The Reserve Bank of India (RBI) being the central bank as well as the banker to the government, often issues bonds in the market in order to borrow money to finance the country’s debt. While most of these instruments are largely subscribed by banks and financial institutions, certain types of bonds issued by the RBI find interest from individual investors who seek long-term, very low risk investment avenues beyond bank fixed deposits.
RBI Relief bonds have traditionally been issued by the central bank carrying interest rates closer to the prevailing small savings rate with the added benefit of income tax exemptions. They are considered bonds with the highest safety, since they are backed by the Government of India. These bonds have long been one of the favoured fixed income investment instruments over the years.
Prior to 2018, these RBI Bonds provided several incentives to encourage retail investment but many of them have now been revised. These include removing income tax exemptions, increasing tenure, non-tradability of the bonds on exchanges, among others. The latest RBI Bond issued was on January 10th, 2018 which was taxable and offered a lower interest rate of 7.75% with a maturity of seven years. These bonds are also not eligible as collaterals for loans from banks and financial institutions.
To suit the risk and return profile of the safety-seeking, retirement focussed investors, certain incentives for senior citizens with regard to the ability to withdraw funds before maturity are also provided.
RBI Bonds or 7.75% of Government of India bonds are considered suitable for investors in a low income tax bracket seeking long term savings options other than post office savings schemes or bank deposits.
Apart from RBI Bonds, individual investors also have other low-risk investment options such as infrastructure bonds.
Infrastructure bonds are issued by government approved private financial institutions such as ICICI Bank, IDFC, LIC and L&T Infrastructure Finance Company and are typically comparable to RBI Bonds, bank fixed deposits and other small savings instruments in their risk profile. They are bonds issued to borrow money to fund infrastructure projects in the country and typically have high credit ratings, making them safe investment avenues. They also provide additional benefits of income tax exemptions and the interest rates are comparable to those offered by other government of India bonds or bank fixed deposit rates. These bonds are typically of a longer tenure and are thus, susceptible to changes in the interest rate environment.
Thus, an investor seeking suitable long term savings options with a very low risk tolerance can consider investing in such government and quasi-government bonds and diversify his/her portfolio