The Reserve Bank recently announced that it will launch inflation-linked bonds every month, starting June 4, to attract household savings of up to Rs 15,000 crores this fiscal so as to discourage investments in gold. RBI said in statement, “RBI, in consultation with Government of India, has decided to launch Inflation Indexed Bonds (IIBs)”. These bonds will have a maturity period of ten years and the total issue size will of IIBs will be Rs 12,000-15,000 crores in 2013-14. The first tranche of the IIBs-2013-14 will be issued on June 4 and after that bonds will be issued on last Tuesday of every month. First series of IIBs will be open for all class of investors but the second series issue (beginning October) will be reserved exclusively for retail investors. Government and RBI are worried over the rising gold imports as it is putting pressure on Current Account Deficit (CAD), which widened to historic high of 6.7 per cent in third quarter of 2012-13.The announcement of IIBs has prime objective to discourage investments in gold as it is being considered as the second major move by RBI after placing restrictions on banks to import gold.
Giving details of first series of IIBs, RBI announced:
1. Coupon rate (interest rate) will remain fixed on these bonds but the principal amount invested in the bonds will be linked to inflation based on Wholesale Price Index (WPI).
2. These bonds provide inflation protection to bond holders as at maturity, the adjusted principal or the face value, whichever is higher, will be paid.
This class of bonds is making a comeback in the Indian financial markets after almost a decade. They have not been very fashionable as investment products in the past due to pricing issues and lack of investor education. Inflation-linked bonds may have a challenge to attract the retail investors away from attractive asset class like gold and real estate, as the principal and coupon to be received on these bonds would be linked to wholesale price inflation and not the retail price-led inflation indices. The WPI inflation for April came at 4.89%, the lowest in 41 months but the consumer price inflation, on the other hand, is still above 9%. Some more features of IIBs which may not suit to retail investors are:
1. Investors who place the highest bids would get to subscribe to these bonds and most retail investors are unaware of the process of investment.
2. Retail investors are supposed to have SGL (Subsidiary General Ledger)accounts with primary dealers or banks to place their bids on the negotiated dealing system-order matching system, an electronic platform where bids for trading in bonds are placed.