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The Budget 2020 has proposed a debt exchange-traded fund (ETF) consisting of government securities and also hiked investments in corporate bond limit by the FPIs from 9 per cent to 15 per cent to deepen the bond market.
"For the financial markets, deepening the bond market is the key. Some government securities will be open for non-resident investors. To improve investor confidence, a legislation on laying down mechanism for netting of financial contracts will be done. A debt ETF consisting of government securities will be launched. For NBFCs and HFCs, liquidity constraints will be addressed. The FPI Limit in corporate bonds will be raised to 15 per cent from 9 per cent", Finance Minister Nirmala Sitharaman said in her Budget speech.
The entry of G-Secs will add enhanced liquidity, enhanced investors base and transparency and smoothening of borrowing plans of the participating CPSEs.
The debt market comprises the government securities market and the corporate debt market. G-Secs constitute 79 per cent of the total amount of outstanding bonds in India.
Government securities (G-Secs) will add lustre to the debt ETF as part of the initiative by the Centre to help PSUs bring down their cost of borrowings. Along with bonds of 'AAA' rated PSUs, G-Secs will make the proposed debt ETF far more attractive for investors.
However, immediate gains hike in corporate bond limit from 9 per cent to 15 per cent is unlikely as only 60 per cent of the current limit is utilized now," says CRISIL.