RBI to sell R1,000-cr IIBs today, coupon rate likely at 1.5-2.5%

Written by Aparna Iyer | Mumbai | Updated: Jun 4 2013, 07:09am hrs
Inflation indexed bonds, set to debut on Tuesday through an auction, are expected to find eager buyers even though inflation is on a downward trend.

The Reserve Bank of India will sell R1,000 crore worth of IIBs on Tuesday wherein retail investors can bid to buy upto 20% of the notified amount. Both the principal and the interest payment will be adjusted against the wholesale price index (WPI) and provide a hedge against price rise. IIBs typically find strong buying interest in a rising inflation scenario as investors seek to protect their returns.

In this case, launch of IIBs comes on the back of a sharp rise in purchase of gold and real estate by investors due to erosion of real returns offered on financial instruments due to persistently high inflation over the last two years. The IIBs have been touted as an alternative to these other inflation hedges.

However, India's (WPI) inflation has fallen sharply to 4.89% in April and is expected to remain benign in the coming months. On an average inflation is expected to be around 6%, so there will be demand for the IIBs even though the inflation trajectory is benign, said a trader at a public sector banks.

For retail investors looking to invest in IIBs, the nominal coupon offered may be between 8.8% and 9.8% based on the February wholesale price index of 7.28%. The nominal coupon rate is arrived at after adding the inflation rate to real coupon rate set at the auction. Dealers said that the RBI will have to set a real coupon rate of at least 1.50% on the IIBs to find enough demand for the bonds. Foreign banks and primary dealers said that they would bid at a coupon rate of 2-2.50% band.

"A section of the market is quoting aggressive yield but we would not be bidding below 2.00%, said the head of treasury of a foreign bank. Dealers said that demand from insurance companies and provident funds would also be sizable. Jayesh Mehta, managing director and head of treasury at Bank of America-Merrill Lynch said that traders would not be keen to bid below 2%.