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As yield on 10-yr govt security falls, what should retail investors do?


While the Reserve Bank of India (RBI) in November 2021 allowed retail investors to participate in the government securities market – both primary and secondary – retail investors have not shown enthusiasm.

Should retail investors consider investing in government-backed securities?

Why are retail investors shying away?

On November 12, 2021, Prime Minister Narendra Modi launched the RBI Retail Direct (RBI-RD), a one-stop solution to facilitate investment in government securities by individual investors. The total number of registrations in the retail direct scheme since its inception stands at 99,371 as on May 22, 2023.

The number of accounts opened so far are 84,158. On average, retail subscriptions to government securities in every G-sec auction held over the past few months have been around Rs 42 crore.Total cumulative primary market subscriptions stood at just Rs 2,112.83 crore as on May 22, when the last G-sec auction was held. The total traded volume on a cumulative basis in the secondary market was Rs 351.58 crore.

“Though the RBI has developed a platform, a layman finds it complicated to invest in government bonds. They need some guidance, maybe through intermediaries, for investing in government bonds,” said Marzban Irani, Chief Investment Officer (Fixed Income), LIC Mutual Fund.

Bankers said retail investors are not enthusiastic as the G-sec market lacks liquidity. “After being allotted government securities in the primary auction, a retail investor might not always get a buyer in the secondary market at a level they want to sell and so, they are stuck. When you need money, you may not be able to get it immediately,” said a banker.

Experts believe that the scheme can pick up if the government gives retail investors some tax sops or if the investment process in G-secs is simplified like for fixed deposits.

The RBI Retail Direct platform is beneficial for an informed investor who understands the government securities market, but for an uninformed participant, investment in G-secs is advisable only through mutual funds.

Why are yields on government securities falling?

The yield on the 10-year government security, which was trading at 7.4% in early March 2023, fell to 7.3% after the government on March 24 announced changes in the taxation of debt mutual funds. The benefit of indexation in the calculation of long-term capital gains on debt mutual funds was removed. The 10-year G-sec yield eased to 7.2 % following the RBI’s surprise move to keep the repo rate unchanged at 6.5 % in its April 6 monetary policy. Currently, the 10-year G-sec yield is trading at around 6.96-6.99 %.

The yield on 5-year G-sec has fallen from 7.4 % to 6.93 %, and on one-year government bonds from 7.23 % to 6.79 %.

Besides, the fall in inflation has also pushed the yield downwards. “The yields on sovereign papers have eased as there is an expectation the RBI may go for a longer pause after April inflation fell to 4.7 %. The 10-year G-sec yield may further ease to 6.5 %,” said a banker.

Is it the best time for retail investors to go for G-secs?

Experts say that the yield on 10-year G-sec at 6.96-6.99% is a good proposition for retail investors if they want to wait till maturity. “Earlier, the yield on 10-year paper was at 7.5 %, which was very attractive for investment. You are now getting a sovereign asset at 7 %, which is still a good rate for retail investors to invest,” Irani said.

He, however, said investors should prefer investing in longer papers, having maturities of 20 or 30 years.

Apart from government bonds, he said, investors can also invest in state development loans (SDLs) through mutual fund schemes.

What are the other investment options?

“The broad advice right now is to lock into these (G-sec) rates since they are not likely to climb too much hereon,” BankBazaar’s CEO Adhil Shetty said.

One can also look at fixed deposits (FDs), where banks have started raising interest rates following the 250 basis points rise in the repo rate since May 2022.

SBI, the country’s largest lender, has been offering an interest rate of 6.8% to 7% for deposits less than Rs 2 crore and maturing between one year to less than three years. For longer-term deposits — three years and up to 10 years — SBI has been offering an interest rate of 6.5%. Senior citizens can get an additional interest rate of 0.5% on these tenors.

Similarly, private sector lender HDFC Bank has been offering interest rates of 6.6% to 7.1% on deposits maturing between one year and up to 18 months. From 18 months to up to 10 years, the bank is offering 7%. Senior citizens will get 50 basis points higher interest rates.

“If you’re going for an FD, pretty much every bank now offers 7.5 % on select tenors to senior citizens. Some banks are offering these rates for 5-10 years as well. It makes sense to lock into those tenors even for an FD, which is typically treated as a short-term instrument. In a high-rate scenario such as this, the FD can also be a long-term income generator,” Shetty said.

He said one can watch out for new bonds and NCDs being launched. AAA-rated issues in particular should be interesting. “Lastly, there’s always the option of turning to the humble post office. The 5-year deposit is being offered at 7.5%, which most large banks don’t match at this moment,” he said.





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EMIs start rising as RBI ups key rate 50bps; fourth hike in five months


MUMBAI: Reserve Bank of India’s monetary policy committee on Friday voted 5-1 to increase its key policy rate by 50 basis points, the fourth rise in five months. The latest repo rate hike, aimed at reining in inflation, will make all borrowings, home loans included, more expensive. Several banks, led by SBI have already hiked lending rates.
For those who took home loans before the May 4, 2022 rate hike, this is a major shock. Banks which had pushed rates to 6.6% will now re-price the loan at 8.5%. Borrowers who don’t have room to extend tenure will see EMIs rise by 15%.
RBI governor Shaktikanta Das, announcing the increase in the repo rate to 5.9%, hinted more rate hikes were to come. He said that after adjusting for inflation, the repo rate continues to trail 2019 levels.

SBI, others hike loan rate by 50bps
SBI & BoI hiked loan rates after the RBI raised the benchmark interest rate. The hike has been effected in their benchmark rate linked to the repo rate. Even HDFC hiked the lending rate by 50bps effective Saturday. ICICI also hiked rates, effective Friday itself. With the increase, EMIs will go up for those with loans on external benchmark-based lending rate (EBLR) & repo-linked lending rate (RLLR).

Lenders likely to come out with festive offers
RBI governor Shaktikanta Das said on Friday that after adjusting for inflation, the repo rate continues to trail 2019 levels. The rate hike was widely anticipated as the RBI is the latest among the central banks worldwide that have followed in the footsteps of the US Fed, which hiked interest rates by 75bps (100bps = 1 percentage point) on September 21.
“Consumer price inflation remains elevated and above the upper tolerance band of the target due to large adverse supply shocks, some firming up of domestic demand, and the spillovers from global financial markets,” said Das.
For new borrowers, the rates might not go up proportionately as banks can revise their spreads to charge lower rates. As the cost of funds for banks has not gone up, lenders are likely to announce special offers for the festive season. Lenders said that while higher rates do have an impact on demand, the overall sentiment is positive. The sensex gained as the policy was on expected lines and the rupee also firmed up.
RBI officials also exuded confidence on the state of the economy. When asked whether the RBI was preparing for a soft landing, RBI deputy governor Michael Patra said, “Soft landing is for the governments of advanced economies, for India it is take-off”. While the RBI cut the growth projection for FY23 to 7% from 7.2%, India continues to be among the fastest-growing major economies in the world. “The encouraging growth in the consumption pattern will continue to have a positive rub-off on the home loan demand aided by festive sentiments,” said Y Viswanatha Gowd, MD & CEO, LIC Housing Finance.





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Government And RBI In Complete Harmony On Cryptocurrency, Other Issues: Finance Minister


Government and RBI on same page on various issues including cryptocurrency, the finance minister said

Finance minister Nirmala Sitharaman on Monday said that there was complete harmony between her department and the Reserve Bank of India (RBI) on all matters including cryptocurrencies. She added that there is respect towards each other’s domain and priorities keeping national interest in mind.

She was addressing media persons after RBI’s board meeting.

“Not just on crypto, but on every other thing as well. I think there’s complete harmony with which we’re working, respecting each other’s domain and also knowing what we’ve to do with each other’s priorities and in the interest of the nation. There’s no turfing here,” Ms Sitharaman was quoted as saying by agencies.

RBI governor Shaktikanta Das on his part said that the issue of cryptocurrency was under discussion internally between the central bank and the government.

“Whatever points we have, we have discussed with the government. Beyond that I think I will not like to further elaborate,” Mr Das said.

Ms Sitharaman, while presenting the budget on February 1, had said that a digital currency will be issued by the central bank in the next fiscal, which will use the blockchain technology. The budget also proposed to amend the RBI Act to introduce the proposed central bank digital currency (CBDC), which will function simultaneously with the traditional banknotes.

Last week Mr Das had said that private cryptocurrencies were a threat to macroeconomy and financial stability, and would undermine the central bank’s ability to deal with challenges on the two fronts. In a message for investors, he had said such assets have no underlying whatsoever, “not even a tulip”.

Meanwhile the finance minister reacting on LIC’s draft red herring prospectus, said that there was “positive buzz in the air” about it. 

She said that a big decision like this is never a “knee-jerk reaction. It is done with consciousness… And I can see after the announcement, the reception, there is a buzz in the air”.





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Shaktikanta Das continues to sound dovish, but hints at normalisation



The six-member monetary policy committee of the (RBI) maintained a status quo on for the eighth consecutive meeting, which was along expected lines with Governor batting for retaining the accommodative stance for as long as necessary to revive and sustain growth on a durable basis.


At the same time, the governor said that the liquidity surplus in the banking system has increased in September, with the potential liquidity overhang amounting to more than Rs 13 trillion.





As a result, the central bank has not announced any further bond buying under the Government Securities Acquisition Programme (G-SAP) – a programme that was announced in April. RBI purchased government bonds worth Rs 2.2 trillion under this scheme in the first half of the current financial year. The G-SAP progamme is the equivalent of the quantitative easing undertaken by the central banks of advanced economies.


“Given the existing liquidity overhang, the absence of a need for additional borrowing for GST compensation and the expected expansion of liquidity in the system as government spending increases in line with budget estimates, the need for undertaking further G-SAP operations at this juncture does not arise,” Das said, while assuring that the RBI stands ready to undertake G-SAP whenever necessary.


“While the tenor and quantum of VRRR have increased, RBI has moved a step ahead by reducing further active liquidity infusion by not announcing new GSAP calendar after sterilising earlier two instalments with a simultaneous sale of bonds,” said Madhavi Arora, lead economist, Emkay Global Financial Services.


The other instance which indicates that normalisation of the current ultra-loose monetary will happen sooner than later is the comment from the governor on liquidity absorption through 28-day Variable Rate Reverse Repo (VRRR).


“…the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion,” Das said.


“The announcement of a complete tapering off of the RBI’s quantitative easing programme coupled with an expansion of the scope of the VRRR operations, is a clear sign that liquidity normalisation is now on the offing,” said Aurodeep Nandi, India economist & vice president at Nomura.


According to the central bank’s revised liquidity management framework, announced on February 6, 2020, VRRR of more than 14 days was meant for managing long term durable liquidity. So far, RBI has been conducting 14-day VRRR, which according to the liquidity management framework, was aimed at managing short-term, or transient liquidity.


RBI, however, reminded that the VRRR auctions are primarily a tool for rebalancing liquidity and should not be interpreted as a reversal of the accommodative policy stance.


“Focus was on liquidity management as the VRRR size for 14-day tenor has been increased in a calibrated manner. In a nutshell, dovish policy with focus on sustaining growth momentum amid increasing global uncertainties and supply chain-led high inflation,” said Anubhuti Sahay, head of economic research, South Asia, Standard Chartered Bank.


“Markets, however, might still view higher VRRR cut offs as a subtle way of normalisation in the money market,” she said.


The market clearly saw some indications of the liquidity normalisation process with the yields on the 10 year government bond advancing 3 bps after the measures were announced.


“While the RBI has refrained from committing any G-SAP amount to support bond yields, their emphasis on an “orderly evolution of yield curve” should provide comfort to bond markets. We expect 10-year Gsecs to trade in the 6.20-6.40 per cent range in the near term,” Churchil Bhatt, EVP Debt Investments, Kotak Mahindra Life Insurance Company Limited, said.


While there are subtle indications of normalisation, Das was clear that the central bank has no intention to rock the boat of gradual economic recovery that is underway.


“Our approach is gradualism…we don’t like surprises,” Das emphasised.


Market watchers are now looking at the next policy review meeting in December when the central bank would start increasing the reverse repo rate in order to align the short term rates with the repo rate – seen as a concrete step that the days of ultra-loose policies are over.





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