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Importance of the Government Securities Market Research Team | Posted On Saturday, April 18,2009, 07:08 PM

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Importance of the Government Securities Market



Government Securities market (GSM) constitutes the principal section of the debt market. It not only gives resources to the government for meeting its short term and long term needs but also acts as a benchmark for pricing corporate papers of varying maturities. The government securities issues are useful in implements the fiscal policy of the government. It is critical in bringing about an effective and reliable transmission channels for the use of indirect instruments of financial control. The working of the two of the main techniques of monetary control – Open Market Operations (OMOs) and Statutory Liquidity Ratio are closely connected with the dynamics of this market.

A government security gives the highest variety of collateral for borrowing against their pledge. They have the maximum degree of security of capital and the return on each security depends on the coupon rate and period of maturity. They are traded for both long and short term period depending on the investment and liquidity preference of the investors, switches between the short dated and long dated securities take place on the basis of distinction in redemption yield.

These investors can be classified into three segments :

  • Wholesale market segment namely institutional players like banks, financial institutions, insurance companies, primary dealers and mutual funds.
  • Middle segment consist of corporate, provident funds, trusts, non-banking finance companies and small cooperative Banks with an average liquidity ranging from Rs 7 crore to Rs 25 crore.
  • Retail segment consisting of less active investors for example individuals and non-institutional investors.

The government securities market is generally an institutional investors market as standard lots of trade are around Rs 1 crore and 99 per cent of all trades are done through the Subsidiary General ledger (SGL) account, which is a sort of depository account held by the Reserve bank. Individuals cannot open SGL accounts, they have to open SGL-II accounts with a bank or a primary dealer provided they have a enormous balance and agree to trade on an ongoing basis.

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