In a bid to make inflation-indexed bonds more attractive for investors, the finance ministry is likely to offer inflation-linked returns on both principal and coupon at the time of maturity.
The bonds will be linked to the wholesale price index (WPI) movement and will have a 10-year maturity. The structure will be announced on March 18. The ministry is simultaneously working on a new series of inflation- linked National Savings Certificates that will either link the principal to inflation or provide investors an inflation bonus.
A senior finance ministry official said, ?The thinking within the ministry is that the coupon rate for the bonds would be specified in real terms and would be applied on the inflation?adjusted principal ? to calculate the periodic coupon payments.?
The capital or the principal repayment at maturity would be the higher of the inflation-adjusted principal or the original par value, the official added. This will give investors capital protection.
In an attempt to channelise household savings into financial instruments and wean away investors from gold, finance minister P Chidambaram in his Budget said the government will introduce inflation-indexed bonds or inflation-indexed NSCs. The ministry expects that easier access to these bonds would help raise the share of financial savings.
Gold imports in 2011-12 hit a record $56.5 billion and have touched $38 billion in the first three quarters this fiscal. Apart from fuel, gold accounts for the second biggest chunk of imports.
The government is working on several financial instruments to discourage investments in gold.
Another official said these bonds will be first offered to financial institutions for price discovery purposes and subsequently extended to retail investors.
These bonds will be sold through competitive bidding or auction where investors will bid in terms of a desired real yield (yield prior to inflation).
In 1997, India had introduced a variant of inflation-indexed bonds. The bonds failed to find takers and there has been no subsequent issue of such bonds as only the capital was indexed to inflation, not the periodic interest payments.
Apart from providing investors a hedge against inflation, IIBs also give policymakers an estimate of inflation expectations.
Currently Australia, UK and the US offer similar bonds.