Govt mulls bond issue for middle-class, rates could beat retail inflation

The new scheme, likely to be backed by Nabfid, aims to offer retail investors an alternative savings route to equity markets

A new savings scheme for the middle class is in the offing from the government – a bond with interest rates well above the average rate of consumer price inflation (CPI).  

 

The timing of the scheme – with a launch expected soon after the current winter session of Parliament gets over – will allow Finance Minister Nirmala Sitharaman to take stock of the scheme in her Budget presentation on February 1. The finance ministry and the Reserve Bank of India have already had discussions on the purported bond issue, source said. Another round of talks is expected once the incoming RBI governor Sanjay Malhotra takes charge.   

 

A government official privy to the developments said the logic behind the move is that available opportunities for those planning to save long term have reduced. The closure of tax-saving bonds from public sector companies means only small savings windows comprising of Public Provident Fund, Senior Citizens Savings Scheme, and various Post Office schemes are now open to the public.  

 

The scheme may be floated by the National Bank for Financing Infrastructure Development (Nabfid). The organisation has the advantage of being government backed and has the freedom to create papers of multiple sorts to tap the market. While Nabfid has a huge mandate to finance infra development, the support it can get from government – which holds an equity of Rs 20,000 crore in it – is limited because of fiscal constraints.   

 

The official explained that too many Indians have entered the equity market, particularly the derivatives segment. “This is a cause for concern, but we understand that there are few compelling options for them to invest in.” the official said, on condition of anonymity.  

 

The official said comparable models are the RBI Relief Bonds and other similar long-term ones floated by state-run companies. All of these have either run their course or have been scrapped. These bonds used to be tax free, which is not possible now because of the new tax regime which has done away with all exemptions.   

 

As a result, the available options for individuals who want to invest in government-backed debt securities are limited. The government has tried to pick up the slack by expanding the bucket of GOI securities and state government securities but the level of interest in these papers in the retail segment has been muted. New options like investment in pension or insurance schemes have made some inroads but the demand is not enough to compensate for the overall lack of options.  

 

However, there continues to be substantial demand for domestic money to finance infrastructure schemes, this official pointed out. To finance those, the private sector is keen to raise money from domestic investors since the cost of finance is considerably lower than what they would need to pay from foreign markets.  

 

The finance ministry is also convinced of the appetite for a government bond product going by recent developments. Fintech companies, for instance, are tapping into fixed deposits as they expand their financial services bouquet. New age companies such as Stable Money, Flipkart-backed super.money, and MobiKwik have rolled out such services offering interest rates up to 9.5 per cent per annum across different tenures. 

 

This is the first time that fintechs have shown interest in such fixed interest products. In partnership with small finance banks, deposit-taking non-banking financial companies and commercial banks are also exploring the market. 

 

The plan to float a new bond also sits well with the long-term effort of the finance ministry to create a bond plus corporate paper plus derivative (BCD) triad, which has so far been hampered by the lack of papers of good quality. India has not been able to get this BCD nexus going, despite decades-long efforts, largely because of the lukewarm response by the retail sector to debt papers that do not offer a tax break.