After almost a decade, the interest rates on public sector bonds have touched the 12%-level with National Bank for Agriculture and Rural Development (Nabard) offering 12.82% interest on its latest offering?the Bhavishya Nirman Bonds?which have a tenure of 10 years.
Other PSUs are expected to follow the Nabard bonds. This means for an initial investment of Rs 8,250, an investor will get Rs 20,000 on maturity.
The high rates reflect the high inflation rate in the economy. Though the latest Wholesale Price Index (WPI) shows the inflation has moderated to 4.41%, the inflationary trend continues.
The last time such high rates were offered by a slew of banks and financial institution on their the deep discount bonds in the late nineties. But softening of interest rates starting 2000-01 forced banks to retire them prematurely.
Also, at a first glance, the promised interest rate by Nabard seems much more lucrative compared to interest rate on bank deposits, a closer look suggests it is very much on the lines of the industry.
For instance, Nabard is quoting simple interest rate, whereas banks provides compound interest being calculated on quarterly basis. If calculated on a quarterly basis, the Nabrad 12.5% will come out to be 9.5% approximately, a rate which is comparable to what banks pay for deposits on long term maturity” said Raghavan, general manager, Indian Bank.
“In case of bank deposits, customers can withdraw money even before maturity period (normally on a penalty of 2% interest). On the other hand, in cases of bonds, investor can only get back his money after maturity” said Arun Kaul GM (treasury), Punjab National Bank.
Additionally, bond holders will not able to get the benefits of reinvestment, which fixed depositors with banks enjoy. However, bonds borrowers are likely to benefit if interest rate cycles starts moving downwards. The bond holders will still get a promised return even when banks will reduce interest rate on fixed deposits in a damping interest rate scenario.