Budget 2020 India: Certain specified categories of g-secs would be opened fully for non-resident investors, apart from being available to domestic investors.
By Kaushik Shaparia
Budget 2020 India: This year’s Budget has been drafted with an eye on the longer-term growth prospects of India. So, even if the markets have come away disappointed for the lack of measures that yield immediate results, the finance minister has focussed on laying the ground for a stronger economy. India is taking short, but certain steps towards developing a more vibrant bond market and some of the measures announced on Saturday are a move in that direction.
Certain specified categories of g-secs would be opened fully for non-resident investors, apart from being available to domestic investors. This is indeed a positive step and potentially takes India one step closer to bond index inclusion, which will help reduce the crowding out risks and maintain a healthy demand-supply position in the bond market. The decision to raise the limit for FPIs in corporate bonds to 15% of the outstanding stock from the current 9% should please the fixed income markets. For corporate issuers, this would not only help in more efficient price discovery, it would also provide them access to a larger pool of capital.
Traditionally, domestic banks have been the biggest buyers of government bonds followed by domestic insurance companies and the RBI, while the FII share of bond holding has been less than 5%. With the slow pace of deposit mobilisation, it is difficult for banks to both increase their credit disbursals substantially and also buy enough government bonds to maintain a healthy demand-supply dynamic in the bond market. Given this backdrop, opening up the bond markets more liberally to foreign investors would be a big source of incremental demand for bonds, thereby helping longer tenor yields to decline and aid in the transmission process.
The proposal to set up a new debt ETF for government securities is also a welcome move which allows for a wider and longer-term investor base. Of course, we would need to see the details of the securities that are included in this fund. The decision to divest stake in LIC should be seen as a demonstration of its intent to gradually reduce its holding in state-run enterprises and allow them to operate more independently. That stance seems to be reflected in it wanting some PSBs to raise resources by themselves from the capital markets.
Watch Video: What is Union Budget of India?
However, we would have liked to see more done by way of uniformity in the corporate tax rate for domestic and foreign companies. Though the corporate tax rate has been reduced to 22%, foreign companies operating in India continue to be taxed at a much higher rate of 40%. This, we believe, should be corrected to allow for a more level-playing field. We would have also liked to see more done by way of steps to alleviate the stress we continue to see in the NBFC and real estate sectors. But as much as might remain to develop a truly dynamic financial market, we are moving in the right direction.
The writer is chief country officer, Deutsche Bank, India