“Corporate and bank deposit rates have come down in line after the rate cuts announced by RBI,” said Anup Bhaiya, MD and CEO, Money Honey Financial – a Mumbai-based distributor. “However, since the RBI floating rate deposit rates continue to be unchanged at 8.05%, there is higher demand for these deposits from retail investors.”
These bonds, issued by the central bank on behalf of the government, come with high safety and pay a 35-basis-point mark-up over the returns promised by the National Savings Certificate.
US bond yields saw a 19-month peak before settling. Wall Street experienced mixed stock results. The US dollar gained strength after previous losses. Concerns about the US fiscal situation and government debt demand lingered. The House passed Trump’s tax bill, adding to debt worries. Solar energy shares declined due to expected subsidy cuts.
That works out currently to 8.05% and has a tenure of seven years, with interest paid once every six months. This interest rate could also change once every six months, and the interest income is taxable for the investor.
Liquidity Challenges
To be sure, these bonds, although sovereign backed, do not have a liquid market, and investors need to hold them until maturity.
“There is no premature withdrawal option, and these bonds cannot be used as a collateral for borrowing, and hence, investors must be sure to buy and hold them until maturity,” said Harshvardhan Roongta, CEO, Roongta Securities.
The minimum investment is ₹1,000 and there is no upper limit on investments in these bonds.
Distributors said both deposit-taking non-bank lenders and banks have slashed rates by 25 to 100 basis points after RBI reduced the policy rate by a cumulative 50 basis points since February.
The 10-year benchmark yields investors 6.22%.
After the rate cuts, Bajaj Finance that has a AAA rating pays 7.25% for a 24-60 month deposit, while SBI pays 6.3% for a deposit between 5 and 10 years. Senior citizens could earn 50-100 basis points more.
Investors can log on to the RBI retail direct website to buy these bonds, or can buy them from a distributor or private bank websites easily. “These bonds help you earn a lucrative 180 basis points over the 10-year benchmark government bond, while over fixed deposits and corporate deposits these bonds help you earn around 65-150 basis points more,” said Vikram Dalal, managing director, Synergy Capital.