Government securities are referred to as 'gift-edged securities', as they are absolutely secured RBI, beingthe banker to the Government,  issues different types of paper on belhalf of the...

Government securities are referred to as 'gift-edged securities', as they are absolutely secured RBI, being
the banker to the Government,

 

issues different types of paper on belhalf of the latter, to cater various requirement. Discuss the various types of Government securities that are issued by the RBI.

Asked on by krishb

1 Answer | Add Yours

posdef1's profile pic

posdef1 | High School Teacher | (Level 1) eNoter

Posted on

To re write part of your question.  I do not know what RBI is, I'm assuming the Royal Bank of something with an I, but it doesn't really matter since all central banks/treasuries work much the same.

Government securities are referred to as 'gilt (not gift) edged securities' in reference to gold, which at one time backed them up.  The phrase is out of use these days, as in fact no gold backs them up.  The Royal Bank, or in some countries called the Treasury is the banker for the government, and is a part of the government.  The 'absolutely secured' part is not correct, the bonds of the government have the full faith and credit of the government.  If however that credit is not good, or that faith not good, then there is no assurance of repayment.  Revolutions, regime change, and other things are political risks, the other main risk is financial.  The government can only repay what it can collect in taxes and if economic times are bad, that may not suffice.  Iceland recently had/has this problem and has effectively repudiated some of its debt, it is not the first by far nor will be the last in this situation.  Credit agencies rate the soundness of government debt, and will readily downgrade where needed.

The issuance of debt, which is a better term, comes in three main types. 1) short term bills, which are used for cash management purposes, to level income (taxes) to expenses. 2) notes, or short term bonds which are to manage intermediate term needs, within an economic cycle, and 3) long term bonds which fund expenses known to be long term in nature.  All of the issues can be used in greater or lesser amounts based on the costs of funding at the time.  With the possible exception of short term bills, which are what they are meant to be, all debt can be used for whatever purposes the government chooses.

We’ve answered 318,908 questions. We can answer yours, too.

Ask a question