Govt bonds: Biggest bet in this rate hike cycle for individuals
If New Delhi aims to attain a $10 trn economy by 2030, rates should trend lower over a period of time. So, this cycle could well be your last opportunity to earn as much as 8%
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For now, you can go for government bonds maturing in the next one-two or three years. Shorter duration sovereign papers with maturities up to one year are called Treasury Bills. The three-month, six-month and 12-month gauges are yielding in the range of 5.13-6.25% compared with 3.9-4.6% for SBI term deposits offered with maturities less than a year
The lure of debt is back amid a lurking bear equity market. Even as the Reserve Bank of India resumed hiking the benchmark rate, individual savers have reasons to reassess fixed income investment strategy especially when the cost of living remains elevated, pinching your purse.
Let us take cognizance of two key rate matrices. Benchmark repo, the rate at which banks park short-term funds with the central bank is now pegged at 4.90 per cent from a record low at 4 per cent in May, 2020 when the Covid induced lockdown brought the whole country to a standstill. The surge of 90 basis points came in the last one and a half months only. A basis point is 0.01 percentage point.
During the same period, the government benchmark bond, a key gauge that helps price corporate borrowing costs, yielded 7.39 per cent versus 5.96 per cent earlier. When bond yields rise prices fall. The spike of 143 basis points may have raised funding costs but has supposedly brought cheers for retail investors too.
A rise in the RBI's benchmark rate has triggered an increase in bank deposit rates across the board. Country's largest lender State Bank of India is offering 5.50-6.30 per cent across 5-10-year maturities. While a senior citizen can avail the upper band, it is the lower end of the band for a general citizen.
This means, a citizen can now earn as much as 189 basis points higher than bank deposits, if s/he can invest in the government bonds maturing in 10 years. The phenomenon remains unchanged across other maturities.
However, tax levy will reduce your interest income in both cases depending on individual income tax slab. So, how do you invest in government bonds?
An easy reply lies in mutual fund schemes, which collect investments from individuals in pools and invest in sovereign papers in bulk. Fund managers charge nominal fees for the same, which could be a big sum in absolute terms. The Securities Exchange Board of India has capped it at 2.25 per cent of overall assets under management.
If an investor is a bit more conversant about financial markets, debt in particular, s/he can earn something more with swiftness suiting her/his tailored investment objective.
Retail direct, a bespoke platform for individual savers to invest in sovereign papers directly works well here. Last November, the RBI had launched the ambitious retail direct plan aiming to bring in individuals to the government bond market dominated by financial institutions. Government bonds or gsecs, popularly known as remains an opaque market for someone living in some corner of East Godavari district.
The government wants to simplify it and garner retail investment to build bridges, roads and hospitals. All you need to do is to register yourself on the website www.rbiretaildirect.org.in to open a Retail Direct Gilt Account with basic KYC compliance. You can buy and sell either in the primary market or secondary market. When the RBI, the merchant banker to the central government, sells a new bond, it is called primary market. Bonds changing hands after the primary sales fall under the secondary market.
Bond houses, known as primary dealers in market parlance, are initially helping the platform to gain liquidity, a key factor that facilitates seamless selling and buying of those securities.
Proposals are reportedly under consideration to make the Retail Direct plan more popular with investor friendly measures. So, should you start investing now?
Take a steady approach until the rate cycle is peaked. The central bank is likely to go for further rate hikes in coming bi-monthly policies.
For now, you can go for government bonds maturing in the next one-two or three years. Shorter duration sovereign papers with maturities up to one year are called Treasury Bills. The three-month, six-month and 12-month gauges are yielding in the range of 5.13-6.25 per cent compared with 3.9-4.6 per cent for SBI term deposits offered with maturities less than a year.
The benchmark bond yield is expected to reach 8 per cent at the peak of rate hike cycle with the repo likely crossing the 6 per cent mark. Bank deposit rates rise at relatively slower pace compared to market driven bond yields, be it the benchmark paper or the Treasury Bills.
The peak of the rate hike cycle will be crucial for bond investors as the best rewards for government bond investment come from it. Interest rates are likely to fall again after global economic uncertainties are allayed amid cooling consumer prices. India - a $3.17 trillion emerging market economy will likely bounce back on a growth path, which is generally, attained through lowering interest rates. All developed economies are recognised with soft interest rates under normal circumstances. If New Delhi aims to attain a $10 trillion economy by 2030, rates should trend lower over a period of time. So, this cycle could well be your last opportunity to earn as much as 8 per cent. Grab it!
