With the inclusion of India’s government securities (G-Secs) in the global bond index, there could be a huge inflow of FPI money, says Abhijit Roy, CEO of GoldenPi. In an interview with Navneet Dubey of BT Money Today, Roy delves into the intricacies of G-Secs, emphasising why they now present an opportune moment for investors to consider this secure asset class for investment. Edited excerpts:
BT: What are G-Secs, and how are they as an investment instrument?
AR: G-Secs are issued by the Reserve Bank of India (RBI) for the government to raise capital in exchange. The G-Secs’ tenure ranges from as low as 5 years when launched to as high as 50 years. The overall G-Sec market is at around $1.2-1.3 trillion. As an asset investment class, it is considered one of the safest classes as it is sovereign-rated, which makes it safer than bank FDs. G-Secs are issued at a ticket size of Rs 100 enables people to start investing on a platform supporting a lower ticket size. They offer rates above 7%, which is traditionally more than the FD rates offered by the PSUs and large private banks. G-Secs give better returns than traditional banks and also give half-yearly coupon payments, which are immune to TDS and can be utilised by investors to build a cash flow.
BT: What are the tax implications for G-Secs?
AR: G-Secs are considered to be a very tax-efficient product as there is no hassle of a TDS as opposed to bank FDs or corporate bonds where investors have to submit a 15G or 15H form to nullify the TDS. However, with G-Secs, investors need to remember that the interest income they receive is taxable as per the investor’s tax slab.
BT: What are the advantages of G-secs? How do they compare to corporate bonds, bank FDs, or other instruments?
AR: Firstly, G-Secs are an extremely safe asset class backed by the central government. Second, investors can start investing from as low as Rs. 100 in a G-Sec, making it a highly financially inclusive investment instrument. Third, as mentioned earlier, they give half-yearly coupons which can used to build a consistent cash flow, and they come with a very short to a very long-term maturity period so if an investor wants to lock in their investment for 7.4% for the next 20 years, G-Secs are the way to go.
The most striking difference between corporate bonds and G-Secs is that the former is riskier and gives better returns. The interest payments of corporate bonds are liable to TDS and are not available at a lower ticket size of Rs 100, like G-Secs. But, to build a well-diversified portfolio, investors should spread their investments in G-Secs, which are safer and give returns of above 7%, and corporate bonds, which are riskier but give higher returns than G-Secs.
BT: For the first time, the government announced a G-Sec with a 50-year maturity. What does this mean for investors?
AR: Any investor looking to lock in at the rate of the 50-year G-Sec and wants to protect themselves from interest rate fluctuations that would go down with time should consider this asset. Similar to what happened in the US, where interest rates for G-Secs came down from 7% to around 4%, the same will happen to the Indian bond market.
BT: How do G-secs contribute to the diversification of an investor’s portfolio, especially when compared to traditional equity or fixed-income investments? Do they enhance overall risk management and stability? How do they complement other asset classes?
AR: G-Secs, being one of the safest asset classes, give investors a cushion in terms of safety in their portfolio. Ideally, a portfolio can consist of equity, a portion of corporate bonds, and some allocation into G-Secs for a well-rounded and diversified portfolio. Being risk-free and backed by the central government, G-Secs enhance stability and risk management. For example, when the equity allocation in a portfolio is going down, G-Secs will cover it with a cushion of 7% returns. Compared to other asset classes, G-secs have a risk-ratio spectrum, which means that G-Secs, which have very low risk, will give a set amount of returns as opposed to other asset classes with higher risk and greater returns.
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BT: JP Morgan had announced the upcoming addition of Indian G-Secs in its emerging markets Bond Index. How will this impact India’s Debt Market?
AR: With the inclusion of India’s G-Secs in the global bond index, we can consider a huge inflow of FPI money in the country in billions of USD. Moreover, it is also positive news for the domestic currency as it will lower India’s cost of funding and help India finance its fiscal and CAD or current account deficit. Firstly, for the economy, our account deficit means the dollar reserves in the country, which determine the price of the Indian currency relative to the US dollar. The Indian rupee will appreciate, which means all our import costs will go down, especially crude oil import costs, and as a result, inflation will come down with the price of commodities coming down. However, because there will be an inflow of external money, G-Secs will go in demand, which means that the G-Sec price will go up, and the yields will come down. A secondary benefit would be the government issuing more G-Secs to raise foreign capital for India’s future infrastructure development. It will also pave the way for the bond market to grow its roots in India.
BT: G-Secs have traditionally been considered investments for institutional or high-net-worth investors. How have G-Secs become more accessible to a broader range of retail investors? How can one invest in them?
AR: RBI has introduced the RBI Retail Direct Platform, where retailers can go and apply for as low as Rs 10,000 when the central government is launching a G-Sec. In the secondary market, SEBI has enabled investments in one unit of G-Secs at Rs 100 through RFQ, which means retailers can start investing in the secondary market at low ticket prices. They can visit OBPP platforms like GoldenPi, where G-Secs are available at Rs 100 and can pay using UPI, Netbanking, IMPS, and other payment methods and will get delivery of the G-Secs into their demat account.
BT: Going ahead, how do you see G-Secs performing? Are there any expected trends?
AR: As India progresses to become a developed nation, the G-Sec rates will come down eventually. With the inclusion of our bonds in the JP Morgan Index, foreign portfolio money coming into the country, and inflation coming down, RBI will not need to issue G-Secs at the current rate of 7%. Therefore, in the future, we can expect the rates to come down, and this would be the right moment for investors to lock in the safest asset class at such high yields.