Government Bonds
Government raises money for its activities through various
means. The bonds (debt instruments) are one way by which governments can
finance its deficits. As in any investment, if the govt employs the capital in
productive measures then the capital grows and if the spending is not done
correctly the money raised is lost (value/ratings/yield etc of govt bonds reduces).
Government bonds are secure as the value is assured by the
government. The rate of interest that government pays is determined by auction
process. The rate of interest as in all cases is based on the credit risk.
What is credit rating of Indian govt bonds?
The credit rating companies (fitch, s&P etc) rate it
based on various factors. The fitch rating is BBB- (2018 – 12 yrs it has been
same).
The rating is based on many things like banking sector
developments, shadow banking, deficit etc.
When the rating gets better, the credit will be available at
lower rate of interest. More funds will flow ( higher risk = higher interest).
Content below may be read by people with interest in
the subject, wont be asked in exams.
Who buys/takes/is bound to own/ Govt bonds?
The govt bonds are used to finance the govt activities and
its deficits. It may be noted that banking, insurance sectors keep funds mandatory in Govt securities. This means when funds of citizens are parked in
banks or when things (now a days everything is insured) get insured, the funds
reach government. The pension funds too park money in govt securities.
Now, the govt bonds can be bought online through NSE and Zerodha buy individuals.
RBI through OMO (open market operations) purchases govt securities.
Why is it important?
The change in the international, national circumstances can
lead to change in the government bond yields. The increase in deficit can lead
to lower rating for the government bonds which means the credit becomes
available for government at higher rate. When govt projects (huge ones) get
locked without results then the capital doesn’t function effectively for its
citizens and nation gets affected. Eg: Land acquisition litigations may delay a
big road project causing huge cost escalations)
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| source: rbi reports |
What are states doing?
The states too are increasingly borrowing to finance
activities. There is significant growth over the years of SDL (govt securities
sold by states) to raise funds.
The 2026-27 will be crucial looking at the maturity profile
of SDLs ( state development loans). Also the way GST, discom debts , UDAY etc
span out and is handled will be interesting for economic observers.
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| source: rbi reports |
What to watch ?
Will the investors prefer buying the SDLs and moving them to Held to Maturity ?
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| click to enlarge, Source:ccil |
Note: Persons who want to know more may read RBI reports on state finances. I have put up a very simplified gist of the subject.
