Government discontinues 8 per cent taxable bondshttps://indianexpress.com/article/business/banking-and-finance/government-discontinues-8-per-cent-taxable-bonds-5007969/

Government discontinues 8 per cent taxable bonds

The move comes few days after it announced reduction in small savings rates by up to 20 basis points.

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The government did not elaborate on the reasons for discontinuing the savings bond.

The finance ministry on Monday announced discontinuation of the 8 per cent Savings (Taxable) Bonds, 2003 — an instrument that provided attractive returns to savers amid declining interest rates in the economy. The move comes few days after it announced reduction in small savings rates by up to 20 basis points.

“The Government of India (GoI) announced here today that 8 per cent GOI Savings (Taxable) Bonds, 2003 shall cease for subscription with effect from the close of banking business on Tuesday, the 2nd January, 2018,” the finance ministry said.

The government did not elaborate on the reasons for discontinuing the savings bond. With interest rates having fallen in the market, the government would have had to bear higher costs while continuing with the savings bond. These bonds mature in six years and are not tradable. These can be bought by individuals and HUF’s in multiples of Rs 1,000 without any upper limit and the interest income on these bonds is taxable. Market players say that these bonds available at RBI office, is practically only subscribed by HNIs as its too cumbersome for small investors and not many know about them.

In contrast to 8 per cent return on these bond, government securities of similar six year maturity were trading at yield of 7.17 per cent on Monday while the benchmark 10-year government bond ended at 7.33 yield. Former finance minister P Chidambaram criticised the government from taking away the savings instrument which has been popular with middle class and senior citizens.

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“Modi government scraps 8 per cent taxable bonds dealing a severe blow to the middle class. How will the risk-averse average citizen save?” Chidambaram tweeted. “GoI 8% taxable bonds have been the safe harbour of the middle class, especially retirees and senior citizens, since 2003. Government has taken away their only safety net,” he said.

Experts say that it is yet another move to bring down the administered rate so that banks can bring their deposit rates down. “The government has been trying to discourage high interest yielding bonds. As long as the administered rates remain high, banks will be forced to keep deposit rates high in order to attract deposits,” said the CIO of a mutual fund.

He further said that post demonetisation the subscription of these bonds had grown as bank deposit rates had come down. “Individuals especially HNIs were preferring to invest in these bonds and small investors preferred postal savings as against bank deposits and this led to rise in small savings collection figures over the last six months. The decision to discontinue this bond is in line with the cut in rates on other small saving schemes,” he said.

The CEO of another mutual fund criticised RBI for the delayed move. “RBI should have discontinued it when the yields on 10-year G-Sec had gone below 6.5. Now that the yields have climbed back to around 7.4, it looks a little strange,” he said.

Chidambaram said that the government owes a duty to provide its citizens one safe and risk free instrument for savings. Taking the only instrument away is a deplorable act. “Is Government pushing people into the stock market and mutual funds? For whose benefit? Government has a duty to explain,” he said.

The government last Wednesday announced a 20 basis point cut in interest offering on small savings schemes including on public provident fund and National Savings Certificate for the January to March quarter. “Interest rates reduced for small savings instruments. 8 per cent taxable bonds discontinued. But inflation is rising. A double whammy for the middle class,” Chidambaram said.

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