No place to hide

Of late, the Indian bond market has been in a tizzy over the excess supply of government securities. Amid concerns that the Centre would breach its fiscal deficit target, the yield on the benchmark 10-year gilt spiked to 7.38 per cent last week. It cooled off only after the Government hastily pruned its excess borrowings from ₹50,000 crore to ₹20,000 crore. Even as the Centre is scrambling to bridge its revenue shortfall, buyers such as banks and mutual funds have been retreating from long-term gilts to avoid mark-to-market losses. Foreign Portfolio Investors (FPIs) are already up against RBI limits on bond purchases. India’s market interest rates have risen by a sharp 100 basis points in the last one year after three consecutive years of decline, on these excess supply worries. But retail investors have had precious little to gain either from this problem of plenty in bonds, or rising interest rates.

Indian savers have made a decisive shift from real to financial assets in recent years prompted by policy nudges and sluggish gold and property markets. But while umpteen new equity-linked options have sprung up on their menu — MFs, NPS, market-linked insurance plans — there’s a notable dearth of debt options. Banks, which garner the lion’s share of retail debt allocations, pegged down their term deposit interest rates with alacrity by 200-250 basis points between 2014 and 2016 as market rates fell. But they have been tardy in passing on the rate increases of the past year. Post office savings schemes, though they have been less aggressive than banks in pruning rates (by 100-180 basis points), continue to be on a cutting spree. RBI recently withdrew the 8 per cent 7-year government bonds it offers to retail investors and replaced them with a new 7.75 per cent series. Outside of these, Indian savers face a real paucity of options to park safe money. In recent years, regulators have sharply shrunk the eligible list of deposit-taking companies and NBFCs, tax-free PSU bond issues have dried up, and corporate bond issues in India are mostly privately placed with institutions, leaving savers at the mercy of banks. With a squeeze on returns, some small savers have been making wholesale switches from fixed deposits to equity funds, lured by the latter’s high returns. This can backfire if the market tide turns.

The retail fixed income menu can be expanded if the Government bites the bullet on disintermediating public sector borrowings. Today, the Centre, the States and public sector entities such as Indian Railways and NHAI borrow prodigiously from the market to bankroll their expenses. But these bonds are open only to institutional investors. Carving out retail quotas in these borrowings, resurrecting tax-free bonds in the Budget, and expanding the menu of G-secs offered directly by RBI to retail savers, would ensure that the over-supply problem in India’s bond market is addressed for good.

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