[India] An Excellent Opportunity To Invest: REC Tax Free Bonds

Should I invest in Rural Electrification Corporation Limited (REC) Tax Free Bond ?

Rural Electrification Corporation Limited (REC), a Government of India undertaking, is issuing Tax Free Secured Redeemable bond to Retail & Corporate/HNI at competitive coupon rate in the first week of March. The issue size is INR 3,000 crores (Green Shoe option of INR 1,500). Each bond has a face value of INR 1,000 with minimum application of 5 bonds with 10 and 15 years respectively.

The Interest rate is anticipated to be in-line with NHAI, PFC and IFRC Tax Free Coupon rates. Precisely the interest rate shall be 50 bps above the current G-sec rate (8.3%) for Retail and 30 Bps above for Corporate and HNIs. This shall be tentatively 8.8% and 8.6% with a marginal upside/downside.

This is an excellent investment opportunity for several fold reason. Fundamentally the interest rate is expected to fall and the duration will drive the bond price up. This will have a magnifying effect on the investment particularly the trading price of the bond – which will spike due to the inverse relationship of interest rate and prices of the bond. Coming closer to reality, the effective yield of the Bond will be anytime effectively high against safest investment avenues such as FDs, Public Provident Fund (PPF) National Saving Certificates (NSC). Moreover, these bonds are highly liquid as it can be sold at any point of time at the bourses and has been rated “AAA” by ICRA, Fetch and CRISIL.

This is a guest post by Mr. Mitesh Agarwal, BBA & MBA (Finance). Currently working as Financial Analyst at a leading firm in Mumbai.