high inflationary environment for over few years now and as they are expected to remain in similar zone in the near future, it gives investors a good option where they can earn high pre-tax return on their investment.
While CPI inflation is currently at 11.2 per cent even they were to come down to levels of 8-9 per cent, investors of these bonds will earn 9.5-10.5 per cent pre-tax due to the fixed rate of 1.5 per cent over and above the inflation and therefore is significantly superior to fixed deposits.
Details of the product
The 10-year bonds are meant for investing only by retail investors — individuals, Hindu Undivided Family and charitable institutions — and investors can invest a minimum of Rs 5,000 while the investment amount can go up to Rs 5 lakh per investor.
The product offers interest in two parts — the inflation rate and a fixed rate of 1.5 per cent. It has been structured in a manner that even if the inflation goes into negative, investors will continue to get 1.5 per cent which is a fixed rate. The fixed rate of 1.5 per cent will be paid six monthly and investors will get the compounding benefit on the six monthly interest.
At the time of redemption they will get both the principal and the compounded interest rate. The inflation rate for a month will be based on the combined CPI of the month preceding three months.
For example, if the inflation rate has to be seen for the month of December 2013, the combined CPI for September 2013 will be used as the reference CPI.
Investors can invest through one of agency banks (SBI & associates, nationalised banks, HDFC Bank, ICICI Bank and Axis Bank) or even through the Stock Holding Corporation of India (SHCIL). On receipt of payment the bank will register the investor on RBI's web platform and generate a certificate of holding.
The securities, however, will be held by RBI that will act as the central depository.
Among other features, the product also allows premature withdrawal facility