The Reserve Bank of India (RBI) has announced the weekly auction of Treasury bills and state government bonds or State Development Loans (SDLs) maturing on different dates.
In this week’s auction, the indicative yields for treasury bills are 6.71 per cent, 7.20 per cent and 7.22 per cent for three months, six months, and 364 days, respectively.
For state government bonds, Jammu and Kashmir (J&K), Haryana, Sikkim, Uttarakhand, Himachal Pradesh, Rajasthan, and West Bengal have some of the highest yields, at more than 7.7 per cent maturing in different durations. The indicative yield is more than 7 per cent for all state government bonds, with a minimum duration of five years and a maximum of 30 years.
In the Finance Bill 2023, passed by Lok Sabha on Friday, the government announced removing the indexation benefits for debt mutual funds with less than 35 per cent in asset under management (AUM) in domestic equities and returns to be taxed as short-term capital gains.
More Investors May Opt For G-Secs Post Finance Bill 2023
This amendment, an expert says, may encourage people to invest in government securities, with the incentive for investing in long-term debt mutual funds withdrawn.
“Post removal of long-term capital gains tax and indexation benefits on debt mutual funds, bond market investors are trying to find other options to invest their money. Of late, investors are also keen to explore possibilities of investing directly in government bonds, state development loans, and Treasury bills issued and serviced by RBI. These government bonds are usually purchased and traded largely by institutional investors,” says Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, a fixed-income advisory firm.
Yields on government securities have been increasing of late amid the central bank’s successive repo rate hikes, the rate at which it lends money to commercial banks and other financial institutions.
RBI last raised the repo rate on February 8, 2023, by 25 basis points (bps) to 6.5 per cent. As a result, retail borrowing costs have increased considerably over the past few months.
The repo rate hikes follow after inflation skyrocketed in the country, threatening to destablise the economy. Experts believe the current rate hike cycle might be in its last phase, at the most, one more increase, before RBI winds down its monetary tightening as the situation perceptively improves.
Investors Can Sell SDLs In the Secondary Market
Investors of long-duration state government bonds can also sell their holdings through the RBI Retail direct portal, where they participate in the auctions directly and purchase them.
“The RBI direct portal has enabled the secondary market trading facility for interested investors, where investors can buy and sell bonds in the secondary market as per the prevailing market prices.
“However, this portal is yet to attract retail investors in large numbers due to the lack of publicity and online trading knowledge. The settlement is safe here,” says Srinivasan.
He explains the other alternative is to invest through online bond cum trading portals and debt brokerage houses, which are keen to tap the retail and HNI (high-net) investors directly by offering various maturities of government bonds and helping the investors with buying and selling of these bonds.
However, the mode and settlement of such financial transactions are to be validated before investment. “It is better that such settlements happen only through settlement houses like National Securities Clearing Corporation Limited (NSCCL) and Indian Clearing Corporation Limited (ICCL). It may be noted that SEBI has introduced several measures for retail trading in corporate bonds,” says Srinivasan.