by Moiz Mannan
India has made another push towards internationalizing its currency and presented another attractive window of opportunity for non-resident Indians wishing to gain from debt rather than equity.
The country’s central bank, the Reserve Bank of India (RBI) last week lifted restrictions on foreign retail investors, including NRIs, to buy rupee-denominated non-convertible tax-free bonds. The bank said in a statement that Indian companies selling such bonds would invest the money raised in the country’s vast but hungry infrastructure sector as well as in bank deposits.
As volatility persists in the Indian equity markets, a large number of resident as well as non-resident Indians feel it prudent to increase their holdings in the debt sector which is safe. Obviously, the rates of return are a concern.
At this stage, the 10-year benchmark bond yield crossed has crossed the nine percent yield. Fixed deposits in banks are also offering comparable returns, but the big difference here is the taxation. Returns from bank deposits are taxable. So, if a bank offers an interest rate of around nine per cent, the actual return after tax deduction would come somewhere over seven per cent. If it is bonds, the investor takes home the entire nine percent.
Tax-free bonds are bonds issued by companies, mostly, government enterprises, on which there is a fixed coupon rate (interest rate) and a long-term maturity of 10,15 or 20 years. This means that this is a good option for investors having a long term horizon.
As the money is raised for long-term infrastructure projects, these bonds have a long tenure. But given that they are issued by government-backed companies, the credit risk or risk of non-repayment is very low.
Companies such as IRFC, IIFCL, NHAI, REC, PFC, HUDCO, NHB, NTPC and NHPC have been permitted to raise tax-free bonds in 2013-14. With the season just starting, REC, HUDCO and IIFCL have so far tapped the market and there may be more issues coming up in succeeding months.
Every year, the government allows some public sector companies to issue tax-free bonds.
Global investors have shown interest in rupee-denominated bonds. Recently, International Finance Corporation, the private finance arm of World Bank, had raised Rs 1,000 crore in the US by issuing rupee-linked bonds to global investors. IFC plans to raise a total of $1 bn. In such currency bond, the foreign investor will get proceeds in rupee. IFC, the private finance arm of the World Bank, will use these funds to finance private sector investment in the country.
Investors in these bonds get the benefit of asset diversification and high yields, particularly in situations when the underlying currency is expected to appreciate. The rupee, which touched a historic low of 68.85 per dollar in August, has strengthened about 11 per cent to around 61.54 a dollar. Currency dealers expect the local currency to strengthen beyond the 60 per dollar level by the end of this fiscal and to strengthen more if the government manages to achieve its deficit targets.
According to economic affairs secretary Arvind Mayaram, the bond issuance will be a new initiative for the intermediation of international savings for development in India, a statement by the finance ministry said last Thursday. It will also help deepen the capital markets in India and establish a rupee benchmark in the global markets.
The RBI decision comes at a time when commercial banks in India have continued to report a steady improvement in deposit mobilisation in December, with year-on-year growth pegged at 17 per cent, mainly showing the effect of inflows from non-resident Indians. Bank executives have been quoted by the media as saying that banks had raised $34bn from NRIs in foreign currency deposits ((FCNR(B)). In rupee terms, it amounts to Rs144,000 crore after swapping dollars with RBI.
Further, an RBI survey, the findings of which were made public recently, records a larger proportion of the money being remitted by NRIs is for investment purposes. The survey on remittances from overseas Indians show that in 2012-13 investments in equity increased from three per cent of the total remittances in 2009-10 to four per cent in 2012-13 while it was three per cent in the case of investments in land and property and steady at 20 per cent in bank deposits.
Out of the total remittance transfers to India, the high value remittances accounted for 63 percent of the total value of remittance inflows. The trends seem to suggest that over the years, a higher proportion of remittances are being directed towards investment purposes, the survey said.
Keeping the trend in mind, one is sure that any forthcoming tax-free bond issue would receive a good response from NRIs who stand to gain more from this option than from bank fixed deposits.
The Peninsula
