 "Flop, superflop: How RBI and FM got it wrong on inflation bonds and RGESS")
Will someone tell the FM and Raghuram Rajan something about what attracts Indian savers? Right now, it seems neither the Reserve Bank of India (RBI) nor North Block has a clue, for we now have two back-to-back flops in two widely-touted schemes intended to attract retail investor.
One is the Rajiv Gandhi Equity Savings Scheme (RGESS), intended to nudge the small investor towards equity, and the other is the Inflation Indexed National Savings Securities (IINSS), intended to entice savers away from “unproductive” investments like gold. Both were washouts in their first avatars, and bigger disasters despite being restructured in their second.
According to a report in Business Standard yesterday (8 April), the RGESS - as predicted by this writer repeatedly - drew less than 6,000 investors in 2013-14, raising a princely sum of Rs 35 crore. Over two years, 41,301 demat accounts were opened for investments in RGESS, but not even half of them actually invest anything.
Verdict: Two years of RGESS have been a double-flop.
As for the inflation-indexed bonds, the first avatar, linked to the wholesale price index, introduced early last year, was given a complete miss by retail investors. Big investors took a small shine to it, but not much. The next one, targeted at retail investors, drew all of Rs 100 crore even though it was linked to the consumer price index (CPI), reports BusinessLine today (9 April).
The reason why no one is buying either the RGESS or the Inflation Indexed Securities should be obvious to everybody except the mandarins in North Block: they are simply too complex for retail investors and offer no major benefit, even assuming one takes the trouble to understand their structuring.
Take the inflation bond. Why would anyone buy a security with a10-year tenure, with a one-year lock-in for senior citizens and three years for the rest, and where if you exit early you lose 50 percent of your indexed earnings? The total rate payable is 1.5 percent nominal plus the CPI rate of inflation - and with no tax benefit.
When CPI inflation is at around 9-10 percent, it means you get around 11.5 percent pre-tax. But the CPI is currently falling. Tax-free bonds offered by public sector companies offer nearly 12 percent pre-tax while the National Savings Certificate offers an 80C benefit. The right time to offer a CPI-linked bond is when rates are rising, but even without the timing issue, the scheme is simply too complex for the ordinary saver.
If the government truly wants the inflation-indexed bond to succeed, it should offer one that is easy to understand and which operates like an instrument that retail investors are already familiar with.
Example: how about an inflation-indexed fixed deposit that pays 1.5 percent extra interest over CPI rates. The FD is something everyone understands, and even without a tax benefit, it is hugely popular. Offer the traditional liquidity of the FD - where a deposit can be broken by reducing the offered interest rate at any time - and the inflation-indexed deposit will probably be a sellout.
What savers want is protection of capital, and liquidity. They may be willing to take a risk on returns - which will be linked to inflation - if ease of entry and exit is assured. This is exactly what is missing.
As for equity, the RGESS was carefully designed to bomb - and Rajiv Gandhi sure would not be happy it was offered as a tribute to his memory.
The scheme offers a 50 percent tax deduction on investments upto Rs 50,000 - but only for first-time investors in shares or equity funds or exchange-traded funds. There is a three-year lock-in, but profits can be booked from the second year onwards provided the initial investment balance in maintained. The scheme also needs a demat account since the only way it can work is by ensuring you have no other demat account, and investments and withdrawals are centrally monitored for tax deduction purposes.
The scheme makes no sense even for the veteran investor, leave alone first-time investors who need simplicity.
While the RGESS needs to be scrapped, the inflation-indexed securities can still be rescued if structured better.
What the two schemes indicate is this: both the RBI and the finance ministry are writing schemes in a vacuum, without consulting investors. Time they got out and smelt the coffee. They could do with some market research.