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Bond market expects Centre to allow huge tax-free bond issues

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With bond yields falling to multi-year lows,a section of the bond market says it could be time the government enables in t he Budget state-owned infrastructure and in rafinance companies to raise enormous amounts of tax-free bonds.

The government doesn’t  raise tax-free bonds directly.It instead allows state-owned institutions to raise these bonds.The bonds raised by these companies are over and above the government’s borrowings.The government is committed to borrowing with in a particular limit.For 2016-17, the borrowing was limited to 3.5 percent oft h e gross domestic product,which was later reduced byRs.18,000crore in the firstweek of January this year.

“The government for goes only asmall amount on taxes on tax-free bonds,but it largely helps the infrastructure sector. Given the government has good taxbuoyancy,whatwith direct and indirect taxes expected to be good after demonetisation,itmay allowafairamountof tax-freebondsthistime around,”saidJoydeep Sen,anindependent financialadvisor.

Foranyinvestment cycletopickup,itisthe government and its companies that start investingfirst.Privatesector investmentactivityhasslowed downinthecountry,ascapacityremainsunutilised.Once thegovernmentstartsspending and creating demand, privatepartieschipinwith theirownlong-terminvestment cycles. This perhaps couldbeaperfecttimeforthe governmenttopickupthetab.

“Ifthegovernmentcompaniesareabletoborrowatrockbottomcoupons,theycanalso deploythemoneyatacheap rate. Now that the cost of borrowingissolow,itwon’tbe surprisingifthegovernment pushes the public sector companiestostartlendingfor investments, or invest in long-terminfraprojects,”said DevendraDash,seniorbond dealeratDCBBank.Theyield on10-yearbondclosedat6.39 percentonTuesday. Theyieldshaveheld steadybelowsevenper centsinceSeptember 2016,aroundthelevels lastseenin2009.

Some,though,disagree that tax-free bonds would spur investment.However, tax-freebondswillhaveother advantagesforsavers.Ifthey areissuedinlargenumbers, bankswillnotbeinaposition tobringdowntheirdeposit ratesbelowthecouponsoffered bythebonds.“Highissuances oftax-freebondswilladdstickinessinbankdepositrates.On thecontrary,high-ratedPSUs areanywayborrowingatattractiveratesinanenvironmentof tepidcreditdemandandhigh liquidityinthebankingsector,” saidSoumyajitNiyogi,associatedirector,Credit&Market ResearchGroup,IndiaRatings
Business Standard New Delhi,11th January 2017

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