Unnecessary intervention – RBI’s Proposal of tax benefits for retail investors

News: The Reserve Bank of India (RBI) is thinking to approach the Union government to ask for tax benefits for retail investors investing in government bonds through its platform.

The idea behind the RBI’s Retail Direct Scheme, to increase the ease of investment in government bonds for individual investors and widen the pool of investors over time, is appropriate.

However, the idea of extending tax benefits to encourage retail participation in the government bond market is unnecessary and must be avoided.

Then, tax benefits to retail investors is not a good idea?

The new retail bond platform will not necessarily increase household financial savings, it may just lead to a shift in the household debt portfolio. It may lead to a revenue loss for the government, as it will reduce the existing household investor base.

Also, Investors entering the market at this stage are likely to suffer a capital loss if they decide to sell bonds over the next few years, as interest rates are likely to go up from the present level.

RBI’s policies are making debt investment unattractive. RBI is maintaining the policy interest rate below the inflation rate, with a high liquidity level.

What needs to be done?

First, RBI should spread awareness and sensitise investors about potential risks associated with bond market investing.

Second, RBI should try to bring the policy interest rate on par with the inflation rate. Low-interest rates have made debt investment unattractive.

Third, all debt instruments can be brought to par by removing tax benefits. It will not only simplify the tax structure but also drive individual investors to evaluate products on their merit.

Source: This post is based on the article “Unnecessary intervention” published in Business standard on 17th November 2021.