Tax-free offer of 7.32% to 7.53% may attract retail investors based on recent trends even though the coupon is lower than what was offered in 2012-13 and 2013-14. Interest rates in future will determine if the offer is an opportunity or not
Indian Railways Finance Corporation (IRFC) issue size of Rs4,532 crore, which is six times more than that of earlier issues, should help the hungry investors of tax-free bonds, who were allotted merely 15%-20% of their investment in NTPC and REC. Tax-free bond is a good option for those in the higher tax bracket who are investing for long-term. Awareness of tax savings by investing in government owned companies tax-free bonds issues has helped recent issues offering around 7.5% when offering of nearly 8% in 2012-13 found difficulty in subscribing quickly.
What’s on IRFC tax-free bonds offer from 8th December?
IRFC bonds offering 20-year bonds with 7.5% is less than 15-year bonds of 7.53%, which is something seen for the first time. Till now, 20-year bonds always offered higher coupon than 15-year tenure. With the one to 10 years bank FD offering 7.25%-7.75% taxable interest, tax-free bonds with 7.5% coupon are attractive for those in 20% or higher tax bracket. There will be an opportunity of big size tax-free bond issues from Housing & Urban Development Corporation (Hudco) and National Highways Authority of India (NHAI) in the near future.
Interest rate cycle is difficult to predict. Investors who have purchased tax-free bonds in 2012-13 at a coupon of nearly 8% may have missed 2013-14 issues of over 9% coupon if they had not kept funds ready for it. So, invest in upcoming tax-free bonds, but do not exhaust all the funds. If there are tax-free bond issues one year from now, it will be almost impossible to guess whether future coupon rate will be higher or lower.
The future tax-free bond rates will depend on G-Sec rates which have been holding up even after the 50 basis points (bps) cut in repo rate by Reserve Bank of India (RBI) in September. The 10-year G-sec yield has actually increased in last month to 7.76% primarily on sustained selling pressure from banks and corporates. However, going forward, the yields will gradually soften says State Bank of India (SBI) in its Ecowrap report. Net supply is one of the reasons why G-sec yields are not coming down.
There are predictions about RBI holding the repo rate till end of financial year and other reports claiming that change is not possible till end of 2016. As expected, RBI kept the rates unchanged on 1st December awaiting more signals from the inflation, Pay Commission proposals and the Centre’s fiscal path. A hike of 23.55% in emoluments, including pay, allowances and pension, for the 47 lakh serving employees of the Central government and 52 lakh pensioners has been proposed by the Seventh Pay Commission. If the recommendations are accepted, it will push up the fiscal deficit to 4.7% of the GDP from this year's 3.9%. Impact on inflation will have to be seen.