When the Budget announces a fiscal deficit, it is also announcing a borrowing programme – currently over 14 lakh crore rupees a year for the central government alone. That money is raised not from a bank but from the bond market, through weekly auctions of government securities that are among the most closely watched events in Indian finance. The yields set in these auctions ripple outward: they anchor corporate borrowing costs, influence home loan rates, and guide the RBI’s monetary policy. Here is how the government’s borrowing machine works.

The instruments: T-bills, dated securities and SDLs

The government borrows across maturities with different instruments. Treasury bills are short-term: 91-day, 182-day and 364-day bills sold at a discount to face value – you pay 98 rupees for a bill redeemable at 100, and the difference is your return. Dated government securities (G-secs) are long-term bonds, typically 5 to 40 years, paying half-yearly coupons; the 10-year G-sec is the market’s benchmark, the single most watched interest rate in the country. State governments borrow through State Development Loans (SDLs), auctioned alongside central securities but priced slightly higher to reflect their lower liquidity. There are also specialised instruments: floating-rate bonds whose coupons reset with market rates, inflation-indexed bonds that protect against price rises, and green bonds earmarked for environmental projects. Together, these auctions fund the deficit week after week through the year.

How auctions work and who buys

The RBI conducts the auctions on behalf of the government through an electronic platform. Primary dealers – banks and financial institutions licensed to underwrite government borrowing – bid competitively, and the cut-off yield is set where demand meets the notified supply. Non-competitive bidding lets small investors, including retail participants through the RBI Retail Direct portal, buy at the auction-determined price without bidding expertise. The buyer base is dominated by commercial banks (which must hold G-secs to meet statutory liquidity requirements), insurance companies and pension funds with long-term liabilities, mutual funds, and increasingly foreign portfolio investors within prescribed limits. When auctions are undersubscribed or cut-offs come too high, the RBI can devolve – take up the unsold stock itself – a signal markets read carefully.

Why G-sec yields move everything

The 10-year G-sec yield is the risk-free rate of the Indian economy – the return on lending to the one borrower that cannot default in rupees. Every other interest rate builds on it: corporate bonds price at G-sec plus a credit spread, bank lending rates track it with a lag, and equity investors compare stock earnings yields against it. When heavy government borrowing pushes yields up, companies pay more for funds, infrastructure projects turn less viable, and the RBI faces pressure – its rate decisions and its management of bond supply through open market operations are two sides of the same coin. This is why the Budget’s borrowing number moves markets before a single tax proposal is parsed: it is the year’s supply shock, announced in advance.

Can ordinary investors buy government bonds?

Yes, and it has never been easier. The RBI Retail Direct portal lets individuals buy T-bills and G-secs in auctions and trade them in the secondary market, with no fees – bringing sovereign yields, currently around 6.5 to 7 per cent on the 10-year, within reach of retail money. Gilt mutual funds offer the same exposure with professional management and SIP options. For conservative investors, direct G-secs combine zero credit risk with better yields than most bank FDs, though prices fluctuate with interest rates – a bond bought today falls in value if yields rise tomorrow. Hold to maturity, and the return is locked regardless of market moves.

FAQs

What is the difference between gross and net borrowing?

Gross borrowing is total new securities issued; net borrowing subtracts repayments of maturing debt. Net borrowing is what actually adds to the national debt.

What happens if a G-sec auction fails?

The RBI can devolve unsold stock onto primary dealers or absorb it itself. Persistent devolvement signals weak demand and usually pushes yields higher.

Are government bonds completely risk-free?

Free of credit risk in rupee terms – the government can always pay. But they carry interest-rate risk (prices fall when yields rise) and inflation risk (fixed coupons lose real value).

Compiled by the Khabar 24h Editorial Desk from publicly available sources.