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CRISIL Budget Impact Analysis: Debt & Mutual Fund Markets

The measures announced in Budget 2001-02 are expected to have a positive impact on the capital markets. There has been a special emphasis on lowering interest rates by aligning the administered interest rates with market rates.

The reduction in the government's net borrowings should boost market sentiment.

Also, measures have been initiated to increase participation as well as enhance transparency in the secondary debt market.

The halving of the dividend distribution tax to 10% should increase inflows into debt mutual funds.

The measures announced in Budget 2001-02 are as follows:

• · Reduction of administered interest rates by 150 basis points as of March 1, 2001.

This signals a lower interest rate regime that will enable corporates to reduce their cost of funds besides helping the government to reduce its interest burden.

• · Clearing Corporation to be set up by June 2001 under RBI with State Bank of India as the chief promoter.
• · Trading of Government Securities through order driven screen-based system to be implemented.
• · An electronic Negotiated Dealing System to be set up to facilitate transparent electronic bidding in auctions and dealing in Government Securities on a real time basis.
• · Ensure smooth and quick movement of funds by introducing Electronic Fund Transfer (EFT) and Real Time Gross Settlement Systems (RTGS).

These measures will bring about transparency and efficiency in government securities trading. Screen-based trading should also increase market participation. The measures would also help integrate the forex and debt markets.

• · Clarification by CBDT to promote issuance of STRIPS, Zero Coupon Bonds and Deep Discount Bonds
• · Comprehensive legislation on Securitisation to be introduced.
• · A group comprising RBI, SEBI, MoF and Stock Exchanges to be set up to monitor and implement developments in the debt market.

All these steps will help deepen the debt market. They will also lead to the introduction of new hedging securities. The asset securitisation market is likely to grow.

• · Reduction of Dividend distribution Tax from 20 to 10%.
• · FII limit enhanced from the existing 40% to 49%
• · Long term capital gains arising from the sale of securities and units to be exempt if such gains are reinvested in primary issues of shares of public companies (IPOs).

The reduction in the dividend distribution tax should increase inflows into debt funds. The finance minister has also attempted to address the slowdown in the primary market besides giving an impetus to portfolio investments

Rediff-CRISIL Budget Impact Analysis
Budget 2001

Disclaimer: CRISIL has taken due care and caution in compiling this report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is also not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of its web site.

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