Bond with the best

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To protect households against negative returns on their savings, the Reserve Bank of India will launch retail inflation-index bonds in mid December. To protect households against negative returns on their savings, the Reserve Bank of India will launch retail inflation-index bonds in mid December.
SummaryNew retail inflation-linked bonds will be a lucrative option for household investors.

bonds issued in December this year. Retail inflation, based on CPI, was 9.84% in September, which accelerated to 10.09% in October mainly on account of higher fruit and vegetable prices.

For the inflation-index bonds issued earlier, the RBI had devised a non-competitive bidding scheme for retail investors where they had to indicate the amount of their bids and not the price at which they want to subscribe. Allocation of bonds to retail investors in this process is done based on the weighted average price that emerges in the competitive bidding. Retail investors can also participate in the non-competitive bidding through primary bond dealers or banks by opening a gilt account with the primary dealer or banks or a demat account for such participation.

Analysts say retail investors will find it easier to buy these bonds from banks. They say post offices should also have been included as distributors considering their reach. “At present, these bonds will be better than fixed deposits, but if the CPI falls drastically, then bank fixed deposits would be more attractive,” said Vipul Sharma, an independent financial adviser.

Analysts also say that the biggest advantage of CPI-index bonds is that it will give the right reflection of the price hikes that consumers have faced in the recent past. Globally, CPI or the retail price index is used by central banks for targeting inflation. Countries like the UK, US, Germany, France, Canada and Japan have introduced IIBs many years ago as a new retirement savings tool.

The government proposed inflation-index bonds in the Budget to protect retail savings from inflation, incentivise households to invest in financial instruments and reduce the physical holding of gold as the record import of the yellow metal widened the current account deficit to $88 billion in 2012-13, or 4.8% of GDP compared with $78 billion (4.2% of GDP) in 2011-12. In June, the RBI launched the first tranche of the bonds to provide inflation protection to both the principal and interest payments and the bonds were linked to the Wholesale Price Index.

In fact, way back in 1997, the government had launched capital-indexed bonds that provided inflation protection only to the principal amount and not to the interest payments. As a result, the bonds evoked lukewarm response from investors. But this time, the bonds will provide inflation protection to both principal and interest payment and further, linking it to the CPI will attract retail

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