Page 61 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes 6. As regards mode of distribution of g-securities, these securities are distributed through
competitive public auctions. The conventional auctions of g-securities follow multiple
price auction system for issuance of conventional securities and uniform price auction
system for securities with special features such as inflation-indexed bonds where there is
market uncertainty.
Most countries adopt a system of Primary Dealers (PDs) to ensure that auctions are well-
bid. PDs also act as a regular source of liquidity in the secondary market and provide
useful information to public debt managers on market developments and debt management
issues. Further, competition among PDs facilitates efficient price discovery in the g-
securities market.
7. Regarding the maturity structure of g-securities traded in the market, it has been observed
that depending on the funds requirements of the government, securities of different
maturities ranging from short-term to long-term are issued. Governments issue securities
with maturities spanning from less than a year to a very long-term stretching up to 50
years. Typically, securities of short-term maturities up to one year, viz., Treasury Bills,
form a part of the money market and facilitate the government's cash management
operations. Bonds having maturities of more than one year facilitate the government's
medium to long-term financial requirements.
8. The government securities in India are ordinarily issued in the denominations of ` 100
and ` 1000. Earlier, the face value of the security was ` 100. But after 1985, the denomination
was raised to ` 1, 000.
9. As for interest on government securities, it is payable half-yearly and is exempt from
income tax subject to a limit. The value of investments in these securities and other
investment specified in the Wealth Tax Act is exempt from wealth tax up to a limit.
10. As regards participants in the government securities market, central government, state
governments, semi-government authorities, e.g., city governments and municipalities,
autonomous institutions such as metropolitan authorities, port trusts, improvement of
developments trusts, state electricity boards, PSUs and other government agencies like
IFCI, NABARD, SIDCs, housing boards, etc., represent suppliers of the market while the
demand essentially comes from banks, financial institutions and other investors, joint
stock companies, individuals and non-residents.

Notes Banks are required by law to invest a proportion of their deposits as determined by
statutory liquidity ratio.
11. Like other countries where central banks as managers of public debt play crucial role in
developing the government securities market, the RBI plays an important role in
management of the government securities market for the purpose of keeping the cost of
financing to the minimum consistent with the offer of market-related interest rates on
government securities, maintaining the market stable and smooth for meeting the portfolio
requirements of all investors to the extent possible and for maintaining a minimum level
of activity in the market with a view to providing liquidity to the securities in the market
so as to develop the market. For this purpose, the RBI acts as consultant to the government,
manager, underwriter, and custodian.
As a banker to the government, the RBI tenders advise on the matters relating to the
amount of issues to be floated, timing and terms of new issues and facilitates such issuances
through its various market infrastructure.

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