The pricing of inflation-indexed bonds and the premium paid to offset inflation impact on returns would be key for getting a good response from investors, said bond market participants.
The coupon on bonds have to be attractive, perhaps more aggressive than the sovereign bond of the corresponding tenure for not just retail, but also institutional investors to buy these bonds. ?I think the challenge is that how do you discover the inflation premium,? said Neeraj Gambhir, the managing director and head of fixed income India at Nomura Securities.
On Thursday, Reserve Bank of India deputy governor HR Khan said inflation-indexed bonds will be issued in the month of May. The wholesale price indexed inflation rate would be used for pricing and these bonds will have a tenure of 7-15 years.
The consumer price index inflation captures the price increase at the retail level and is ideal for indexation of such bonds. However, given that the CPI inflation is rather volatile and is not an established benchmark, the WPI inflation is the index of choice, dealers said. This move will not make the product less attractive to the retail investors, they said.
?People have been putting money in fixed deposits and other products that do not give any returns because of inflation. These indexed bonds will at least give them protection against WPI inflation,? said NS Venkatesh, head of treasury at IDBI Bank.
India?s inflation-based on WPI rose to 6.84% in February from 6.62% in the previous month. The government will release inflation for March next week. CPI inflation slipped to 10.39% in March from 10.91% in February.
A treasury head at a foreign bank said at the start, market participants may ask for a heavy premium against inflation and the coupon can be even higher than the corresponding government bond.
?Initially maybe the market may ask for a higher premium than the currently traded fixed rate bonds. It could throw open a debate on pricing,? he said.
Ten-year benchmark government bond ended at 7.87% on Friday.
In 1997, RBI had launched capital-indexed bonds with only the principal repayment linked to inflation. These were institutional products and were a big failure.
The inflation-indexed bonds announced this time around are positioned as a retail product and aimed at weaning away demand from other assets such as gold.