After 2004?s failed dalliance with inflation-indexed bonds (IIBs), the finance ministry is keen to ensure the upcoming IIB issue sails through, with significant participation from retail buyers. The ministry reckons that the first tranche expected in the first half of the fiscal might attract largely institutional buyers, but hopes this could be a precursor to a bigger offering three to four months down the line, where there could be a special policy thrust for retail investors. A final decision on how to attract more retail investors for the second tranche will be taken after the first issue ? which is seen as a test case ? is wrapped up, a government official said on condition of anonymity.
In IIBs, the principal is periodically indexed to the wholesale price index (WPI). The coupon will be paid on the inflation-adjusted principal, so that the investment is protected from inflation. The government plans to issue IIBs worth R10,000-15,000 crore in H1 ? about 4.3% of the total borrowing plan ?by September. The first tranche will be like any other government security offering, the source said.
Last week, the Reserve Bank of India (RBI) deputy governor HR Khan had said that the RBI and the government were finalising the bond?s features. Most of these features ? coupon, periodicity of indexation and the maturity period ? have now been finalised and officials are awaiting the return of finance minister P Chidambaram from North America for get his go-ahead, the official said. Unlike in 2004, IIBs are now expected to be more attractive to all classes of investors given relatively higher inflation and the inability of many other instruments to give inflation-adjusted (real) returns.
?The upcoming issue is for us to see the price discovery and the market for such bonds. After that, based on the response, we may look at another issue aimed at retail investors as well. The idea here is to encourage even more savings, be it in the form of equity or bonds.?
The ministry?s motive is to move people away from traditional forms of savings such as gold and into more liquid forms of savings like bonds, stocks and mutual funds.
?It makes sense to offer it like any other government security just to come upon a price-discovery. All said and done, it is going to be an experiment, as this is the first time India is launching such bonds,? said A Prasanna, an analyst with ICICI Securities.
Inflation-indexed bonds are designed to cut out the inflation risk of an investment. These can have options where either the principal and the coupon or either of them can be indexed to inflation. The most popular option is to link principal with inflation as coupon automatically gets adjusted to the inflation-linked face value of bonds. Such bonds are issued in the US, UK, Sweden, France, Italy, Japan and Australia, among others. One major difference that India?s IIBs will have is that while other countries link similar securities to their consumer-price indices, India will link them to its wholesale-price index.