Debt fund, equity taxation may be aligned

RBI Deputy Governor H R Khan says consolidation of gilts in the offing fall in savings rate a concern would like inflation-index bonds

The government is considering bringing the tax treatment for debt mutual funds in line with those for equity schemes. “In debt mutual funds, the tax treatment is unequal, compared to equity mutual funds. Equity mutual funds do not have dividend distribution tax, etc. In debt mutual funds, there are taxes. This is being considered by the government,” H R Khan, deputy governor, Reserve Bank of India (RBI), said on Wednesday.

He added the government promoted the instruments of companies and offered tax incentives to these. But for its own instruments, it didn’t give any such benefit. “That’s being looked at by the government,” Khan said.

Consolidation for gilts is also in the offing. “You have so many instruments in small lots. We are in dialogue with the government and in the next two to three years, it would happen. Currently, we are doing partial consolidation, through which we go on reissuing certain securities,” said Khan.

The market needs innovative instruments such as inflation-index bonds, he said, adding there was a need to provide incentives. “In case gilts accounts are opened for inflation-index bonds, we will provide incentives in terms of less transaction costs,” he said. RBI has held talks with the government for pushing inflation-indexed bonds.

In the case of government bonds, the participation of retail investors is participation is negligible. Khan said for a diversified base and stable returns in this category, retail investors were vital. He stressed the need for centralised market-making for retail investors.

RBI is considering lowering the portion of statutory liquidity ratio that can be converted into liquidity coverage ratio. “This is because the entire thing is not qualified for liquidity coverage ratio,” Khan said. RBI was working with market participants on reducing the held-to-maturity limit of the gilts portfolio of banks in a non-disruptive manner, he added.

On the liquidity scenario, Khan said government balances with RBI were quite high and if this continued, the central bank would conduct more open market operation purchase of gilts.

Khan said the fact that the savings rate, as percentage of gross domestic product (GDP), had fallen was a cause of concern. “What is equally worrying is household savings in financial instruments have also been declining,” he said, adding there was a need to educate people on investment. “There is no single person who came and told me to open a Demat account. If this has happened to person like me, you can imagine what can happen to people all over India,” he said.

At one point, savings, as percentage of GDP, stood at about 37 per cent. However, these have seen a decline. Khan said earlier, household savings in financial instruments stood at about 12 per cent of GDP; now, it stands at about eight per cent.

“If you want to develop a vibrant and resilient debt market, you should focus on having good-quality, well-diversified issuers, well diversified and well-informed investors, variety of instruments catering to different needs of investors, infrastructure for selling and buying, intermediaries, some element of incentive for people to invest and innovations,” he said.