THE IMPACT OF GOVERNMENT BOND ON CAPITAL MARKET GROWTH IN INDIA: RASHI BHATIA
INTRODUCTION
The
Capital market is an essential of the financial system. Capital market provides
the maintain of capitalism to the country. The wave of economic reforms
initiated by the government has inclined the functioning and governance of the
capital market .The India’s capital market is also undergoing structural
changes since liberalization. The major aims of the reforms exercise are to
make transparency in stock market transactions, to get better market efficiency
and unreasonable trade practices and to bring financial markets up to worldwide
markets.
Capital
market concerned with industrial security market, government securities markets
and long term loan market. The capital market aids financial growth by mobiling
the savings of the economic sector and directing the similar towards channels
of prolific uses.
Government
Bonds are issued by the Central Government and supervised by the Reserve Bank
of India (RBI). When government is in need of monetary help for any plan which
is for the public good, the government will put up for sale bonds to the public
to raise a good amount of fund. The government would pay the regular bases and permanent
interest rate to the investors who buy the bonds.
TYPES OF GOVERNMENT BONDS
FIXED
–RATE BONDS
Government
Bonds of this nature come with a fixed rate of interest which remain steady
throughout the term investment irrespective of variable market rates.
FLOATING
RATE BONDS
This
name suggests that they are for periodic changes in rate of returns. The changes
in rates are undertaken at intervals which are affirmed beforehand during the
issuance of such bonds.
SOVERIGN
GOLD BONDS
The
Central government issues soverign gold bonds, wherein entities can invest in
gold for an extensive period through such bonds, without the burden of
investing in physical gold. The interest earned on such bond is exempted from
tax.[1]
BENEFITS THROUGH GOVERNMENT BONDS IN
CAPITAL GROWTH IN INDIA
· RISK
FREE
The
investment in government bonds are risk free as it is issued by the central
government and regulated by the RBI. This investment is perfect model for
investors who look for the risk free investment.
· RETURN
BENEFIT
The
return are good quality and always available for a longer time period.
· LIQUIDITY
As
bank and financial institutions contribute in this market, liquidity in
government bonds is problem free.
· TAX
BENEFIT
The
government bonds also offer tax benefits which is good for the capital growth.
· DIVERSIFIED
PORTFOLIO
Your
investment portfolio gets diversified with the adding up the government fund.
PROCEDURE FOR BUYING THE GOVERNMENT
BOND
Government
Bonds are either released by the RBI or the central government itself to quench
the requirement of monetary help for any plan i.e. for the good of the public
in common.
Then
if you want to invest in shares, you must have a Demat account, where all your
shares are held in E-form. Normally, Government stock is not available in the
stock market but you may find them in leading banks and post offices.
To
invest in government bonds, you are advised to visit nearby post office or
bank. You need to carry your necessary documents with you such as Address
proof, PAN Card, ID Card, Aadhar Card and Demat account etc. You are required
to submit the application with required documents.
A
bare minimum time period would be taken to procedure your request. After the
completion and verification of the documents, then you will get the bond
certificate in your name.[2]
IMPACT OF GOVERNMENT BONDS IN INDIA
Governments
Bonds are comparatively more stable but low demand at auctions indicates low
investor confidence in the nation economy. The Financial times defines the yield on a risk free government bond as
being roughly “ equal the rate of growth in the economy, plus the rate of
inflation.” [3]In
case of bonds, it defer would mirror the GDP growth, but the connection between
the yields and trade and industry activity is more complex especially in the
case of developing countries like India.
According
to the RBI norms, Bank has to invest 19.5% of their whole deposits in
government bonds. This is also known as the Statutory liquidity Ratio i.e. SLR.
But most of the banks invest over and above the required amount to be found in
the government securities.
Unlike
in countries where classified companies drives the engine of growth, the
inclination of high bond yields is distressing in the case of India since it
reflects on investor sentiment that is not totally favorable to the prospect of
the government taking on more debt.
As
Investors sell government bonds, then price drop and increase in the
securities. Higher the yields, it will have greater risk. If the yield offered
by a bond is much higher than what it was when issued, there is a chance that
the corporation and government that issued it is economically stressed and then
may on the reimburse the capital. Then it will have greater effect on the
Capital growth of India.
CONCLUSION
I
think so, it is entirely safe to make investments in government bonds as all
principal and interest payments are definite by the government of India
ensuring no default at all. But in comparison with the bank deposits safer is
the term of investments is government bonds.
In
developing countries like India where the government is considered among the
biggest investors in the nation economy, bond yields can be used as powerful
parameter in assessing the capital growth.
Wonderful, well written!
ReplyDeleteGood job!
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