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Union Budget: Liquidity push – New debt ETF with G-secs for retail investors

With the government’s borrowing programme rising next year, along with expansion in the fiscal deficit to 3.5 per cent of GDP, the Centre plans to float a new debt exchange-traded fund (ETF) that will comprise of government securities (G-sec).

Written by Sunny Verma | New Delhi | Updated: February 2, 2020 12:21:54 pm
Budget 2020, Nirmala Sitharaman Budget 2020, Budget 2020 Sensex, new debt exchange-traded fund, government securities, Sensex Nifty Budget, Indian Economy Budget 2020, Economic slowdown budget, India gdp grwoth budget, Budget news, Indian Express “This will give retail investors access to government securities as much as giving an attractive investment for pension funds and long-term investors,” Sitharaman said while presenting the Budget on Saturday.

Finance Minister Nirmala Sitharaman announced a number of measures in Budget 2020-21 to widen and deepen the corporate bond and the government securities market.

The Centre also unveiled measures to increase bond market access of micro, small and medium enterprises (MSMEs). With the government’s borrowing programme rising next year, along with expansion in the fiscal deficit to 3.5 per cent of GDP, the Centre plans to float a new debt exchange-traded fund (ETF) that will comprise of government securities (G-sec). This will ensure that retail investors — who are so far not investing much in the G-sec market — are able to buy a basket of government bonds through the units in the proposed debt ETF in a seamless manner. The government expects the debt ETF to improve liquidity in the bond market, enhance investor base and smoothen its borrowing plans.

From farm sector to personal finance, here’s The Indian Express’ full coverage of Budget 2020

The recently-launched Bharat Bond ETF, which comprised AAA-rated debt papers of large government-owned companies, successfully raised Rs 12,400 crore in its maiden offer. The debt ETF provides of government securities will provide an option to conservative investors to earn around 6.5 per cent to 7 per cent yield, along with the facility of overnight liquidity as ETFs are listed on exchanges. This will also help the Centre diversify its sources of borrowings, as currently only institutional investors are the key buyers of these debt papers. “This will give retail investors access to government securities as much as giving an attractive investment for pension funds and long-term investors,” Sitharaman said while presenting the Budget on Saturday.

Apart from domestic retail investors who can now invest in G-sec via ETF, the finance ministry has also proposed to open certain category of government securities for non-resident investors. The government has pegged its net market borrowings at Rs 5.36 lakh crore for 2020-21, up from Rs 4.99 lakh crore in 2019-20. Enabling access to new class of investors will ensure that the government’s borrowing programme goes on smoothly without putting upward pressure bond yields.

Read | Budget 2020: Govt asks RBI to extend MSME loan recast scheme

With regard to corporate bonds, the Centre has substantially raised investment limit for foreign portfolio investors (FPIs) to 15 per cent of the outstanding stock of corporate bonds from 9 per cent at present. This is aimed at attracting fund flows and comes at a time when the debt market witnessed an outflow of Rs 11,917 crore in January this year. December 2019 saw outflows of Rs 4,616 crore, while November 2019 outflows were Rs 2,358 crore. While the equity investment in calendar year 2019 was Rs 101,122 crore, debt market could attract only Rs 25,882 crore. The Reserve Bank had last December raised FPI investment limits in G-sec as well as short-term bonds.

Read | Budget 2020: International bullion exchange in GIFT City may lead to better price discovery

Meanwhile, to improve MSME access to debt market, the government will introduce a scheme to provide subordinate debt (or quasi equity) for MSME entrepreneurs. This debt will be fully guaranteed through the Credit Guarantee Trust for Medium and Small Entrepreneur, and enable MSMEs to meet their working capital credit requirements, thereby, easing their credit crunch and improving liquidity position. The Budget also proposed measures to enable non-banking financial companies (NBFCs) to provide invoice financing to MSMEs through the Trade Receivable Discounting System, or TReDS. As MSMEs usually get payments after a lag of few weeks, funds raised against billed invoice helps them improve their working capital position.

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