The Government of India 8.5 per cent relief bonds is the emerging star in the bond market. Despite the 5-year lock-in period, the bonds, popularly called RBI Relief Bonds, have mopped up Rs 4,086.41 crore in the first four months of the current fiscal.
While the figures for the corresponding period last fiscal were not immediately available, the GoI bonds had garnered only about Rs 1,201.15 crore in the first quarter 2000-01. Reserve Bank of India officials said that the total outstanding on the GoI 8.5 per cent bond account as on March 31, 2001 stood at Rs 17,602 crore as against Rs 10,960.40 crore as on March-ended previous financial year.
According to debt market analysts, the effective yield of the 5-year 8.5 per cent tax-free relief bonds works out to almost 12 per cent which is quite lucrative compared to returns in a similar tenure government paper.
"The yield on a 5-year gilt today is about 7-7.5 per cent," said Sunita Gupta, who heads research, at PNG Gilts Ltd.
The bonds, which were originally sold only by Reserve Bank of India (RBI), are now distributed by most of the state-owned banks. Several private sector banks like ICICI Bank and UTI Bank too have opened the counters for selling the 8.5 per cent relief bonds. Distributors said the availability of the bond in demat form had increased its liquidity.
Despite the fact that the bonds cannot be redeemed prematurely, investors have invested in the GoI bonds to take advantage of the half-yearly tax-free interest income. "There is no ceiling on the interest income on these bonds. So, the interest income is not taxed at all," an analyst said.
Finance minister Yashwant Sinha had reduced the threshold limit from Rs 10,000 to Rs 2,500 on interest income from bank deposits to check on erosion of tax base and under-reporting of taxable income due to splitting up of deposits.
Sources said that the meltdown in the equities market coupled with the US-64 fiasco had led to the popularity of debt as the most safe instrument.
However, gilt yields have plummeted in the reduced interest rate regime. In the 5-year tenure especially, the rates are as low as 7 per cent and that too without any tax benefits.
Distributors said that high net worth individuals were putting their money in the relief bonds. While corporates cannot invest in relief bonds, they continue to place their bets with medium and short term mutual funds. In the last couple of weeks though, there has a gradual shift from these funds to cash funds, sources said.
