MUMBAI: State-government bonds are increasingly featuring in the shopping carts of wealthy individuals and religious and educational trusts that want returns higher than those offered by fixed deposits or central bonds, the traditional instruments available to risk-averse investors.
Bharatiya Vidya Bhavan, which runs the SP Jain management institute and a large number of schools, the Swaminarayan Trust, SiddhiVinayak Temple Trust, and Thesophy Educational Society are among the investors buying bonds sold by various states, market sources told ET.
They have either started investing for the first time, or are increasing allocations. Provident funds, too, are buying more of these bonds.
Wealthy investors, trusts, and institutions are keen on these papers, said one of the persons cited above. These instruments yield at least 150 basis points more than traditional products such as bank deposits.
Deposits with the State Bank of India (SBI) are offering 6.50% with five-ten year maturities, while state bonds of similar maturity are yielding 8.25-8.50% annually.
“While the rates offered are much higher than traditional bank deposits, the revised 7.75% norm too has helped add a new set of investors for these sovereign-like instruments with little risk of defaults,” said Vikram Dalal, managing director, Synergy Capital. “State bonds …. are treated on a par …. for bank SLR status.”
Government securities bearing 7.75% rate are a special category of securities meant for retail investors primarily. In January the government brought a new window of subscription after reducing the rates by 20 basis points. Also, trusts are apparently barred from investing in these instruments, explaining the demand for state bonds, dealers said.
Statutory Liquidity Ratio, or SLR, is the portion of total bank deposits that must be invested in sovereign bonds. It is now at 19.5%.
“Lately, trusts have started allocating more investments toward state bonds,” said Ashish Ghiya, MD, Derivium Tradition (India). “Their spreads over (central) government bonds have risen in last six months. With more supply coming in, investors are increasingly looking at these securities to attain their yearly return targets.”
The gap between state and central governments bonds is now about 70 basis points.