Government Bonds in India

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

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• 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.

Zero-Coupon Bonds

• No periodic interest.
• Issued at a discounted price and redeemed at face value.
• Created from existing securities, not via auction.