Fixed Rate Bonds
: These are bonds on which the coupon rate is fixed for the entire life (i.e. till maturity) of the bond.
Floating Rate Bonds (FRB)
are securities which do not have a fixed coupon rate. FRBs
were first issued in September 1995 in India
Zero Coupon Bonds
: Zero coupon bonds
are bonds with no coupon payments
Capital Indexed Bonds
: These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the Principal amount of the investors from inflation
Inflation Indexed Bonds (IIBs)
are bonds wherein both coupon flow sand Principal amounts are protected against inflation. The inflation index used in IIBs
may be Whole Sale Price Index (WPI) or Consumer Price Index (CPI)
STRIPS (Separate Trading of Registered Interest and Principal of Securities)
are the securities created by way of separating the cash flows associated with a regular G-Sec i.e. each semi-annual coupon payment and the final principal payment to be received from the issuer, into separate securities. They are essentially Zero-Coupon Bonds (ZCBs)
overeign Gold Bond (SGB)
- SGBs are unique instruments, prices of which are linked to commodity price viz Gold.
- SGBs are denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
- The tenor of the SGB is for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates.
State Development Loans :
- State Governments also raise loans from the market which are called SDLs.
- SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government.
- Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date.
Open Market Operations( OMOs) :
- OMOs are the market operations conducted by the RBI by way of sale/ purchase of G-Secs to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
- When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
- Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.
Repurchase (buyback) of G-Secs :
- Repurchase (buyback) of G-Secs is a process whereby the Government of India and State Governments buy back their existing securities, by redeeming them prematurely, from the holders.
- The objectives of buyback can be reduction of cost (by buying back high coupon securities), reduction in the number of outstanding securities and improving liquidity in the G-Secs market and infusion of liquidity in the system.
Liquidity Adjustment Facility (LAF) :
- LAF is a facility extended by RBI to the scheduled commercial banks (excluding RRBs) and PDs to avail of liquidity in case of requirement or park excess funds with strong>RBI in case of excess liquidity on an overnight basis against the collateral of G-Secs including SDLs.
Basically, LAF enables liquidity management on a day to day basis.
Trading in G-Secs take place :
The securities can be traded in secondary market either through
(i) Negotiated Dealing System-Order Matching (NDS-OM)
(ii) Over the Counter (OTC)
- In August, 2005, RBI introduced an anonymous screen based order matching module called NDS-OM.
- This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants.
Over the Counter (OTC)/ Telephone Market:
- In this market, a participant, who wants to buy or sell a G-Sec, may contact a bank /PD/ financial institution either directly or through a broker & negotiate price and quantity of security.
- Such negotiations are done on telephone and a deal may be struck if both counter parties agree on the amount and rate.
- RBI has launched NDS-OM-Web on June 29, 2012 for facilitating direct participation of gilt account holders (GAH) on NDS-OM through their primary members (PM) (as risk controller only and not having any role in pricing of trade).
- The GAH have access to the same order book of NDS-OM as the PM.
- GAH are in a better position to control their orders (place/modify/cancel/hold/release) and have access to real time live quotes in the market.
Major Players in G Sec Market:
- Major players in the G-Secs market include commercial banks and PDs besides institutional investors like insurance companies.
- Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds.
- Foreign Portfolio Investors (FPIs) are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time.
- Corporates also buy/ sell the G-Secs to manage their overall portfolio.
Clearing Corporation of India Limited(CCIL):
- The CCIL is the clearing agency for G-Secs. It acts as a Central Counter Party (CCP) for all transactions in G-Secs by interposing itself between two counter parties.
- In effect, during settlement, the CCP becomes the seller to the buyer and buyer to the seller of the actual transaction.
- All outright trades undertaken in the OTC market and on the NDS-OM platform are cleared through the CCIL.
Role and Functions of FIMMDA:
- The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an association of Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers and Insurance Companies was incorporated as a Company under section 25 of the Companies Act,1956 on June 3, 1998.
- FIMMDA is a voluntary market body for the bond, money and derivatives markets.
- FIMMDA has members representing all major institutional segments of the market.
- The membership includes Nationalized Banks such state Bank of India, its associate banks and other nationalized banks; Private sector banks such as ICICI Bank, HDFC Bank; Foreign Banks such as Bank of America, Citibank, Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance Companies like Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company and all Primary Dealers.
- FIMMDA represents market participants and aids the development of the bond, money and derivatives markets.
- It acts as an interface with the regulators on various issues that impact the functioning of these markets.
- It also undertakes developmental activities, such as the introduction of benchmark rates and new derivatives instruments, etc.