Stupid question?

Well let us attempt an answer first…then decide whether the question is stupid….

The full repayment of principal and interest is guaranteed by the government, so there is no way how you will get less than what you paid for. So in a way it is safe.

However if you have a 8% bond maturing in 20 years…and you have bought it at Rs. 100 and redeem it at Rs. 100, and inflation in that period has been 8% p.a. YOUR REAL RETURNS ARE NEGATIVE (negative because of the post tax yield that you got!). Thus government securities will more or less give you a ZERO return, but it will surely repay the money that you had lent fully!

With foreign lenders there are 2 games that government can play…

1. Print as many notes as you can – inflation will ensure that the rates that the country is benefiting by the excessive printing. For those old enough to remember, the Yen was at 330 to the Dollar! Now it is 75 and falling. I think we will live to see a day when a Japanese says ‘here is a Yen, gimme a dollar’. The Japs may feel good, but what they are getting back is 20% of what they had lent. Risk? Totally.

2. Keep exchange rates under artificial control: again this will mean you will lose all the money that you have lent!

India has a lot of reserves – and too much of it is in US Dollars. We like to say ‘Our exports are….in US Dollars’. Remember if Ben Bernanke prints like there is no tomorrow…it may not be a far day when the dollar rupee rate may be Rs. 30 to the dollar. Currently all governments are printing notes – so that we can continue to ‘sell’ to US.

Well, let us continue to say ‘Government Securities are safe’ but at least not cheat our own selves….

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  1. SUbra,

    China’s take on yuan vs dollar would be interesting to cover. My understanding is this has contributed immensely to its growth engine ( by restricting internal consumption however).

  2. Hi Subra,

    But it looks like Ben also forcing (may be indirectly) other countries into the game of money printing. There by maintaining the value of USD. But USD is loosing value against hard assets like commodities, bullion & land everywhere.

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