RBI ceases subscription of 7.75% 2018 savings bond

The Reserve Bank Of India, today, on its press release announced the closure of the 2018 taxable savings bond with interest of 7.75% for further subscription from May 28, 2020.

RBI issues short and long term bonds on the basis of the prevailing economic condition using Open Market Operations (OMO). In 2018 RBI issued long term bonds at the rate of 7.75%.

Any Indian can invest in these bonds with a minimum investment of Rs.1000 and in multiples of 1000 thereon.  There was no maximum limit on investments.

Interest on these bonds will be taxable under the Income-tax act 1961 as applicable for the individual bondholders. Usually, for long term bonds, there will be a lock-in period for the investors. The lock-in period in these bonds was 7 years, but relaxations for senior citizens in the lock-in period clause was provided.

The investors in these bonds can opt for cumulative or non-cumulative form for receiving interest. In the cumulative method, the interest payable to the investors will be reinvested and the total interest will be paid to the investor at the end of the maturity period. For non-cumulative form where investors receive interest at half-yearly from the date of issue.

The bonds were issued at par and made available to investors at the face value of Rs.1000. Today is the last day for subscribing to these bonds.

What led to the closure of the Bond to investors?

The RBI makes decisions on the monetary policies of the country to maintain stability in interest rates and drive economic growth. The bonds issued by the RBI are considered to be risk-free.

The repo rate at which the RBI lends to other banks decide the lending rates at which the banks lend to its borrowers. The repo rate is being reduced by RBI continuously in the past month to fight the COVID-19 crisis. This eventually led to the fall in interest rates at which banks lend to borrowers. Now to maintain the interest margin at which banks operate the deposit rate, which depositors get for their deposits, will get reduced.

So if banks are going to provide lesser interest for its deposits but RBI giving more interest which is considered to risk-free then investors will invest in these bonds than investing in riskier bank deposits.

Hence RBI has decided to close the subscription of these bonds to investors and also instructed the receiving officers to make a note and communicate this to their bank branches.

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