Revamped inflation-indexed bond on its way

Jun 13 2014, 13:19 IST
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SummaryThe Reserve Bank of India (RBI) on Thursday said it will introduce a new inflation-indexed bond which is likely to have a higher spread over the inflation rate and quarterly interest payouts.

The Reserve Bank of India (RBI) on Thursday said it will introduce a new inflation-indexed bond which is likely to have a higher spread over the inflation rate and quarterly interest payouts.

RBI deputy governor HR Khan admitted that the current inflation- indexed bonds had not been a success, saying the product had not been understood.

“The timing was possibly not right and there were

also issues regarding the interest payout,” Khan said on the sidelines of a BFSI conference.

RBI governor Raghuram Rajan had in November introduced inflation-indexed bonds and sought to move investors away from gold and real estate into financial instruments.

“We will issue inflation-indexed savings certificates linked to the new CPI index to retail investors by the end of November,” Rajan had said during his bi-monthly policy in September.

The interest payable on these bonds has two parts —

a fixed rate (1.5% per annum) and an inflation rate based on the CPI compounded in the principal on a half-yearly basis and paid at the time of maturity.

On March 14, the RBI offered half a percentage point in extra commission to banks that manage to collect R100 crore or more by selling CPI-linked bonds.

However, bankers say that the bonds are not so attractive to investors as they are linked to the CPI and argue that the consumer inflation will not stay at elevated levels, hence giving them lesser yields.

The CPI had hit a high of 11.16% in November and subsequently cooled to 8.59% in April.

The bonds are also taxable which makes it a lesser investment, bankers said, and investors demand went towards more attractive options such as tax-free bonds.

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