Record investor response to NTPC's tax-free bond sales indicate that there is a growing belief that interest rates are headed southward. The state-owned corporation's issue was oversubscribed more than 10 times on its opening on Wednesday, suggesting that in turbulent times, state-backed bonds are investors' best bet.

The state-owned company received Rs 4,417 crore subscription against Rs 400 crore, the core issue size excluding an option to retain oversubscription up to Rs 300 crore, mandated earlier by the government. The company is likely to close the issue on Thursday.

Three categories of investors including retail, high networth individuals and qualified institutions can invest in those bonds with 10-15-20 year maturities subject to different rates. A retail investor can earn as high as 7.36-7.53-7.62% across maturities.

"Amid an uncertain equity market, retail investors including HNIs, prefer to bet on taxfree bonds with a higher safety net," said Deepak Panjwani, head - debt markets at GEPL Capital. "Given RBI's lower interest rate trajectory, at least for the next one to two years, investors seek to gain from falling yields via secondary market."

An investor can exit through secondary market as those bonds will be listed on stock exchanges. If RBI cuts the benchmark rate going forward, yields will fall pushing prices up. Tax is not payable on the interest earned on such bonds, making them look more attractive than taxable debt instruments. For a toprated paper, a retail investor in the higher tax bracket, can earn a pre-tax return of 11.37% compared with 8.10% earned from almost similar maturity government bonds.

"This is a record oversubscription as investors were desperate to lock in at higher interest rates with tax efficiency before the benchmark rate starts falling," said Ajay Manglunia, head-fixed income at Edelweiss Securities.

"We have seen major investment interest coming from all sectors, including retail, high networth individuals."

A triple-A rated issuer can sell bonds to retail investors at a rate which is 55 basis points lower than similar maturity government bond yields, according to a circular issued on July 6 by CBDT.