Respected Sir
1)Government is thinking of paying 50% of salary arrears in for 2 year & above.
2) Thus there is urgent need to know about Bank Capitalisation bonds
3) In my view it Good for government to have large amounts for growth
But there are many strings attached
A) The global economy is in turmoil so will be bond market
B) Your Principal will remain in tact but gains will suffer.
C) It will be be like your money lying in Government Locker
D).Bonds can be traded in stock market in lot of 1000 crores. Thus you cannot trade
E) There will be need to open trading account & you will have to pay all charges . Thus your returns reduces further.
F) Bonds in odd lot can be traded through Big Bond holder. But you will then get less returns.
G). Bonds are inflation indexed Like RBI Governor worry .. You too will become his associate of worry.
H) Government gains on your money.. You get hardly gain but enjoy pain( Serving has no choice.It reminds me of old saying .When Rape is inevitable then ENJOY)
4),My sincere wish .. Government can pay arrears to serving in 2-4 installments
5) Don't issue Bonds to Serving .. Many may not how to operate & may loose even Principal
With best wishes & warm regards.
Col Lamba ( one man army)
.. ..........
Inflation Indexed Bonds in India
If you buy a fixed income bond, your problem is that as inflation increases, your income remains the same and this gives you a much lower return, net of inflation. One way to solve that problem is to have bonds whose payments are linked to inflation.
RBI has allowed inflation indexed bonds
(IIBs) in 2013-14, where they believe the Indian retail investor will keep their money because if Inflation should go up, income also goes up.
The lag is to allow for adjustments due to revisions. I’ve noted recently that WPI is adjusted often and sometimes significantly (a 0.4% change is significant and it was done for Feb WPI numbers when April numbers were released).
[The 7% is just for illustration. The actual coupon is likely to be much lower]
[Update: The first IIB coupon has been set at 1.44%]
Inflation index bonds expect to change the principal but retain the coupon at the same rate. You will get 7% but on a higher or lower principal depending on how inflation goes.Effectively the amount of interest you receive moves with inflation.
Year 1: Let’s say inflation is 10%. That means the WPI index, which was 200 at start, is now 220. The calculation is that principal goes up by this amount and so does interest.
So, principal = issue time principal * (current WPI / WPI index at issue time).
or, principal = 100 * (220/200) = 110.
The New Principal is Rs. 110. Interest paid out = Rs. 110 * 7% (constant coupon). = Rs. 7.7.
Effectively the new principal went up. You can’t do anything with this new principal. But like the house you live in, you can feel good that its price went up.
Year 2: Let’s say inflation is 5%. So the WPI is at (220 * 105%) = 231.
Same calculations give us:
New Principal = 100 * (231/200) = Rs. 115.5
Interest paid out = 7% of 115.5 = Rs. 8.085.
Year 3: Inflation of 12%
WPI = 258.72
New Principal = 100 * (258.72/200) = Rs. 129.36
Interest paid out = 7% of that = Rs. 9.06
And so on. Here’s a rough table comparing it with a regular bond of 7%:
If the bond now matures (note: maturity is 10 years for these bonds, but just saying) Rs. 197.78 will be paid to you as the principal. This becomes a capital gain. However, should the bond principal fall below Rs. 100 because the WPI index hugely deflates at maturity, you will get Rs. 100. The bonds are issued by the government of India, in Indian rupees. They are as safe as bonds get.
How do I buy and sell?
When such bonds trade they will trade on yields that, when added with expected inflation, will give you market level returns for similar tenure government bonds. This might just be a fantastic deal for a retail investor – an expectation of 5% inflation will give you a product that yields 12%, if you get to invest at Rs. 100.
On that note, Mutual Fund companies should create MFs that exclusively buy and hold such bonds. The interest that MFs receive is not taxable.
The gains that you make are taxable only on exit, and if you leave after a year, you can further “index” your returns to inflation as well, giving you a double benefit.
Linking to the WPI is a little zany. India will be the only country that uses a wholesale price index instead of a consumer price index (CPI) for inflation indexed bonds – other countries like the US, UK, Sweden and Hong Kong use consumer prices. After all that’s what you want to protect against – retail inflation.
In April 2013, the WPI shows just 4.89% inflation, while the CPI shows 9.39%. The gap is so wide that there is no chance any retail investor will want to buy indexed bonds based on the WPI.
CPI also contains elements the WPI does not, such as housing costs, services and others. In addition, the CPI revisions have been minor, and therefore is a more reliable number.
interest is paid once a year, or twice that is the case with other government bonds. (Answer: Twice)
There might be a trading case based on whether you think inflation will go up on down, though in most other government bonds rising inflation is bad for the price (they think yields will go up, and yields are inversely proportional to price); in IIBs, the price should go up or remain the same since the principal will be adjusted to reflect the change.
Certain things that will make the bonds attractive:
What is a Government bond
Government Bonds are as guaranteed as deposit-insurance-covered bank accounts (it'll be the government that steps in and pays the guaranteed amount, quite possibly issuing bonds to cover the cost), but (assuming the country does not default on its debt, which happens from time to time) you will get back the entire amount plus interest. For a deposit-insured bank account of any kind, you are only guaranteed (to the extent that one can guarantee anything) the maximum amount in the country's bank deposit insurance; If the bank where the money is kept goes bankrupt, for holdings on the order of what banks deal with, you would be extremely lucky to recover even a few percent of the principal.
Government bonds are also generally accepted as collateral for the bank's own loans, which can make a difference when you need to raise more money in short order because a large customer decided to withdraw a big pile of cash from their account, maybe to buy stocks or bonds themselves.
Government bonds are generally liquid. That is, they aren't just issued by the government, held to maturity while paying interest, and then returned (electronically, these days) in return for their face value in cash.
Government bonds are bought and sold on the "secondary market" as well, where they are traded in very much the same way as public company stocks.
If banks started simply depositing money with each other, all else aside, then what would happen? Keep in mind that the interest rate is basically the price of money. Supply-and-demand would dictate that if you get a huge inflow of capital, you can lower the interest rate paid on that capital.
Banks don't pay high interest (and certainly wouldn't do so to each other) because of their intristic good will; they pay high interest because they cannot secure capital funding at lower rates.
This is a large reason why the large banks will generally pay much lower interest rates than smaller niche banks; the larger banks are seen as more reliable in the bond market, so are able to get funding more cheaply by issuing bonds.
Individuals will often buy bonds for the perceived safety. Depending on how much money you are dealing with (sold a large house recently?) it is quite possible even for individuals to hit the ceiling on deposit insurance, and for any of a number of reasons they might not feel comfortable putting the money in the stock market.
Buying government bonds then becomes a relatively attractive option -- you get a slightly lower return than you might be able to get in a high-interest savings account, but you are virtually guaranteed return of the entire principal if the bond is held to maturity.
On the other hand, it might not be the case that you will get the entire principal back if the bank paying the high interest gets into financial trouble or even bankruptcy.
Some people have personal or systemic objections toward banks, limiting their willingness to deposit large amounts of money with them. And of course in some cases, such as for example retirement savings, it might not even be possible to simply stash the money in a savings account, in which case bonds of some kind is your only option if you want a purely interest-bearing investment..
......
RBI has allowed inflation indexed bonds
How do they measure inflation?
RBI will use the monthly-released WPI number. However they won’t use the most recent number – they would have used the number in Sep-Oct 2012 to finalize numbers for Feb-March 2013 and they’ll interpolate to get to the number on a certain date. (That is, for an interest payment date of March 15, they’ll do a day interpolation of the indexes of Feb and March)The lag is to allow for adjustments due to revisions. I’ve noted recently that WPI is adjusted often and sometimes significantly (a 0.4% change is significant and it was done for Feb WPI numbers when April numbers were released).
How does it work?
If you pay Rs. 100 for a bond that tells you it will pay 7% a year, the normal expectation is to get Rs. 7 per year, because the 7% (“coupon”) is on the Rs. 100 (“principal”).[The 7% is just for illustration. The actual coupon is likely to be much lower]
[Update: The first IIB coupon has been set at 1.44%]
Inflation index bonds expect to change the principal but retain the coupon at the same rate. You will get 7% but on a higher or lower principal depending on how inflation goes.Effectively the amount of interest you receive moves with inflation.
Year 1: Let’s say inflation is 10%. That means the WPI index, which was 200 at start, is now 220. The calculation is that principal goes up by this amount and so does interest.
So, principal = issue time principal * (current WPI / WPI index at issue time).
or, principal = 100 * (220/200) = 110.
The New Principal is Rs. 110. Interest paid out = Rs. 110 * 7% (constant coupon). = Rs. 7.7.
Effectively the new principal went up. You can’t do anything with this new principal. But like the house you live in, you can feel good that its price went up.
Year 2: Let’s say inflation is 5%. So the WPI is at (220 * 105%) = 231.
Same calculations give us:
New Principal = 100 * (231/200) = Rs. 115.5
Interest paid out = 7% of 115.5 = Rs. 8.085.
Year 3: Inflation of 12%
WPI = 258.72
New Principal = 100 * (258.72/200) = Rs. 129.36
Interest paid out = 7% of that = Rs. 9.06
And so on. Here’s a rough table comparing it with a regular bond of 7%:
If the bond now matures (note: maturity is 10 years for these bonds, but just saying) Rs. 197.78 will be paid to you as the principal. This becomes a capital gain. However, should the bond principal fall below Rs. 100 because the WPI index hugely deflates at maturity, you will get Rs. 100. The bonds are issued by the government of India, in Indian rupees. They are as safe as bonds get.
How do I buy and sell?
This part isn’t very clear again. The RBI conducts auctions for regular government securities. In these auctions you can buy bonds of Rs. 10,000 face value, at a price. The coupon rate is mentioned – in the first auction, the coupon rate will be determined from all the bids, and the final rate will be the rate for subsequent issuances.
To buy, you’ll have to have a demat account at least, to transfer those securities to. I believe that to bid in the auction you may need a CSGL account as well, but even the RBI says that it’s better to run a bid through a primary dealer than to try do it yourself, for now.
Even if you got a CSGL account up, you will find it difficult to sell unless you transfer your holding to a demat account. This process can take days.
To sell, you have to hope that these IIBs list either on the NSE debt segment or elsewhere (these are in the plan). A corporate with a CSGL account could sell on the RBI’s NDS platform, but only by going through a dealer; and here,
most trades are in multiples of Rs. 5 crores.
(there is an “odd lot” market for smaller numbers but those generally get worse prices)
Bonds will be auctioned on the last Tuesday of every month, and the first one will be on Jun 4, 2013. Each auction will be sized at 1,000 to 2,000 crore, for a total of 12,000 to 15,000 cr. (120 to 150 bn rupees) in 2013-14. This is just 2% of the gross government borrowing in the whole year.
Bond tenures are 10 years right now. They might introduce a longer one at another time.
Can Foreign Investors Buy?
Yes, within the same limits as any other government bond.What price do the bonds come at?
What price would you pay for this bond? The actual yield of this bond should not be considerably higher than a regular bond of the same tenure – typically, the rate of return = Average Inflation + coupon rate.
That means a 7% coupon IIB will, at 8% average inflation will give you 15% rate of return. (7% + 8% inflation). This will make sense only if the regular 10 year bond is trading at around 15%.
If inflation is expected to be 5% then expect that the bond will trade at yields of around 2.5% now, since the current 10 year bond is at 7.15%.
Pricing is fiendishly tough since there is no easy way to predict inflation.
The WPI itself is flawed, and is likely to be changed using a different base year soon, so many index calculations will change.
Right now we don’t know the coupon rate (5%? 7%?) of such a security since that will also be determined by weighted bid method in the first auction. Effectively the coupon of this security is the “real” interest rate – the amount greater than inflation – that you earn. In India we have always been working with negative real rates – that is, we are happy to have lower yields on our investments than the inflation we face. To that extent, a coupon rate of even 1% should be very desirable.
View
Interest received is taxable so you will get actual interest that is less than inflation. Instead, if you want to hold for a long term, you should buy a mutual fund that owns such securities.On that note, Mutual Fund companies should create MFs that exclusively buy and hold such bonds. The interest that MFs receive is not taxable.
The gains that you make are taxable only on exit, and if you leave after a year, you can further “index” your returns to inflation as well, giving you a double benefit.
Linking to the WPI is a little zany. India will be the only country that uses a wholesale price index instead of a consumer price index (CPI) for inflation indexed bonds – other countries like the US, UK, Sweden and Hong Kong use consumer prices. After all that’s what you want to protect against – retail inflation.
In April 2013, the WPI shows just 4.89% inflation, while the CPI shows 9.39%. The gap is so wide that there is no chance any retail investor will want to buy indexed bonds based on the WPI.
CPI also contains elements the WPI does not, such as housing costs, services and others. In addition, the CPI revisions have been minor, and therefore is a more reliable number.
interest is paid once a year, or twice that is the case with other government bonds. (Answer: Twice)
There might be a trading case based on whether you think inflation will go up on down, though in most other government bonds rising inflation is bad for the price (they think yields will go up, and yields are inversely proportional to price); in IIBs, the price should go up or remain the same since the principal will be adjusted to reflect the change.
Certain things that will make the bonds attractive:
- The coupon rate should be more than 1%
- They use the CPI
- They list the bonds on the NSE/BSE for easy buying/selling.
- They auction the bonds on the NSE directly – the whole CSGL/demat system is very complicated and unnecessary. I know RBI thinks its awesome, but it’s only great if you’re a dealer or a bank – for the rest of us human beings it is littered with barriers.
- They allow the bonds to be used as collateral for multiple purposes. For instance, margins when you take futures positions, or collateral for a loan or bank guarantee.
What is a Government bond
Government Bonds are as guaranteed as deposit-insurance-covered bank accounts (it'll be the government that steps in and pays the guaranteed amount, quite possibly issuing bonds to cover the cost), but (assuming the country does not default on its debt, which happens from time to time) you will get back the entire amount plus interest. For a deposit-insured bank account of any kind, you are only guaranteed (to the extent that one can guarantee anything) the maximum amount in the country's bank deposit insurance; If the bank where the money is kept goes bankrupt, for holdings on the order of what banks deal with, you would be extremely lucky to recover even a few percent of the principal.
Government bonds are also generally accepted as collateral for the bank's own loans, which can make a difference when you need to raise more money in short order because a large customer decided to withdraw a big pile of cash from their account, maybe to buy stocks or bonds themselves.
Government bonds are generally liquid. That is, they aren't just issued by the government, held to maturity while paying interest, and then returned (electronically, these days) in return for their face value in cash.
Government bonds are bought and sold on the "secondary market" as well, where they are traded in very much the same way as public company stocks.
If banks started simply depositing money with each other, all else aside, then what would happen? Keep in mind that the interest rate is basically the price of money. Supply-and-demand would dictate that if you get a huge inflow of capital, you can lower the interest rate paid on that capital.
Banks don't pay high interest (and certainly wouldn't do so to each other) because of their intristic good will; they pay high interest because they cannot secure capital funding at lower rates.
This is a large reason why the large banks will generally pay much lower interest rates than smaller niche banks; the larger banks are seen as more reliable in the bond market, so are able to get funding more cheaply by issuing bonds.
Individuals will often buy bonds for the perceived safety. Depending on how much money you are dealing with (sold a large house recently?) it is quite possible even for individuals to hit the ceiling on deposit insurance, and for any of a number of reasons they might not feel comfortable putting the money in the stock market.
Buying government bonds then becomes a relatively attractive option -- you get a slightly lower return than you might be able to get in a high-interest savings account, but you are virtually guaranteed return of the entire principal if the bond is held to maturity.
On the other hand, it might not be the case that you will get the entire principal back if the bank paying the high interest gets into financial trouble or even bankruptcy.
Some people have personal or systemic objections toward banks, limiting their willingness to deposit large amounts of money with them. And of course in some cases, such as for example retirement savings, it might not even be possible to simply stash the money in a savings account, in which case bonds of some kind is your only option if you want a purely interest-bearing investment..
......
Innovative approach: Government staff's pay hikes may fund bank capitalisation
08 Apr, 2016, 1041 hrs IST, Dheeraj Tiwari, ET Bureau
The government is considering an innovative proposal under which 50% of increased salary of higher-income government staff under the Seventh Pay Commission will be compulsorily invested in bank capitalisation bonds.
NEW DELHI: The government is considering an innovative proposal under which 50% of increased salary of higher-income government staff under the Seventh Pay Commission will be compulsorily invested in bank capitalisation bonds. The proceeds will be used to recapitalise banks without additional pressure on the fiscal.
While this will result in less cash in the hands of higher-income employees, as a sweetener they will get income tax rebate on the amount invested. Those wanting to invest more than 50% to save tax will be allowed to do so. The Bank Recapitalisation Scheme, as this proposal is being called, will be voluntary for employees with lower salaries (those in the Rs 5,200-20,200 bracket) and pensioners.
A finance ministry official confirmed that preliminary discussions around this proposal were held at a meeting on Thursday, but no decision on its implementation was taken. "The issue was discussed. We are looking at all options," he said.
"The proposal entails that through a provision under Income Tax Act, tax rebate should be offered to all employees receiving extra salary income through pay commission in the year 2016-17 and 2017-18, provided the money is invested in this Bank Recapitalisation Scheme," added the official.
The government will have to additionally shell out Rs 40,000-50,000 crore annually on account of implementation of the seventh pay commission recommendations with effect from January 1, 2016. If this proposal is accepted, a portion of this money will be used to capitalise banks. According to finance ministry estimates, state-run banks will require Rs 1.8 lakh crore of additional capital in the next four financial years, of which Rs 70,000 crore will be provided by the government.
The government has budgeted Rs 25,000 crore for bank capitalisation in the current fiscal. While the government has said it has made adequate provision in the Budget to cover the extra spending on account of the pay commission recommendations, analysts reckon it is not adequate and full implementation of award will make it difficult to achieve the fiscal deficit target of 3.5% of GDP.
"Increase in government employee wages and pension expenditure on account of seventh pay commission recommendations is not fully provided for in the Budget," Morgan Stanley had said in a report.
The proposal currently under consideration gives the government the leeway to meet both its pay commission and bank capitalisation commitments without putting the fiscal deficit target under threat. Bonds will provide the exchequer some wriggle room. The payment will become due when bonds mature, leaving the government with only the interest payment liability in the current fiscal.
The flip side is that the proposed scheme could annoy government employees expecting a greater take-home pay. Hence the scheme has a tax exemption lollipop.
A second government official said this amount will be used to recapitalise banks through a special bank capitalisation fund that will invest in perpetual non-redeemable preference shares issued by banks. Banks will pay 5.1% dividend that is also proposed to be exempted from the dividend distribution tax. The fund will in turn pay 5% interest to government employees, retaining 0.1% as administrative charge.
"This interest income will also be tax free for government employees," he said, which will increase the effective yield. The government will eventually pay back the amount in four equal investments after 8, 9, 10 and 11years, spreading the fiscal burden of repayment over that period. It will guarantee payment of 5% interest and repayment of deposits irrespective of whether the banks pay the dividend or not, the official
......
Salaried class will suffer
Bonds... Bonded money in. Capital Bonds
Col lamba ( one man army )
08 Apr, 2016, 1041 hrs IST, Dheeraj Tiwari, ET Bureau
The government is considering an innovative proposal under which 50% of increased salary of higher-income government staff under the Seventh Pay Commission will be compulsorily invested in bank capitalisation bonds.
NEW DELHI: The government is considering an innovative proposal under which 50% of increased salary of higher-income government staff under the Seventh Pay Commission will be compulsorily invested in bank capitalisation bonds. The proceeds will be used to recapitalise banks without additional pressure on the fiscal.
While this will result in less cash in the hands of higher-income employees, as a sweetener they will get income tax rebate on the amount invested. Those wanting to invest more than 50% to save tax will be allowed to do so. The Bank Recapitalisation Scheme, as this proposal is being called, will be voluntary for employees with lower salaries (those in the Rs 5,200-20,200 bracket) and pensioners.
A finance ministry official confirmed that preliminary discussions around this proposal were held at a meeting on Thursday, but no decision on its implementation was taken. "The issue was discussed. We are looking at all options," he said.
"The proposal entails that through a provision under Income Tax Act, tax rebate should be offered to all employees receiving extra salary income through pay commission in the year 2016-17 and 2017-18, provided the money is invested in this Bank Recapitalisation Scheme," added the official.
The government will have to additionally shell out Rs 40,000-50,000 crore annually on account of implementation of the seventh pay commission recommendations with effect from January 1, 2016. If this proposal is accepted, a portion of this money will be used to capitalise banks. According to finance ministry estimates, state-run banks will require Rs 1.8 lakh crore of additional capital in the next four financial years, of which Rs 70,000 crore will be provided by the government.
The government has budgeted Rs 25,000 crore for bank capitalisation in the current fiscal. While the government has said it has made adequate provision in the Budget to cover the extra spending on account of the pay commission recommendations, analysts reckon it is not adequate and full implementation of award will make it difficult to achieve the fiscal deficit target of 3.5% of GDP.
"Increase in government employee wages and pension expenditure on account of seventh pay commission recommendations is not fully provided for in the Budget," Morgan Stanley had said in a report.
The proposal currently under consideration gives the government the leeway to meet both its pay commission and bank capitalisation commitments without putting the fiscal deficit target under threat. Bonds will provide the exchequer some wriggle room. The payment will become due when bonds mature, leaving the government with only the interest payment liability in the current fiscal.
The flip side is that the proposed scheme could annoy government employees expecting a greater take-home pay. Hence the scheme has a tax exemption lollipop.
A second government official said this amount will be used to recapitalise banks through a special bank capitalisation fund that will invest in perpetual non-redeemable preference shares issued by banks. Banks will pay 5.1% dividend that is also proposed to be exempted from the dividend distribution tax. The fund will in turn pay 5% interest to government employees, retaining 0.1% as administrative charge.
"This interest income will also be tax free for government employees," he said, which will increase the effective yield. The government will eventually pay back the amount in four equal investments after 8, 9, 10 and 11years, spreading the fiscal burden of repayment over that period. It will guarantee payment of 5% interest and repayment of deposits irrespective of whether the banks pay the dividend or not, the official
......
Salaried class will suffer
Bonds... Bonded money in. Capital Bonds
Col lamba ( one man army )
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