India is set to make its first ever issuance of 50 year Government Bond as part of its plan to raise ₹ 6.55 Lakh crore in the market borrowings in the second half of the fiscal year ending in March 2024. Let us understand what is Government Bond and Why 50 year Government Bond is being issued.
What is Government Bond??
A government Bond is a debt instrument issued by Central and State Government of India. This is done so that the government can cover up the liquidity crisis and use the funds for infrastructure development. Government bonds in India is a contract between the issuer and the investor wherein the issuer guarantees interest earnings on the face value of bonds held by the investors along with the repayment of principal value on a stipulated date. Government Bonds India, fall under the broad category of government securities (G-Sec) and are primarily long term investment tools issued for periods ranging from 5 to 40 years.
Why India is issuing 50 Year Government Bond??
- India in its history for the first time is all set to issue 50 year government bonds and 30 year green bonds which can be easily absorbed by the insurance companies and the provident funds who are keen to park their funds for long term.
- With this 50 year Government Bond India aims to raise ₹ 55 trillion through the sale of bonds in October 2023 up to March 2024. This amount includes ₹ 300 billon of the 50 year security the first auction carried out by central government.
- Insurance companies look for long term investment for their asset liability management. The government also reintroduced green bonds for the second half after pausing it in April-September. It aims to raise ₹200 billion through such notes, half of which would be through the new 30-year papers.
- The government sold its first-ever green bonds with five-year and 10-year maturities in January, at yields that were just around five basis points lower than other securities. Banks are not comfortable absorbing green bonds at a major premium.
- However, insurance companies would be comfortable investing in green bonds of longer maturities
- Over one-third of the government’s fiscal second-half bond supply is in papers maturing in 30-50 years. The Reserve Bank of India said last month it plans to add the 50-year bond in response to market demand for ultra-long papers, extending the nation’s yield curve.
- Insurers’ holdings of government bonds rose to 26% at the end of March 2022, up from over 23% in 2018, according to the latest finance ministry data, reflecting their growing heft in the local debt market. Bank’s ownership fell to 38% from 43% in the period.
Types of Government Bonds
Offer a fixed interest rate throughout the investment tenure, providing clarity with the coupon rate mentioned.
Floating Rate Bonds (FRBs)
Subject to periodic interest rate adjustments, often with a base rate and fixed spread determined through auctions.
Sovereign Gold Bonds (SGBs)
Allow investments in gold without physical possession, with tax-exempt interest and prices linked to gold’s value.
Adjust both principal and interest based on inflation, using indices like CPI or WPI, tailored for retail investors.
7.75% GOI Savings Bond
Features a 7.75% interest rate and available to individuals, minors with legal guardians, and Hindu Undivided Families.
Bonds with Call/Put Option
Permit either issuer or investor to buy back or sell bonds, respectively, on specified dates, after 5 years from issuance.
Generate earnings from the difference between issuance and redemption prices, as they do not provide interest income.
Benefit of 50 year Government Bond to the Insurance companies
- Sovereign Guarantee: Government bonds are backed by the government’s commitment, offering stability and assured returns.
- Inflation-Adjusted: Inflation-indexed bonds protect investors from rising prices, maintaining the real value of their investments.
- Regular Income: Government bonds provide semi-annual interest disbursements, offering investors a source of regular income.
- Lower Income: Apart from 7.75% GOI Savings Bonds, government bonds typically offer lower interest rates.
- Lack of Relevance: With maturity tenures ranging from 5 to 40 years, government bonds may lose relevance over time, particularly in the face of inflation.