After a disappointing retail investor show in the first auction of inflation-indexed bonds, the Centre is likely to bring in a number changes in the second series scheduled from October to make the security more attractive to the masses. The biggest of these will be to link the series to consumer price index-based inflation, finance ministry officials privy to the matter said.
The first auction of Rs 1,000-crore worth inflation-indexed bonds was oversubscribed by more than four times, with 167 competitive bids worth Rs 4,616 crore. Only 26 of these bids were accepted.
The 20% cap for retail investors, compared to 5% for other bond issues, came a cropper though with only 14.06 crores worth of non-competitive bids coming in, less than 2% of the total.
?Since its CPI-based inflation which has a greater impact on common investors, it will be be better that we have a instrument that will protect their investments against that indicator. We will look to bring in CPI from October,? an official told FE.
The government’s aim is to offer the October series exclusively to retail investors as it looks to move people away from traditional forms of savings such as gold and into more liquid investments such as bonds, stocks and mutual funds.
The first tranche of IIBs, linked to wholesale price index-based inflation, was always seen as a test-case to subsequent issues. The government plans to issue Rs 10,000-15,000 worth of IIBs for the current fiscal. The easing in WPI inflation, which was 4.89% for April, has been more prominent as compared to CPI inflation, at 9.39% for the same month, another reason that the shift to the latter was being considered for IIBs, the official added.
If this move happens, it will be similar to IIB issues in other countries such as US, UK, Sweden, France, Italy, Japan and Australia, among others, all of which link similar instruments to consumer inflation data.
What is also a concern among policymakers is that the auction fetched a coupon rate of 1.44%, as compared to their expectations of close to 2%. Another official who spoke to FE said that this was because bond yields had risen in the past two weeks and in hindsight, maybe a larger tranche could have been auctioned off.
He also said that a big reason for the very low retail participation is that common investors find it more difficult to participate in a bond auction. Some changes will be made to the issuing of IIBs including allowing demat account holders to buy government securities.
Currently, those with demat account can only trade in securities listed on various exchanges such as stocks and commodities, and certain infrastructure and corporate bonds. If this proposal is pushed through, it will enable more than 20 million people, who hold demat accounts, to invest into such bond issues.