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How G-Sec Rates Affect Your Loan Rates?

What are G-Secs or Government Securities?

Government securities are bonds issued by the government. The government issues these bonds to raise debt money from the general public. It raises this money to meet its various expenditure requirements. Often the revenues of the government are not enough to meet all its expenditure requirements. To meet this shortfall, the government issues bonds or securities to raise money from the general public. Like any other type of bond, the government pays interest to those who buy the bonds from it. At the time of maturity of the bond, the government pays back the principal to the bondholders. Government securities that have a maturity of less than 1 year are called treasury bills (T-Bills). Government securities that have a maturity of more than 1 year are called government bonds or treasury bonds. Government securities can have different maturities such as 3 months, 1 year, 5 years, 10 years etc.

Why is Credit Risk of G-Secs Low?

The credit risk of government securities is very low. Credit risk is the risk of the bond issuer defaulting on the interest and principal payments due on the bonds. Treasury bills or government bonds of less than 1-year maturity are considered to be almost risk-free. The low credit risk of these bonds is due to the fact that the government can always print more currency to pay the interest and principal on the loan, as a last resort.

How Interest Rate on G-Secs affect interest rate on your loans?

Since the credit risk of government bonds is the lowest, the interest rate paid on them is the lowest among all categories of bonds. The interest rate that is paid on a bond depends on the credit risk of the borrower. The borrower or bond issuer in the case of government bonds is the Government. For example, if the current interest rate on government bonds is 4%, the interest that will be charged on any other loan will be more than 4%. This is because any other borrower, whether it is a private company or a private individual, has a credit risk higher than that of the government. An individual or a company cannot print the currency to pay for its debt obligations – when it runs into a financial crisis- unlike the government. So even profitable companies and prosperous individual borrowers carry some degree of credit risk.

So whenever the interest rates or yields on government bonds go up, it also means that the interest rate that you pay on your gold loans, business loans, home loans etc. may also go up.

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