, repos are undertaken on overnight basis, i.e., for one day period. Settlement
of repo transactions happens along with the outright trades in G-Secs.

30.7 The consideration amount in the first leg of the repo transactions is the amount borrowed
by the seller of the security. On this, interest at the agreed ‘repo rate’ is calculated and paid
along with the consideration amount of the second leg of the transaction when the borrower
buys back the security. The overall effect of the repo transaction would be borrowing of
funds backed by the collateral of G-Secs.

30.8 The repo market is regulated by the Reserve Bank of India. All the above mentioned
repo market transactions should be traded/reported on the electronic platform called the
Clearcorp Repo Order Matching System (CROMS).

30.9 As part of the measures to develop the corporate debt market, RBI has permitted select
entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs, NBFCs,
mutual funds, housing finance companies, insurance companies) to undertake repo in
corporate debt securities. This is similar to repo in G-Secs except that corporate debt
securities are used as collateral for borrowing funds. Only listed corporate debt securities that
are rated ‘AA’ or above by the rating agencies are eligible to be used for repo. Commercial
paper, certificate of deposit, non-convertible debentures of original maturity less than one
year are not eligible for this purpose. These transactions take place in the OTC market and
are required to be reported on FIMMDA platform within 15 minutes of the trade for
dissemination of trade information. They are also to be reported on the clearing house of any
of the exchanges for the purpose of clearing and settlement.

Triparty Repo

"Tri-party repo" means a repo contract where a third entity (apart from the borrower and
lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo
to facilitate services like collateral selection, payment and settlement, custody and
management during the life of the transaction. Funds borrowed under repo including tri-party
repo in government securities shall be exempted from CRR/SLR computation and the
security acquired under repo shall be eligible for SLR provided the security is primarily
eligible for SLR as per the provisions of the Act under which it is required to be maintained.
Tri Party Repo Dealing System (TREPS) facilitates, borrowing and lending of funds, in
Triparty Repo arrangement. CCIL is the Central Counterparty to all trades from TREPS and
also perform the role and responsibilities of Triparty Repo Agent. All the repo eligible
entities are entitled to participate in Triparty Repo. The entity type admitted include, Public
Sector Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial Institutions,
Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFCs,
Corporates, Provident/ Pension Funds, Payment Banks, Small Finance Banks, etc.

TREPS Dealing System is an anonymous order matching System provided by CCDS

(Clearcorp Dealing Systems (India) Ltd) to enable Members to borrow and lend funds. It also
disseminates online information regarding deals concluded, volumes, rate etc., and such other
notifications as relevant to borrowing and lending under Triparty Repo by the members. The
borrowing and/ or lending can be done for settlement type T+0 and T+1.

Commercial Paper (CP)

30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the form of
a promissory note and held in a dematerialized form through any of the depositories approved
by and registered with SEBI. A CP is issued in minimum denomination of ₹5 lakh and
multiples thereof and shall be issued at a discount to face value No issuer shall have the issue
of CP underwritten or co-accepted and options (call/put) are not permitted on a CP.
Companies, including NBFCs and AIFIs, other entities like co-operative societies,
government entities, trusts, limited liability partnerships and any other body corporate having
presence in India with net worth of ₹100 cr or higher and any other entities specifically
permitted by RBI are eligible to issue Commercial papers subject to conditions specified by
RBI. All residents, and non-residents permitted to invest in CPs under Foreign Exchange
Management Act (FEMA), 1999 are eligible to invest in CPs; however, no person can invest
in CPs issued by related parties either in the primary or secondary market. Investment by
regulated financial sector entities will be subject to such conditions as the concerned
regulator may impose.

RBI has issued Reserve Bank Commercial Paper Directions 2017 - FMRD.DIRD.01/CGM
(TRS) - 2017 dated August 10, 2017

Certificate of Deposit (CD)

30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Banks can issue CDs for maturities
from 7 days to one year whereas eligible FIs can issue for maturities from 1 year to 3 years.

31. What are the role and functions of FIMMDA & FBIL

31.1 The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an
association of Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers
and Insurance Companies was incorporated as a Company under section 25 of the Companies
Act,1956 on June 3, 1998. FIMMDA is a voluntary market body for the bond, money and
derivatives markets. FIMMDA has members representing all major institutional segments of
the market. The membership includes Nationalized Banks such as State Bank of India, its
associate banks and other nationalized banks; Private sector banks such as ICICI Bank,
HDFC Bank; Foreign Banks such as Bank of America, Citibank, Financial institutions such
as IDFC, EXIM Bank, NABARD, Insurance Companies like Life Insurance Corporation of
India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company
and all Primary Dealers.

31.2 FIMMDA represents market participants and aids the development of the bond, money
and derivatives markets. It acts as an interface with the regulators on various issues that
impact the functioning of these markets. FIMMDA also plays a constructive role in the
evolution of best market practices by its members so that the market as a whole operates
transparently as well as efficiently.

31.3 Financial Benchmarks India Pvt. Ltd (FBIL) was incorporated in 2014 as per the
recommendations of the Committee on Financial Benchmarks. FBIL has taken over existing
benchmarks such as Mumbai Inter-Bank Outright Rate (MIBOR) and option volatility and
introduced new benchmarks such as Market Repo Overnight Rate (MROR), Certificate of
Deposits (CDs) and T-Bills yield curves. The development of FBIL as an independent
organisation for administration of all financial market benchmarks including valuation
benchmarks is important for the credibility of these benchmarks and integrity of financial
markets. FBIL has assumed the responsibility for administering valuation of Government
securities with effect from March 31, 2018.

FBIL has also assumed the responsibility for computation and dissemination of the daily
“Reference Rate” for Spot USD/INR and other major currencies against the Rupee, which
was previously being done by the Reserve Bank.

Glossary of Important Terms and Commonly Used Market Terminology

Accrued Interest

The accrued interest on a bond is the amount of interest accumulated on a bond since the last
coupon payment. The interest has been earned, but because coupons are paid only on coupon
dates, the investor has not gained the money yet. In India day count convention for G-Secs is
30/360.

Auction –Multiple price and Uniform Price

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. On the other hand, 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.

Bid Price/ Yield

The price/yield being offered by a potential buyer for a security.

Big Figure

When the price is quoted as ₹102.35, the portion other than decimals (102) is called the big
figure.

Competitive Bid

Competitive bid refers to the bid for the stock at the price stated by a bidder in an auction.

Coupon

The rate of interest paid on a debt security as calculated on the basis of the security’s face
value.

Coupon Frequency

Coupon payments are made at regular intervals throughout the life of a debt security and may
be quarterly, semi-annual (twice a year) or annual payments.

Discount

When the price of a security is below the par value, it is said to be trading at a discount. The
value of the discount is the difference between the FV and the Price. For example, if a
security is trading at ₹ 99, the discount is ₹ 1.

Duration (Macaulay Duration)

Duration of a bond is the number of years taken to recover the initial investment of a bond. It
is calculated as the weighted average number of years to receive the cash flow wherein the
present value of respective cash flows are multiplied with the time to that respective cash
flows. The total of such values is divided by the price of the security to arrive at the duration.
Refer to Box IV under question 27.

Face Value

Face value is the amount that is to be paid to an investor at the maturity date of the security.
Debt securities can be issued at varying face values, however in India they typically have a
face value of ₹100. The face value is also known as the repayment amount. This amount is
also referred as redemption value, principal value (or simply principal), maturity value or par
value.

Floating-Rate Bond

Bonds whose coupon rate is re-set at predefined intervals and is based on a pre-specified
market based interest rate.

Gilt/ G-Secs

G-Secs are also known as gilts or gilt edged securities. “G-Sec” means a security created and
issued by the Government for the purpose of raising a public loan or for any other purpose as
may be notified by the Government in the Official Gazette and having one of the forms
mentioned in the G-Secs Act, 2006.

Market Lot

Market lot refers to the standard value of the trades that happen in the market. The standard
market lot size in the G-Secs market is ₹ 5 crore in face value terms.

Maturity Date

The date when the principal (face value) is paid back. The final coupon and the face value of
a debt security is repaid to the investor on the maturity date. The time to maturity can vary
from short term (1 year) to long term (30 years).

Non-Competitive Bid

NCB means the bidder would be able to participate in the auctions of dated G-Secs without
having to quote the yield or price in the bid. The allotment to the non-competitive segment
will be at the weighted average rate that will emerge in the auction on the basis of
competitive bidding. It is an allocating facility wherein a part of total securities are allocated
to bidders at a weighted average price of successful competitive bid. (Please also see
paragraph no.4.3 under question no.4).

Odd Lot

Transactions of any value other than the standard market lot size of ₹ 5 crore are referred to
as odd lot. Generally, the value is less than the ₹ 5 crore with a minimum of ₹10,000/-. Odd
lot transactions are generally done by the retail and small participants in the market.

Par value

Par value is nothing but the face value of the security which is ₹ 100 for G-Secs. When the
price of a security is equal to face value, the security is said to be trading at par.

Premium

When the price of a security is above the par value, the security is said to be trading at
premium. The value of the premium is the difference between the price and the face value.
For example, if a security is trading at ₹102, the premium is ₹ 2.

Price

The price quoted is for per ₹ 100 of face value. The price of any financial instrument is equal
to the present value of all the future cash flows. The price one pays for a debt security is
based on a number of factors. Newly-issued debt securities usually sell at, or close to, their
face value. In the secondary market, where already-issued debt securities are bought and sold
between investors, the price one pays for a bond is based on a host of variables, including
market interest rates, accrued interest, supply and demand, credit quality, maturity date, state
of issuance, market events and the size of the transaction.
Primary Dealers

In order to accomplish the objective of meeting the Government borrowing needs as cheaply
and efficiently as possible, a group of highly qualified financial firms/ banks are appointed to
play the role of specialist intermediaries in the G-Sec market between the issuer on the one
hand and the market on the other. Such entities are generally called Primary dealers or market
makers. In return of a set of obligations, such as making continuous bids and offer price in
the marketable G-Secs or submitting reasonable bids in the auctions, these firms receive a set
of privileges in the primary/ secondary market.

Real Time Gross Settlement (RTGS) system

RTGS system is a funds transfer mechanism for transfer of money from one bank to another
on a “real time” and on “gross” basis. This is the fastest possible money transfer system
through the banking channel. Settlement in “real time” means payment transaction is not
subjected to any waiting period. The transactions are settled as soon as they are processed.
“Gross settlement” means the transaction is settled on one to one basis without bunching with
any other transaction. Considering that money transfer takes place in the books of the
Reserve Bank of India, the payment is taken as final and irrevocable.

Repo Rate

Repo rate is the return earned on a repo transaction expressed as an annual interest rate.

Repo/Reverse Repo

Repo means an instrument for borrowing funds by selling securities of the Central
Government or a State Government or of such securities of a local authority as may be
specified in this behalf by the Central Government or foreign securities, with an agreement to
repurchase the said securities on a mutually agreed future date at an agreed price which
includes interest for the fund borrowed.

Reverse Repo means an instrument for lending funds by purchasing securities of the Central
Government or a State Government or of such securities of a local authority as may be
specified in this behalf by the Central Government or foreign securities, with an agreement to
resell the said securities on a mutually agreed future date at an agreed price which includes
interest for the fund lent.

Residual Maturity

The remaining period until maturity date of a security is its residual maturity. For example, a
security issued for an original term to maturity of 10 years, after 2 years, will have a residual
maturity of 8 years.

Secondary Market

The market in which outstanding securities are traded. This market is different from the
primary or initial market when securities are sold for the first time. Secondary market refers
to the buying and selling that goes on after the initial public sale of the security.
Tap Sale

Under Tap sale, a certain amount of securities is created and made available for sale,
generally with a minimum price, and is sold to the market as bids are made. These securities
may be sold over a period of day or even weeks; and authorities may retain the flexibility to
increase the (minimum) price if demand proves to be strong or to cut it if demand weakens.
Tap and continuous sale are very similar, except that with Tap sale the debt manager tends to
take a more pro-active role in determining the availability and indicative price for tap sales.
Continuous sale are essentially at the initiative of the market.

Treasury Bills

Debt obligations of the Government that have maturities of one year or less are normally
called Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/
Government. They are instruments issued at a discount to the face value and form an integral
part of the money market.

Underwriting

The arrangement by which investment bankers undertake to acquire any unsubscribed portion
of a primary issuance of a security.

Weighted Average Price/ Yield

It is the weighted average mean of the price/ yield where weight being the amount used at
that price/ yield. The allotment to the non-competitive segment will be at the weighted
average price/yield that will emerge in the auction on the basis of competitive bidding.

Yield

The annual percentage rate of return earned on a security. Yield is a function of a security’s
purchase price and coupon interest rate. Yield fluctuates according to numerous factors
including global markets and the economy.

Yield to Maturity (YTM)

Yield to maturity is the total return one would expect to receive if the security is being held
until maturity. Yield to maturity is essentially the discount rate at which the present value of
future payments (investment income and return of principal) equals the price of the security.

Yield Curve

The graphical relationship between yield and maturity among bonds of different maturities
and the same credit quality. This curve shows the term structure of interest rates. It also
enables investors to compare debt securities with different maturities and coupons.