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India Households Buy Most Tax-Exempt Debt Since 2002    
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Source: Bloomberg

Individuals in India are buying the most bonds in eight years, taking advantage of tax breaks and providing funding to build the roads, railways and power plants needed to sustain growth in Asia’s third-biggest economy.

Indian Railway Finance Corp., the finance unit of the state-owned rail network, opened a sale on Nov. 15 to raise as much as 30.8 billion rupees ($675 million) of five-, seven- and 10-year notes. This year’s sales to individuals exceed 50 billion rupees, the most since about 56 billion rupees were sold in the fiscal year ending March 2002, according to Securities and Exchange Board of India data.



Pranab Mukherjee, India's finance minister.
Photographer: Tomohiro Ohsumi/Bloomberg



Finance Minister Pranab Mukherjee allowed tax deductions for bonds linked to infrastructure projects in his February budget, seeking the $1 trillion needed for construction in the five years to 2017. The yield on India’s benchmark 10-year rupee bond has declined 14 basis points in the past month to 8 percent as yields in China and Brazil rose, reflecting optimism that India will cut its budget deficit and rein in inflation.

“The government intends that the tax benefit percolate to as large a number of common people as possible,” Rajendra Kashyap, managing director of Indian Railway Finance, said in a telephone interview from New Delhi. “The borrowed money is used for acquiring rolling stock such as locomotives, wagons and coaches, which are highly productive infrastructure products.”

Rising Demand

Investors bid for 20 times the amount of bonds offered when State Bank of India, the nation’s largest lender, sold 10 billion rupees of debt to individuals last month. Infrastructure Development Finance Co., a state-backed lender, and L&T Infrastructure Finance Co., a unit of India’s biggest engineering company Larsen & Toubro Ltd., sold retail bonds this month. The companies are based in Mumbai.

Households in India, with savings equivalent to 11.9 percent of the economy, favor retail bonds offering tax benefits to help meet financial goals, such as educating their children or funding marriages. Investors get a 20,000 rupee tax exemption on buying infrastructure bonds, increasing the effective yield.

“My financial goal was just to save tax,” Prem Raheja, 32, a Mumbai-based businessman who bought Infrastructure Development Finance’s five-year bonds, said in an interview yesterday. “The attraction was tax savings of an additional 20,000 rupees on the bonds.”

Falling Yields

The yield on India’s 10-year rupee bond was near a three- week low and has declined from as high as 8.18 percent on Oct. 26 as inflation slowed. The benchmark wholesale-price index in October rose 8.58 percent from a year earlier after an 8.62 percent increase in September, the Commerce Ministry said in New Delhi on Nov. 15.

Yields on India’s benchmark bonds have shrunk to within 520 basis points, or 5.2 percentage points, of U.S. Treasuries from a decade-high 567 basis points on Oct. 20.

The Reserve Bank of India is monitoring the current liquidity situation in the banking system, Deputy Governor Shyamala Gopinath said in Mumbai this week. India’s banks have borrowed an average of 1 trillion rupees each day this month through the central bank’s repurchase auction, compared with a daily average of 522 billion rupees last month, indicating the tight cash conditions in the banking system.

New Offering

Rural Electrification Corp., India’s state-controlled lender to power projects, started marketing a 5 billion rupee sale of 10-year bonds yesterday, according to two people with direct knowledge of the matter. The company told investors it aims to price the notes to yield 8.8 percent after the sale closes on Nov. 25, the people said, asking not to be identified as the information in private.

India’s rupee weakened to a two-month low today, reaching 45.66 per dollar. It’s up 2 percent this year.

The cost of protecting the debt of government-owned State Bank, which some investors perceive as a proxy for the country, has fallen 77 basis points from this year’s high of 239 reached in May, according to CMA prices. They were 162 as of yesterday.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Barclays Plc and Nomura Holdings Inc. forecast the Reserve Bank of India will hold borrowing costs until March as Commerce Ministry data this month showed factory output grew 4.4 percent from a year earlier in September, the slowest pace in 16 months.

Mumbai Airport

India’s environment ministry this week approved construction of a 150 billion-rupee second airport in Mumbai, the nation’s financial capital. Building infrastructure is helping to spur growth in the $1.3 trillion economy.

Malaysia, the Philippines, Indonesia and Thailand have sold the equivalent of at least $6 billion worth of local-currency bonds to individual investors this year as they augment sales aimed at plugging their budget deficits, according to data compiled by Bloomberg. In Japan, there are $330 billion of retail bonds outstanding in the market, Bloomberg data show.

“Selling retail bonds is a strategy to diversify to new investor classes,” Geeta Chugh, a credit analyst at Standard & Poor’s in Mumbai, said in a telephone interview yesterday. “The purpose is to tap household savings because infrastructure requires long-maturity funds.”

Infrastructure bonds typically have longer maturities to match the length of time such projects take to complete. Banks have deposits that typically mature in less than two years, Chugh said.

To contact the reporters on this story: Anurag Joshi in Mumbai [email protected]

To contact the editor responsible for this story: Sandy Hendry at [email protected]

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