Inflation indexed bonds in a month
The Reserve Bank of India (RBI) may issue inflation-indexed bonds in a month, deputy governor H.R. Khan said Thursday, as the government seeks to encourage individuals to invest more in such instruments than in gold.
These bonds are likely to be for a term of seven to 15 years, will have a larger portion than usual reserved for retail participants and be a part of the government borrowing programme.
The finance ministry is in discussions with the central bank to finalize the structure and tenor of the bonds. "We are still in the process of finalising the features," Khan aid. "It will be finalized soon."
Finance minister P. Chidambaram, in this year's budget, proposed the introduction of instruments to "protect savings from inflation, especially the savings of the poor and middle classes". He said these instruments could be either in the form of inflation-indexed bonds or inflation indexed-national security certificates.
The government has been looking for ways to make financial instruments more attractive to channelize household savings into the financial sector and away from gold, which was increasingly being used as a hedge against inflation.
The proposed bonds will protect both the principal and the interest components from inflation risks. India's inflation based on the wholesale price index (WPI) rose to 6.84% in February from 6.62% in the previous month.
Inflation index bonds will be linked to WPI.
The bonds will be indexed every six months to the inflation index and the real rate of interest will be based on this indexed amount. The redemption amount will be equivalent to the indexed amount but will not be lower than the fair value.
The plan is to issue such bonds on a regular basis, Khan said on the sidelines of a conference organized by the National Housing Bank.
To channelize household savings, the bond issuance will have a larger non-competitive bidding portion for small investors than the 5% currently in place for government securities.
"The plan is that it will be issued like any other government security. It will be auctioned and sold. What we are proposing is that we will have a higher percentage of non-competitive bidding," Khan said. "It could be 10%, 15%, or 20% so that more portion is earmarked for small investors like individuals and trusts."
Retail investors can open a gilt account with a primary dealer or a bank and obtain the bonds at the cut-off price. "Then after few months, we will think of certificate for such inflation indexation," Khan said.
"It will take some time for inflation indexed bonds to catch the fancy of retail investors. Initially, we may only see some interest from institutional investors," said Abheek Barua, chief economist at HDFC Bank.
"And linking it to WPI may not make it that attractive to retail investors as they would like to guard against CPI inflation," he said.
Best Regards
Prakash Nair
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