Financial Daily from THE HINDU group of publications
Tuesday, May 25, 2004
Financial Daily from THE HINDU group of publications Tuesday, May 25, 2004 |
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Money & Banking
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Govt Bonds Capital-indexed bonds may be reintroduced Our Bureau
Mumbai , May 24 THE Reserve Bank of India has proposed reintroducing capital-indexed bonds (CIB) with inflation-linked returns to deepen the government securities market. The instrument was first introduced in December 1997, but saw no fresh issuances with lacklustre interest from the primary and secondary markets. It is now to be reintroduced in consultation with the Government in a structure open for discussion. According to a press release, the RBI released a discussion paper on the structure of this instrument on Monday. Some of the reasons cited for the earlier lacklustre response were that it offered only inflation hedging for the principal while the coupons of the bond were left unprotected against inflation, and complexities involved in pricing of the instrument. The first issuance of a CIB may be at par, i.e., at Rs 100. The price of re-issued bond will be determined in the auction and may be at below par or above par depending upon the real coupon of the bond vis-à-vis the cut-off real yield of the bonds under re-issuance. The proposed CIB would offer inflation-linked returns on both the coupons and principal repayments at maturity. The basic feature of bonds would be that the coupon rate for the bonds would be specified in real terms. According to the discussion paper, the Wholesale Price Index for all commodities released by the office of the Economic Advisor, Ministry of Commerce and Industries, Government of India, would be taken as the index for measuring the inflation rate for the proposed bonds. However, for the purpose of inflation protection, it would be the monthly average of WPI (average of weeks) and not the weekly one. Referring to the coupon, the RBI said interest on CIB would be payable on a semi-annual basis at a fixed real rate of interest throughout the tenure of the bonds. The fixed real rate of interest would be applied not to the par amount of the security but to the inflation-adjusted principal.
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