No tax exemption for inflation-indexed bonds
3 min read . Updated: 21 May 2013, 07:35 AM IST
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Bonds to count towards SLR requirement of banks; investors can claim capital indexation benefits, says expert
Mumbai: India’s first inflation indexed bonds to be launched on 4 June won’t get any special tax treatment but will count towards the statutory liquidity ratio (SLR) requirements of banks, Reserve Bank of India (RBI) said in a conference call on Monday.
SLR is the mandatory investment that Indian banks have to make in government securities, currently at 23% of deposits. Most banks hold government securities in excess of this level.
The RBI said on Wednesday that it plans to issue ₹ 12,000 crore to ₹ 15,000 crore of these bonds in 2013-14 in line with a budget announcement in February.
These 10-year bonds will have a fixed coupon rate and their principal value will be linked to the Wholesale Price Index (WPI). They will be sold in tranches of ₹ 1,000 crore to ₹ 2,000 crore starting with the first sale on 4 June.
The bonds were being issued with an aim to “protect savings of poor and middle classes from inflation and incentivize household sector to save in financial instruments rather than buy gold," RBI had said.
“In order to maintain liquidity, the same bonds will be reissued every month after deciding their principal based on the inflation numbers," said R. Gandhi, executive director, RBI.
The central bank referred to a four-month indexation lag in its press release last week, which means January WPI would be used as a reference for bonds issued June.
The principal will be adjusted according to the prevalent coupon rate. For example, if the face value of bond is ₹ 100 and inflation is 10%, the holder at the time will be paid the coupon rate on a principal of ₹ 110, which will help keep returns above inflation.
The bonds will only be issued to institutional investors initially till September to allow RBI to price the instrument. Retail investors having a demat account can, however, participate through primary dealerships with a minimum investment of ₹ 10,000.
“The bonds are also eligible for SLR and there is no floor on the securities," RBI’s Gandhi said. The bonds will be included in the government’s annual borrowing programme.
Gandhi said RBI may move to indexing the bonds to consumer prices in the future.
“Once the CPI (Consumer Price Index) stabilizes, we may move over to that index," Gandhi said. April CPI inflation at 9.39% is higher than 4.89% WPI inflation in the same month. Some analysts had criticized the move by RBI to link inflation to WPI saying that it defeats the purpose of inflation indexation for retail investors.
Meanwhile, non-state company Larsen and Toubro Ltd (L&T) last week issued ₹ 100 crore of inflation-linked, capital-indexed non-convertible bonds at a yield of 1.65% per annum, with the principal adjusted to the average WPI with a lag of four months.
Rating agency Crisil gave a AAA stable rating to the issue on Monday.
“For issuers, such instruments are akin to variable-rate loans, and in the near term, allow them to benefit from an expected reduction in the inflation rate," said Pawan Agrawal, senior director, Crisil.
Dwijendra Srivastava, senior vice-president, and head fixed income, Sundaram Asset Management Co. Ltd, said he expects the bonds issued by RBI to yield a coupon of around 0.50%.
“I think there will be demand for this because it qualifies as an SLR investment and the bonds will be issued in small tranches of not more than ₹ 2,000 crore which will keep yields low," Srivastava said.
N.S. Venkatesh, treasurer at IDBI Bank Ltd, who also attended the conference call, said the fact that the bonds will offer a real rate of return will help generate demand.
“There will be no special tax treatment but investors can claim capital indexation benefits," Venkatesh said. “I think these bonds will do well."
The RBI also said it will issue FAQs (frequently asked questions) on the bonds by the end of the week to explain the auction process.
