Previous Year Question
With reference to the Indian economy, consider the following statements:
A share of the household financial savings goes towards government borrowings.
Dated securities issued at market-related rates in auctions form a large component of internal debt.
Which of the above statements is/are correct?
Only 1
Only 2
Both 1 and 2
Neither 1 nor 2
Correct Answer: C
Detailed Solution
Statement 1 is correct.
The portion of household income that is not used for current consumption constitutes household savings. These savings may be held either in physical assets or in financial assets.
Household financial savings primarily include currency, bank deposits, life-insurance funds, provident and pension funds, small-savings instruments, mutual funds and securities.
A part of these financial savings reaches the government through two channels:
Households may invest directly in national small-savings schemes or government securities.
Banks, insurance companies and pension funds invest a portion of the money mobilised from households in government securities. This constitutes indirect financing of government borrowing.
Household financial savings are, therefore, an important source for financing the government’s fiscal deficit and other financial requirements.
Statement 2 is correct.
Dated government securities are long-term debt instruments that ordinarily have an original maturity exceeding one year. They may carry fixed or floating coupon rates, while the principal is repaid on a specified maturity date.
Central Government dated securities are issued through auctions conducted by the RBI. Their price or yield is determined through the competitive bidding process; consequently, they are issued at market-related rates.
The Central Government’s internal debt primarily includes dated securities, Treasury Bills and certain special securities. Dated securities constitute a major component of this internal debt. Therefore, the second statement is also correct.
Dated securities should be distinguished from Treasury Bills. Dated securities have maturities exceeding one year, whereas Treasury Bills are short-term instruments presently issued for maturities of 91, 182 and 364 days.