Is somebody cooking a Bond ETF?

The Bharat Bond ETF will soon make its debut and everybody's excited. But what on earth is a Bharat Bond ETF?

Also, if you want to read this Finshot on our website you can click here.

The Story

Bonds are beautiful. Unlike stocks that represent ownership in corporations, bonds involve a less intimate relationship. You lend some money to a large entity. They’ll issue a paper (bond) promising to pay you back in full. Of course, they’ll also throw some extra money on top of it, to compensate you for your benevolence. But that’s about it. And unlike stocks that don’t offer you any guarantees, these bad boys (bonds) are much safer. Yes, they might not offer you the 15% returns stock markets have in store. But you’ll know exactly what to expect walking into the agreement, even if its a measly 8% return on your investment. And that counts for something especially when you know these bonds are very likely to pay out in full. However, buying a bond in India is a pain. Especially if you’re a regular investor like myself.

This creates two problems. One, it prevents investors from directly accessing a very important investment vehicle when seeking alternatives to stocks, gold, and real estate. Two — big corporations that are always on the lookout for funds lose out on an opportunity to raise money from regular folks like yourself. So, how does one get around this little inconvenience? One solution is you introduce a Bond ETF.

An ETF is like Cadbury Celebrations. When you buy one, you get an exotic mix of chocolates all packed in one neat little box. Yes, you can buy them all individually. But the box. There’s something about the box. And more often than not, the price of the box roughly equates to the price of the constituents. And imagine there’s a marketplace out there for people to buy and sell this box. Wouldn’t that be amazing?

Of course, it would. And that’s what a Bond ETF does. It gives you access to a bunch of bonds from big corporations and you can buy them straight off the market. The new Bharat Bond ETF will include bonds from a bunch of large government-owned entities and you can buy it all now in one single swoop. Granted that investors might not be as excited to buy this thing right off the bat, but the government is going to push for this hard.

The rationale is simple. If there's not enough people getting excited about this thing and there’s not enough buying and selling happening, nobody’s going to want it. Imagine you get your hands on one of these ETFs and you find out it's gone out of fashion. Or even worse, imagine not being able to sell it and finding out you can only sell it by offering a massive discount. That won’t be a pleasant feeling, not at all. Especially since most retail folks (you and me) can’t sell the constituents of the box (ETF) individually.

So while this is a welcome move, the success of the Bond ETF revolution in India will largely depend on the adoption rates. And hopefully it's good.

RBI c̶u̶t̶s̶ ̶r̶a̶t̶e̶s̶ doesn’t cut rates

Yesterday, India’s Monetary Policy Committee (the good people that decide on RBI’s interest rates) surprised Economists around the country by announcing that they would not be cutting interest rates further. The repo rate- the rate at which RBI lends money to other banks- has already been slashed down by 135 basis points or 1.35% over 5 sessions this year. It currently stands at 5.15%, and for now, it seems like it’s going to stay that way, at least until the next review.

So what’s happening here?

Well long story short, the RBI has been cutting rates for a while now in an attempt to kickstart growth in this country. RBI cuts repo rate. Banks, in turn, borrow at cheap interest rates. This allows them to extend cheap loans to consumers. Consumers buy things they don’t need. This demand spurs the economy. It’s a wonderful exercise.

Only problem, too much demand can sometimes push prices to sky-high levels. What's the point of growth if prices keep rising beyond your buying capacity? So the RBI has to ensure they keep inflation in check.

However, prices have been rising despite all this hoopla. A rough monsoon this season has had a veritable impact on farm produce this year. And with supplies running short, prices have been on the rise. I am sure you’re following the onion crisis very closely. So yeah, the RBI didn’t want to cut rates and risk aiding inflation.

So for now, the status quo prevails.

Also, If you’ve found Finshots useful, please do consider telling your friends about it. All you have to do is send this story on Whatsapp or Tweet this :)