Analysts see return of tax-free bonds in Budget, but wary of jump in yields

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Mumbai | Published: February 25, 2015 12:12:45 AM

After showing little presence in FY15, tax-free bonds could make a comeback in 2015-16...

After showing little presence in FY15, tax-free bonds could make a comeback in 2015-16. While there was no announcement in the FY15 Budget on tax-free bonds, the government may announce some quota for tax-free bonds this time. State-owned public sector units, especially in the roads and railways sectors, are likely to benefit from this.

“We expect the government to bring in tax-free bonds in the Budget as that will help boost infrastructure spending,” said Ashish Jalan, assistant vice-president, fixed income at SPA Securities.

Tax-free bonds with a limit of Rs 30,000 crore were introduced in 2011-12 to boost infrastructure spending. Select state-owned entities, including Rural Electrification Corporation (REC) and Power Finance Corporation (PFC), were allowed to issue these bonds. This fiscal, the yields across maturities remained in the range of 7.93% to 8.3%.


In 2012-13, the limit was doubled to Rs 60,000 crore. However, the amount issued was Rs 18,000 crore which was way below the target. The yields in this fiscal for various maturities were in the range of 6.82% to 7.4%.

In the next financial year, the limit was brought down to Rs 50,000 crore, against which companies borrowed around Rs 49,000 crore. The yield in this fiscal remained above 8% for all tenures.

Bond market experts say that allowing tax-free bonds could lead to a rise in yields as investors will have many options to choose from. “It is unlikely that the government will bring in tax-free bonds this time as they will not want to give up revenues,” said Shashikant Rathi, senior vice-president at Axis Bank.

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