Following the death of Sahara Group founder Subrata Roy last week, the government is investigating the legality of transferring unclaimed funds from the Sahara-Sebi Refund Account to the Consolidated Fund of India, according to ET. After payments to select claimants, the monies recovered from the Sahara Group and deposited in state-owned banks amounted to Rs 25,163 crore as of March 31.
With officials claiming that the Sebi's dedicated refund account had barely seen claimants come forward after 11 years, here's how a potential transfer of funds to the Centre could provide a breather for the government bond market, which has seen record supply in recent years.
HOW MUCH IMPACT WOULD THE SAHARA FUNDS HAVE ON THE BOND MARKET?
If about Rs 25,000 crore in unclaimed Sahara monies found their way to the government's Consolidated Fund, assuming a proportionate decrease in the amount of money needed to be borrowed by the Centre, the impact on government bonds would be minimal.
According to the current fiscal year's borrowing trend, the Centre has issued a monthly average of Rs 1.45 lakh crore in bonds during the last three months. The government plans to sell bonds worth Rs 1.29 lakh crore in November, with weekly sales averaging more than Rs 30,000 crore.
WHY DOES THE GOVERNMENT TAKE OUT LOANS?
The federal and state governments borrow money to cover their fiscal deficits, or the difference between their revenues and expenditures. Borrowing is accomplished through the issuance of bonds, which are mostly purchased by institutional investors such as banks, mutual funds, insurance companies, foreign portfolio investors, and provident funds.
There is a provision for retail investors to purchase government bonds, albeit participation has been low thus far. As part of the Statutory Liquidity Ratio, Indian banks are required by the RBI to invest a portion of their deposits in government bonds.
HOW MUCH DOES THE GOVERNMENT BORROW?
Until FY19, the central government's gross market borrowing via bonds had never exceeded Rs 6 lakh crore. Government borrowing increased in succeeding years as a result of the Centre's efforts to increase spending and restore declining economic development, particularly during the COVID crisis. The Centre has announced a gross borrowing of Rs 15.43 lakh crore in FY24, up from Rs 7.10 lakh crore in the Interim Budget for FY20. This results in a significant increase in the supply of government bonds.
ARE THERE ANY WORRIES ABOUT MORE GOVERNMENT BORROWING?
A prospective transfer of Sahara cash to the government might aid the bond market by alleviating fears about increased market borrowing. In recent years, the government has occasionally announced more market borrowing. After taking stock of revenue, the Centre has occasionally declared the same in December. It had previously announced further borrowing at the Budget on February 1. Given that 2023 is a pre-election year, there are some concerns that the government would increase spending on welfare programmes that may require additional money.
WHAT EFFECT DOES GOVERNMENT BORROWING HAVE ON THE ECONOMY?
Government bond yields are the benchmarks that corporations use to estimate the rate of interest that they must pay to investors in order to raise funds through bonds. If government bond yields rise, corporate companies must pay more to obtain funds through bonds, raising borrowing costs in the economy. Government bond yields normally rise when there is an increase in supply.
