Context: the Reserve Bank of India said the Government of India has discontinued 7.75 per cent savings (taxable) bonds, 2018 for subscription with effect from the close of banking business.

Current scenario:

  • Over the last few months there has been cut in deposit rates by the banks and a cut in small savings rate.
  • The  recent move comes in line with the cut in repo rate by the RBI and subsequent cut in deposit rates by banks and small savings rate by the government,

About 7.75 percent bonds:

  • The 7.75 bonds 2018 were issued with effect from January 10, 2018 and were available for subscription to resident citizens/HUF to invest in a taxable bond. 
  • 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 encasement to individuals who were 60 years and above. Interest on these bonds will be taxable under the Income-tax Act, 1961.

What is  this change now?

  • The government has withdrawn these bonds and therefore it will not be available for investors to invest. 
  • This means it is only ceasing fresh issuance and not redeeming those already invested. Those whose cheque’s got submitted and cleared till yesterday will get 7.75 per cent.
  • Concerns: The move will deprive investors of another saving instrument that yielded relatively higher post tax returns for investors.

Was it in high demand?

  • It was mostly used by High Networth Investors (HNIs) to invest, the demand for RBI bonds went up significantly over the last couple of months as investors turned risk averse. 
  • The tax returns were low but the investors saw it as the safest investment instrument available.
    • At this time investors are not looking for return but for the safety of their capital and so many investors were investing in these instruments purely for reasons of safety of their capital

Source: https://indianexpress.com/article/explained/explained-what-rbi-discontinuing-7-75-saving-bonds-means-to-investors-6432799/

Image Source: The Economic Times