Capital-indexed bonds open for subscription today
OUR BANKING BUREAU
MUMBAI, December 28: The government of India's capital-indexed bonds open for subscription on Monday. The bonds will be tradable and eligible for repo facility. The bonds, which bear an interest of 6 per cent, are payable semi-annually. The inflation adjustment for repayment of principal will be on the basis of the monthly average of the wholesale price index as calculated by the Reserve Bank.According to an I-Sec report, inflation-protected bonds should be a good adjunct to other asset classes that are not directly inflation-protected. The emergence of an inflation-protected bond market promises to be an important development in the financial markets. Not only will it represent a funding innovation for the government and a potentially desirable asset class for investors, but it will also facilitate the development of a market for public sector and corporate issuers considering inflation-linked debt. The issue of inflation-linked instruments will bring into focus real interest rates, a concept which has
so far received little attention in the fixed-income markets. The RBI has chosen the Canadian-style inflation-protected bond form for the on-tap issue. The bonds will be issued with an initial principal of 100 and a real yield determined through the auction process. Over time, the principal adjusts itself according to the changes in the price index from the time the bond is issued. The rate of inflation has remained at consistently low levels over the past couple of years. As inflation stays at low levels and inflationary expectations are broken, the required real return should decline and initial investors will be able to make a holding period return in excess of the real yield at purchase. Additionally, being a new product, it is priced marginally cheaper than conventional bonds in order to develop market interest in the instrument, the report says.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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