Context:
The Reserve Bank of India (RBI) successfully conducted its second government bond buyback auction of FY26, infusing substantial liquidity while managing public debt maturities.
Implications and Market Reaction
- Liquidity infusion: Durable systemic liquidity is added through buybacks.
- Banks’ HTM Management: Banks may be offloading near-term securities from their Held-to-Maturity (HTM) portfolios.
- Yield Lock-in Opportunity: Banks use buybacks to swap short-term for long-term bonds to lock-in attractive yields.
What Are Government Bonds?
- Government bonds are debt instruments issued by the Central and State Governments of India.
- These are used to raise funds, often for infrastructure development or during liquidity crises.
- They guarantee interest payouts (coupon) and principal repayment on maturity.
Key Features
- Bonds fall under the broader category of Government Securities (G-Secs).
- Typically long-term instruments with tenures from 5 to 40 years.
- State government bonds are called State Development Loans (SDLs).
- Interest (coupon) is usually fixed or floating and paid semi-annually.
Access to Investors
- Initially available to large institutions (banks, corporates).
- Now also open to retail investors, co-operative banks, and individuals.
Types of Government Bonds in India
Fixed-Rate Bonds
- Offer a constant interest rate throughout the bond’s life.
- Example: “7% GOI 2021” means 7% annual coupon till 2021.
Floating Rate Bonds (FRBs)
- Interest rates change at fixed intervals (e.g., every 6 months).
- Some FRBs have a base rate + fixed spread (spread decided via auction).
Sovereign Gold Bonds (SGBs)
- Allow investment in digital gold linked to gold prices.
- Issued by the Central Government.
- Interest: 2.50% annually, exempt from tax.
- Redemption after 5 years, on interest payout dates.
- Limits:
- Individuals & HUFs – max 4 kg/year
- Trusts – max 20 kg/year
Inflation-Indexed Bonds (IIBs)
- Returns indexed to inflation (CPI or WPI).
- Ensure real returns regardless of inflation rise.
- Capital Indexed Bonds: Only principal is inflation-adjusted.
7.75% GOI Savings Bond
- Replaced the 8% Savings Bond in 2018.
- Interest: 7.75%, taxable under the Income Tax Act, 1961.
- Minimum investment: ₹1,000 and multiples thereof.
Bonds with Call or Put Options
- Call option: Government can buy back after 5 years.
- Put option: Investor can sell back to government after 5 years.
- Transactions happen on interest payout dates at face value.
- No periodic interest.
- Issued at a discounted price and redeemed at face value.
- Created from existing securities, not via auction.
