To protect the household savings from high inflation, the Reserve Bank of India is likely to launch inflation-indexed bond (IIB) within a month and it will be accompanied by guidelines, including provisions to ensure high retail investor participation.

Speaking to mediapersons on the sidelines of an event organised by the National Housing Bank on Thursday, RBI deputy governor HR Khan said these bonds may have a tenure of 7-15 years and will form part of the government?s borrowing programme.

IIB will be issued, auctioned and sold like government securities, Khan said, adding both principal and interest may be linked to WPI-based inflation and the indexation would be done every 6 months.

To facilitate the purchase of these bonds by more retail investors, the bond issuance will include a provision for a higher percentage (say, around 15-20%) in the non-competitive portion earmarked for retail investors, up from the current 5% reserved for such investors to purchase government securities. However, retail investors will have to open a gilt account to purchase IIB.

Khan also said the quantum of these bonds will be announced soon. He said retail investors would be able to purchase these bonds without taking part in the auction at the cut-off price.

Learning from the sour experience of a variant of IIB, which was introduced in India in 1997 (the bonds failed to find takers and there has been no subsequent issue of such bonds as only the principal was indexed to inflation, not the periodic interest payments), this time IIB will protect the principal as well as the interest component from the risks associated with inflation. This means, IIB yields will be more or less stable.

?It will be a very good product primarily targeting retail investors. Besides the fact that it is one of the first real hedges against inflation, these bonds will be one of the best market indicators of inflation, more accurate than all the analyst surveys. It will hopefully help in investors diversifying their holdings of government securities,? said Saugata Bhattacharya, a Mumbai-based analyst with Axis Bank.

IIB was announced in the Union Budget 2013-14 by finance minister P Chidambaram to incentivise the poor and the middle class people to save in such financial instruments rather than buy gold.

Despite government?s efforts to curb gold purchases, the country?s gold imports were worth $42 billion in April 2012-January 2013, in turn leading to a high current account deficit (CAD).

CAD had hit a record 6.7% of GDP in the third quarter of the last fiscal. The government has, however, dropped plans to further hike gold duties fearing an increase in cases of smuggling, and has instead opted to promote financial instruments which will act as a good hedge against inflation, much like gold.