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Indian Economy

Savings Bonds Scrapped

  • 30 May 2020
  • 5 min read

Why in News

Recently, the Government of India has discontinued 7.75% savings (taxable) bonds, 2018 for a subscription.

Key Points

  • Applicable: The government’s withdrawal of these bonds means that it is only ceasing fresh issuance and not redeeming those already invested.
  • 7.75% RBI Bonds 2018:
    • These were issued with effect from 10th January 2018 and were available for subscription to resident citizens/Hindu Undivided Family (HUF) to invest in a taxable bond.
      • These bonds were first introduced in 2003 as 8% GOI Savings (Taxable) Bonds.
      • The 8% interest rate was brought down to 7.75% in January 2018.
    • While one bond was of Rs 1,000 each, the bonds had no maximum limit for investment.
    • The bonds had a 7-year lock-in period from the date of issue but it permitted premature encashment to individuals who were 60 years and above.
    • Interest on these bonds is taxable under the Income-tax Act, 1961.
  • Reasons for High Demand:
    • The bonds are mostly used by the High Net-worth Individuals (HNIs) to invest as the bonds offer both regular and cumulative income options.
    • These bonds were a good choice for savers, pensioners and investors who are not falling under tax liability or who have an exemption under the Income-tax Act as these are safe and generate adequate returns.
    • Their demand went up significantly over the last couple of months as investors turned risk-averse and invested in them purely for reasons of safety of their capital.
  • Reasons for Cut in Rate:
    • The interest rates are declining after the global growth rate projections have been brought down following the spread of Covid-19.
    • The RBI first announced a 75 basis point cut in repo rate to 4.4% on 27th March 2020 and then again announced a cut in repo rate by 40 basis points to 4% on 22nd May 2020.
      • A cut in repo rates not only reduces the rate at which commercial banks borrow from RBI but also leads to a cut in deposit and lending rates for banks.
    • The RBI’s move to cut in repo rate has been to push credit growth and demand in the economy for its growth.
  • Impact:
    • The move comes as a setback to savers and pensioners at a time when their returns from bank deposits have fallen steeply following the cut in deposit rates and reduction in the small savings rate.
    • The saving bonds were guaranteed for repayment by the RBI but now savers and pensioners are now at the mercy of banks.
    • The scrapping will deprive investors of a saving instrument that yielded relatively higher post-tax returns.
      • Investors and savers are already worried due to stock markets falling, the Sensex down by around 10,000 points this year and mutual funds giving negative returns.
  • Comparison to Other Options:
    • After the cut in the small savings rate in April 2020, Public Provident Funds (PPF) interest rates were cut to 7.1% (7.9% earlier) and Sukanya Samriddhi Yojana interest rates were cut to 7.6% (8.4% earlier).
    • State Bank of India (SBI) currently offers an interest rate of 5.3% for a term deposit of 3-5 years and 5.4% on term deposits of 5-10 years.

Source: IE

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