Index to be followed, timing of launch need to be sorted out: Subbarao
To wean investors away from buying gold, Reserve Bank of India has decided to introduce inflation-indexed bonds (IIBs) in a new avatar.
Gold imports have been a cause of concern for both the Reserve Bank of India as well as the Finance Ministry. Last week, in a bid to restrict gold imports, the Government hiked the import duty on gold to six per cent from four per cent.
“The central bank had introduced IIBs some years ago but it did not take off due to some design flaws,” RBI Governor D. Subbarao said while addressing media persons during the monetary policy conference.
“We have tried to re-design it,” he added.
The most important change is that both principal as well as the coupon rate on the bond will be indexed to inflation.
However, according to bankers, some issues need to be sorted out before the government can go to the market with the IIB.
“Questions like which inflation index to be followed — wholesale price index-based inflation (WPI) or consumer price index-based inflation (CPI) — will have to be addressed,” the governor quoted bankers, who brought up the issue during the policy meeting. While WPI-based inflation was 7.18 per cent in December, CPI-based inflation was 10.56 per cent in the same month. Then there were questions about timing of introduction of IIB. “Can it be introduced when inflation rate is high?” bankers asked.
Few bankers suggested that IIB should be introduced when there is no competition from tax-free bonds.
Bankers have been concerned over flight of savings to non-bank space like substitution of bank savings through purchase of gold.
India is the largest importer of gold in the world as people view it as a hedge against inflation.
Gold imports grew 39 per cent in FY2012 and accounted for almost three-fourths of the current account deficit (CAD). India’s current account deficit was 4.2 per cent of GDP, or $80 billion, in FY 2012.
In first half of FY 2013, the current account deficit grew to 4.7 per cent of GDP. \
satyanarayan.iyer@thehindu.co.in
Keywords: inflation-indexed bonds, RBI, Gold imports, import duty, current account deficit
Comments:
Surprising that neither the government nor the RBI took any action during the entire gold and silver run up over the last 6 years. Now gold is at a price that might not sustain but for rupee weakening. IIBs will cost the exchequer badly since there is no established relationship with gold and domestic inflation. RBI should rather check the volume and profitability of the real estate sector, commodity prices like iron ore, coal and mega-project involving imported capital goods, large land etc and the quantum of gold bought by Indians.
CPI will be a better index since it tells us about retail inflation.Our consumer do not go to whole sale market even if they do their number is very limited. The inflation we take away home is better gauge of inflation. WPI is always less than CPI but the difference between the two may be considerable. We should try to eqaulise WPI with CPI while controlling inflation.
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