Learning from the poor investor response to last fiscal?s inflation-indexed bond issues, the government and the Reserve bank of India are set to give the instrument another shot for FY15, albeit with a few changes, finance ministry sources told FE.
For the current fiscal, the RBI will offer two variants from the very beginning: inflation-indexed bonds and inflation-indexed savings certificates. The former will be primarily for institutional investors through the auction process, with a 20% limit for retail investors. The latter will be primarily available
for households and will be available over the counter through post offices and banks. Both will be linked to consumer-price index (CPI) inflation.
In FY14, the RBI had first launched the bonds linked to wholesale inflation (WPI) in June and, later, converted them to CPI inflation from the second tranche in January. Moreover, the savings certificates were only launched in December 2013.
One of the biggest changes will be allowing trading of the bonds on the secondary markets, a finance ministry official said.
Sources said the lack of transferability of the instrument as well as the absence of a provision to facilitate secondary market trading last year contributed to a less- than-enthusiastic response.
?Last year was an experiment for this instrument. Hence, there were a lot of changes. This fiscal, the RBI has prepared a through draft guideline. The finance ministry will have more talks with the central bank regarding the bonds and savings certificate,? a second ministry official told FE.
The official added that the plans will be presented before the new finance minister and the views of the incoming government will be sought.
As against the plan to raise R12,000-15,000 crore in FY14 through IIB, only around R7,000 crore was raised by the RBI. Worse were funds from the inflation-indexed savings certificate. As against a plan of R1,000 crore, only about R200 crore could be raised.
In a recent discussion between the central bank and the government, the RBI had said IIB’s first tranche was unpopular among investors. Sources said that senior bankers have informed the ministry and RBI that one of the major reasons for IIBs being a failure was the poor timing of the introduction of the instrument as people’s expectations were that inflation would decline soon.
The penalty on premature redemption after three years, and competition from other investment options, including long-dated fixed maturity plans, which give better returns on a post-tax basis, in addition to the absence of a system for the bonds’ internal valuation, also led to the failure of IIBs, they added.
Besides, incentives to distributors and brokers of the instrument were perceived to be inadequate despite the hike the brokerage charges.
Officials also agreed that for the instruments to succeed, greater public awareness was needed. This includes the kind of advertising the centre and market regulator Sebi pursued for the Rajiv Gandhi Equity Savings Scheme.