The Telegraph
Since 1st March, 1999
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No consolation in relief bonds
- Reserve Bank plans to bring down yield by 0.5%, end tax-free returns

New Delhi, March 10: Tax-free relief bonds issued by the Reserve Bank of India (RBI) with a coupon rate of 7 per cent could soon earn an interest of 6.5 per cent only while investors in 8 per cent relief bonds face a tax bite. An individual is free to invest up to Rs 2 lakh in the 8 per cent bond, and any amount in the 7 per cent bond.

Government officials say tradable-bonds, maturing in five years and carrying a coupon rate of 6.75 per cent, will be introduced for those willing to trade in US-64 units. “This will provide small investors a good investment option in lieu of US-64,” financial analysts said.

Since these bonds would be tax exempt, sources said the effective yield would be around 9.64 per cent for large investors. The government had announced a administered price of Rs 10 per US-64 unit in August 2001 with an addition of 10 paise every month, till May 2003.

The Reserve Bank stopped subscriptions to the relief bonds last week, saying it could not afford to fork out high interest rates of 8 per cent and 7 per cent now. “This has been done to realign these yields with the current low-interest rate regime,” it had said in a release.

This year’s budget cut the interest on small savings, which include post office deposits and other government plans for individuals, by 1 percentage point to bring them closer to what banks pay on fixed deposits.

This was followed by the central bank’s decision to snip its key repo rate by half a percentage point to 5 per cent. The cut, effective from March 3, was the third this fiscal.

Analysts and government officials said the new series of relief bonds, to be issued soon, would have an effective return of around 9.2 per cent for investors with a gross income taxed at the peak rate of 30 per cent. “However, compared with the 8 per cent relief bonds, the net return will be 1 percentage point less,” they said.

They also said the lower rates would help expand the economy, which the government hopes will grow at the rate of 4.4 per cent in 2002-03 — the slowest in two years.

Meanwhile, Reserve Bank governor Bimal Jalan, who had arrived in the capital for a meeting with officials of the finance ministry, said the rate of inflation might see a short-term spurt as the fall-out of a possible Gulf war. “But, there will be no problems in meeting the oil bill,” Jalan said, adding the interest rates should remain steady in the current financial year.

The inflation rate, based on the wholesale price index, was 4.91 per cent for week ended February 22. During the same time, forex reserves shrunk marginally to $ 72 billion on payment of $ 3 billion in offshore debts.

Jalan also said states could come up with fresh bonds on March 12 as part of their second tranche of market borrowing programme for the current fiscal. “These bonds issue would not affect liquidity,” Jalan said.

In the October 2002 credit and monetary policy, known as the busy season credit policy, RBI opted for a softer rate regime, slashing the bank rate and the repo rate.

The bank rate — the benchmark at which RBI lends to commercial banks— was pruned 25 basis points to 6.25 per cent; the repo rate — the rate at which RBI borrows from banks — was cut by the same margin to 5.5 per cent. The next credit policy is due in April.

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