On July 09, 2021, the Reserve Bank of India (RBI), issued the new 10-year Government Security (G-Sec) (that would mature in 2031), at a cut-off yield of 6.10 percent per annum, higher than the earlier cut-off yield of 5.85 percent.
G-sec Auctions:
- RBI sold 3 auctions such as New 10-year G-Sec 2031 at 6.10 percent (for Rs 14,000 crore), 2023 G-Sec at 4.3 percent (Rs 3,000 crore), and 2061 G-Sec at 7.18 percent (for Rs 9,000 crore).
- Through the 3 auctions, an aggregate of Rs 26,000 crore was raised by the government.
Note – In December 2020, RBI issued the previous 10-year G-Sec bond at 5.85 percent.
Key Analysis:
i.Such acceptance of G-Sec at a higher rate by RBI would increase the government’s (govt) cost of borrowing in FY22.
- The govt paid 25bp (basis points) more to raise resources via the new 10-year G-Sec.
ii.It shows RBI’s willingness to accommodate the market demand for higher yields due to rising inflation.
iii.Through such acceptance of higher cut-off yield, the yields in the secondary market would rise.
Note – RBI also has locked the yields below 6 percent for certain months to keep the government’s borrowing costs low.
Recent Related News:
On May 31,2021, RBI had fixed the limits for Foreign Portfolio Investors’ (FPI) investment in Government securities (G-secs) and State Development Loans (SDLs) unchanged at 6 percent and 2 percent respectively, of outstanding stocks of securities for FY22.
About Primary and Secondary market:
i.Primary Market: It is a financial market, in which the new stocks and bonds are sold to the public for the 1st time through different types of issues like IPO (Initial Public Offer).
- Under the primary market, the investors could purchase securities directly from the issuer.
ii.Secondary Market: It is the market in which it contains the previously issued financial instruments such as stocks, Equity shares, bonds, preference shares, treasury bills, debentures, etc. from the primary market.
- The financial instruments in the secondary market would be traded by market participants.
