Government Bonds

A government bond is a debt instrument issued by the Central and State

Governments of India. Issuance of such bonds occur when the issuing body
(Central or State governments) faces a liquidity crisis and requires funds for the
purpose of infrastructure development.

Government bond in India is essentially a contract between the issuer and the
investor, wherein the issuer guarantees interest earnings on the face value of
bonds held by investors along with repayment of the principal value on a
stipulated date.

Government Bonds India, fall under the broad category of government

securities (G-Sec) and are primarily long term investment tools issued for
periods ranging from 5 to 40 years. It can be issued by both Central and State
governments of India. Government bonds issued by State Governments are also
called State Development Loans (SDLs).

Initially, most G-Secs were issued for the purpose of large investors, such as
companies and commercial banks. However, eventually, GOI made government
securities available to smaller investors such as individual investors, co-
operative banks, etc.

There are multiple variants of bonds issued by GOI and State Governments
which cater to the various investment objectives of investors. The Government
Bond interest rates, also called a coupon, can either be fixed or floating and
disbursed on a semi-annual basis. In most cases, GOI issues bonds at a fixed
coupon rate in the market.

What is a Government Bond?

Government bonds, or G-Secs as they are commonly known, are debt securities
that the central and state governments of India issue. These bonds are issued to
raise money from the general public to cover its budgetary deficit and other
infrastructure development initiatives.

A government bond in India is, in the simplest terms, a legal agreement between
the issuer and the investor. The bonds have a fixed interest rate and a specified
maturity date, and the investors receive regular interest payments until maturity
on the face value of the bonds.

Since the issuing government backs them, government bonds are typically seen
as low-risk investments. It comes in an array of tenures, ranging from a few
months to several years, and offers set interest rates. Investors can purchase and
sell such bonds on the secondary market since they can also be traded on stock
exchanges.

It’s important to remember that government bonds come in two varieties: short-
term (also known as Treasury bills, with initial maturities of less than one year)
and long-term (also known as government bonds or dated securities, with
original maturities of a year or more).

Types of Government Bonds in India?

The government issues several types of government bonds or debt securities to

raise funds for various purposes. These bonds differ in nature, coupon rate,
maturity date, principal amount, etc. Here is a detailed government bonds in
India list to make an informed investment decision for the safest debt
instruments

A.Treasury Bills

Treasury bills, also popularly known as T-bills, are short-term money market
instruments issued by the Reserve Bank of India on behalf of the central
government. T-bills are issued in three maturity periods: 91 days, 182 days, and
364 days which are issued weekly.

These securities do not have coupon payments; they are issued at a discount and
redeemed at face value at the time of maturity. For example, a treasury bill that
has a face value of Rs. 100 is issued at a discounted price of Rs. 98.20 which
will be converted to its nominal value of Rs.100 upon redemption. If an entity
buys it, the gain at redemption would be Rs. (100 minus 98.20) = Rs. 1.80.
The Reserve Bank of India auctions 91-day, 182-day, and 364-day T-bills every
Wednesday

B. Cash Management Bills (CMBS)

CMBs are short-term instruments that were launched in 2010 by the Reserve
Bank of India to meet temporary mismatches in cash flow. The CMBs have the
same features as T-bills, but their maturity period is less than 91 days.

C. State Development Loans

State Development Loans (SDLs) are dated securities issued by state

governments to fund their fiscal deficits. Interest is paid half-yearly, and the
principal is repaid on the maturity date. SDLs also qualify for the State
Liquidity Ratio (SLR).

D. Dated Government Securities

Dated government securities are long-term instruments of the government for

mobilizing funds. They carry either a fixed or floating rate of interest, which is
paid on the face value at regular intervals. Usually, the tenure of dated securities
ranges from 5 to 40 years. A typical dated fixed coupon G-Sec contains the
coupon, the name of the issuer, and the maturity year. For example- 7.17% GS
2028 would stand for a bond paying a coupon of 7.17% issued by the
government of India and maturing in 2028.

There are various forms of dated government securities with different maturity
dates.

● Fixed Rate Bonds

The Government issues these bonds at a fixed interest rate. This fixed amount is
based on the percentage value of the principal amount at regular intervals to the
bondholders. The government bond India interest rate remains constant until the
bond matures, irrespective of fluctuating market conditions.

Fixed-rate bonds can be issued for one year to thirty years or more. The longer
the tenure, the higher the interest rate offered to compensate for the longer lock-
in period.

● Floating Rate Bonds

Floating rate bonds are government bonds subject to periodic fluctuations in the
rate of return. These bonds have a fixed coupon rate but base the government
bonds' interest rates on the prevailing market conditions.

The government changes the interest rates of these bonds, thus impacting the
rate of return for the bondholders. For example, while issuing these bonds, the
government may specify a pre-announced interval of 6 months, which means
the interest rate is reset every six months. Some floating rate bonds have two
components–a base rate and a fixed spread.

● Sovereign Gold Bonds

Under the supervision of the Reserve Bank of India, the government issues
sovereign gold bonds to allow investors to invest in gold. These bondholders do
not need to buy and store gold physically but can benefit from the domestic gold
rate increase.

The price of these bonds is directly related to the domestic gold rates. RBI uses
the simple average of the closing price of 99.99% pure gold three days before
the bond's issuance to determine its nominal value. SGBs have a fixed maturity
period of 8 years, but holders can redeem them after the fifth year on interest
payment dates.

● Inflation-Indexed Bonds
Also known as inflation-linked bonds or capital-indexed bonds, these bonds are
fixed-income securities issued by the Indian government or corporations. The
motive behind issuing these bonds is to protect against inflation by adjusting the
principal value of the bond in line with the inflation rate.

The government periodically adjusts the principal value of such bonds

according to the Consumer Price Index (CPI). They provide a fixed interest rate
to the bondholders over the inflation adjustment. This government bond interest
rate is paid semi-annually on the face value.

● 7.75% GOI Savings Bonds

The government introduced the 7.75% GOI Savings Bonds in 2018 to replace
the 8% Savings Bond. As the name suggests, the interest rate of such bonds is
7.75%. These bonds are non-transferable, non-negotiable and are issued only in
the investor's name.

They have a tenure of 7 years, and the investor receives the interest annually.
The minimum investment amount is Rs 1,000 with no upper limit.
● Put and Call Option Bonds
Put and call option government India bonds come with the feature of buy-back
from the issuer or sell-back for the bondholder. The government can buy back
(call) the bonds anytime before maturity. Further, the bondholders have the
right to sell (put) them back to the government anytime before maturity.

However, both parties can only execute the transactions on the date of interest
disbursal. This step is possible after five years from the issuance date.

● Zero coupon Bonds

Also known as discount bonds or deep discount bonds, zero coupon bonds are
debt securities that do not pay periodic interest payments like traditional bonds.
Instead, the government issues these bonds at a discount to their face value and
pays no interest during their term.

The investor earns a return by purchasing it at a discounted price and receiving

the face value at maturity. Zero coupon bonds are typically long-term
investments ranging from 10 to 30 years. These bonds are subject to interest rate
risk. If interest rates increase after the purchase, the bond value will decrease.
On the other hand, if interest rates fall, the value of the bond will rise.

Advantages of Investing in Government Bonds

Risk-Free Investment Instrument
These bonds are guaranteed by the government of India. The possibility of a
default, therefore, is practically zero. So, if you are a risk-averse investor, these
bonds are perfect for you.
Inflation Adjusted Returns
Inflation index bonds have provisions to adjust the principal and the interest amount
as per the movement in the inflation index to ensure real returns. Similarly, capital
indexed bonds have the principal amount adjusted as per an inflation index to
prevent the capital from reducing in value due to inflation. That is, the face value at
redemption is increased by a factor of the increase in inflation during the duration of
the bond.
Highly Liquid
Government bonds are one of the most liquid investment instruments in the
country, right next to cash, demand drafts, and cheques. You can even pledge them
to get loans. Financial institutions can use these bonds to fulfil their SLR (Statutory
Liquidity Ratio) requirements. They can be sold quickly in the secondary market
with a settlement period of t+1 (settlement complete one day after the date of
transaction).
Portfolio Diversification
You can use government bonds to diversify the risk of your portfolio. By being
risk-free, they reduce the overall risk exposure of your investment portfolio. They
come with various maturity periods, from less than 91 days to 40 years. Therefore,
you can ladder your investments using these.
Excellent Source of Regular Income
Government bonds that pay regular coupon payments can become a source of
steady income for those who need one. People without a stable income source, such
as freelancers, salespeople, etc., can invest in these bonds to ensure the stability of
funds. These bonds are also an excellent tool for planning a retirement portfolio.
Disadvantages of Investing in Government Bonds

Although government bonds in India come with a sovereign guarantee and high
liquidity, there are certain disadvantages.

● Lower Income: The Indian government ensures that the bonds come with
the lowest possible risk and tackle market fluctuations. Hence, other than the
7.75% GOI Savings Bond, government bonds offer low coupon rates.
● Inflation Risk: While inflation-indexed bonds protect against inflation,
other types of government bonds in India are vulnerable to inflation risk. If the
inflation rate rises above the interest rate paid by the bond, the real value of the
investment will decline.
● Currency Risk: Government bonds denominated in foreign currencies are
subject to currency risk, which means that fluctuations in exchange rates can
impact the value of the investment.
● High Tenure: Most government bonds come with a high maturity tenure
ranging from 5-40 years. Some investors may feel that the bonds can lose
relevance amid rising inflation.

Who Should Invest in Government Bonds?

Government bonds are suitable for investors depending on their goals, risk
tolerance, and financial situation. Bonds are one of the safest investment
instruments investors can utilise for effective diversification.

Apart from G-secs, almost all other market-linked investment instruments are
volatile as market factors highly affect their prices and return potential. For
example, if the equity market is going through a bear phase, the investor may
incur huge losses with lower liquidity.
Risk-averse investors who do not want to invest in high-risk, high-return
investment instruments can look towards investing in government bonds in
India. The investors can allocate their capital for long-term government-issued
debt securities, providing them with a lower but guaranteed steady income.
Government bonds can also help investors who are looking to diversify their
portfolio by providing exposure to a different asset class than stocks or real
estate.

Furthermore, retirees and pensioners relying on a fixed income stream to cover

their living expenses may find this a suitable investment option. The steady
income from government bonds can help them meet their income needs without
taking on excessive risk.