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Tax-free bonds look appetising

Our Bureau

MUMBAI, Aug. 1

MR Jaswant Singh's new tax-free bond is expected to be the best bet for investors in an otherwise depressed market, according to market watchers.

The bonds are seen as an attractive opportunity as there is no cap on investment unlike the five-year RBI Relief Bonds on which there is a ceiling on investment at Rs 2 lakh.

"Currently, the yield on a six-year paper in the secondary markets is around 6.85 per cent. So these bonds offer a higher return at seven per cent," said a bond dealer with a private sector bank.

Market players expect good demand for the new paper from the middle-class population where the avenues for investment are dying out. "In the current market environment where there is no safe avenues for investment, this instrument will provide the requisite safety, assured returns and in the absence of any price risk, it is definitely a good buy," said one senior banker.

Added a money market dealer, "Another reason why these bonds will find favour is that for a deposit of three years, the deposit rates are now around 7.5 per cent which is taxable whereas on the new paper, the rate will be seven per cent tax-free.''

If an investor invests in a post-office savings instrument, the rate is around nine per cent at a maximum of Rs 6 lakh where the interest in taxable. The PPF also offers nine per cent for a period for 15 years. Therefore, at six years at seven per cent, most players are bullish on the new paper.

Meanwhile, the financial markets are viewing the announcement of the new bonds at seven per cent as another strong signal from the Government indicating a lower interest rate regime.

A section of market participants also feel that this could be a prelude to a cut in the bank rate in the near future.

Bankers and analysts believe that with the introduction of the new paper, the previous RBI Relief Bonds may have to be gradually phased out over a period of time.

According to debt market analysts, the Government may bring down the interest rate on the Relief Bonds on par with the new paper.

Mr Arun Kaul, Managing Director, PNB Gilts, said, the Government could not carry on this dichotomy for too long and may phase out the earlier relief bonds.

However, Mr Kaul added that since the Finance Minister had not said anything concrete in this regard as yet, one would have to wait and watch.

"The central bank is likely to stop fresh issuances of RBI relief bonds. The new bonds at the rate of seven per cent is an indication to the market that the Government is keen on its soft interest rate policy," said Mr Moses Harding, CEO, JM Harding Financial and Investment Services Ltd.

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