With interest rates coming down in the system during Covid-19 times, the government has moved quickly to stop selling the 7.75 per cent savings bond 2018, popularly known as the RBI Savings bond.
This move is in line with the recent RBI cut in repo rate, subsequent trimming of deposit rates by banks, and paring of small savings rate by the government. It is, however, a big dampener for senior citizens and those savers who were looking to opt for this savings instrument for safety of capital and relatively higher post tax returns.
SBI fixed deposit
The savings bond offered post tax returns of 4.4 per cent annually for a person in the highest tax bracket. In the case of SBI fixed deposit, the post tax return on term deposit of 3-5 years for a person in the 30 per cent tax bracket stands at 3.71 per cent. The bank’s one-year deposit rate is at the lowest in 17 years.
As options for investments shrink, the latest RBI/ government move may prompt investors to look at top-rated fixed deposits of corporates, say economy watchers. Wealthy investors, who have turned risk averse in the wake of economic uncertainties, now prefer secured returns as against astronomical yields/ returns.
“The Government of India..hereby announces that the 7.75 per cent Savings (taxable) Bonds 2018 shall cease for subscription with effect from the close of banking business on Thursday, May 28,” the Reserve Bank of India (RBI) said in a notification published on its website.
The RBI Savings Bond, which had tenure of seven years and came with cumulative and non-cumulative options, was introduced in January 2018 as a taxable bond to individuals and Hindu Undivided Family members. It was seen as very attractive for those, especially the retired, looking for a safe haven with reasonable returns. Also, the lock-in conditions are relaxed for senior citizens. For investors in the age bracket of 60-70 years, 70-80 years and above 80 years, the lock-in period had been pegged at 6, 5 and 4 years.
The minimum value of investment was ₹1,000 with no maximum limit. The RBI Savings Bond, issued only in demat form,were issued by the RBI on behalf of the Indian government. These bonds were neither tradeable in the secondary market nor transferable.
Conservative investors looking for safety had opted to park a portion of their surplus in the RBI Savings bond, although it was taxable at a coupon rate of 7.5 per cent. With half yearly compounding, the yield on the cumulative bond came up to 7.9 per cent, much higher than the Fixed Deposit rates of public sector banks.
Attractive returns
A return of 7.5 per cent is certainly attractivewhen the repo rate in the system is just 4 per cent. The move to stop selling RBI Savings Bond comes on the heels of the RBI’s May 22 announcement (an inter-meeting move) of reduction of the repo rate to 4 per cent from 4.4 per cent. The reverse repo rate was also slashed to 3.35 per cent from 3.75 per cent. Following the lockdown announcement, the RBI had, on March 27, first announced a 75 basis cut in repo rate to 4.4 per cent. The sharp cut in repo rates this year translated to sharp reduction in the rates at which banks borrowed from RBI, but also brought down the deposit rates in the system.
The closure of the RBI Savings Bond will apply only for prospective investors, and those who have already purchased these bonds will not be affected by the latest move, experts said.
It may be recalled that the government had, in April this year, cut the interest rate on small savings schemes. While the rate on Public Provident Fund was cut to 7.1 per cent from 7.9 per cent, the coupon on Sukanya Samridhi Yojana was lowered to 7.6 per cent from 8.4 per cent earlier.
Despite the fall in bank deposit rates, the flow of money into bank deposits has only surged and between April 1 and May 8, the banks time deposits increased by ₹4.4-lakh crore (₹1.46-lakh crore in the same period last year).