To protect savings of poor and middle classes from price rise and to incentivise the household sector to save in financial instruments rather than buy gold, the Government plans to issue bonds indexed to inflation rate.
The first set of such bonds will be auctioned on June 4.
The Government plans to issue around Rs 1,000-2,000 crore of such bonds every month, to raise Rs 12,000-15,000 crore in the current fiscal.
It hopes the new instruments will attract retail investors.
However, in the first series of such bonds, with a tenor of 10 years, only a fifth will be given to retail investors, while the rest will be reserved for institutional investors. But the second series, to be launched during October, will be exclusively for retail investors.
The Government had earlier tried to issue inflation-indexed bonds (IIBs) in 1997 and 2004. These had failed to attract much retail interest, since only the principal was inflation-indexed.
This time around, while the principal will be linked to the Wholesale Price Index (WPI), the interest rate will be linked to the principal, thereby insulating both capital and interest from inflation impact. The bonds to be issued under first series will be called Capital Indexed Bonds. The Finance Ministry has argued that for appropriate price discovery and market development, it was necessary to first issue comparable instruments through auctions to institutional investors such as pension funds, insurance and mutual funds.
The auction will help create demand for IIBs and help in making them tradable in the secondary market, it said in a statement.
The IIBs will have a fixed real coupon rate and a nominal principal value that is adjusted for inflation. Periodic coupon payments are paid on adjusted principal. Thus, CIBs provide inflation protection to both principal and coupon payment. At maturity, the adjusted principal or the face value, whichever is higher, will be paid.
Mumbai Bureau adds: Meanwhile, market players wonder if the IIB, which is designed to protect investors from rising inflation, will click at a time when inflation is declining. According to N.S. Venkatesh, Chief General Manager & Head - Treasury, IDBI Bank, the trading pattern in the IIBs will serve as an indicator of the market players’ perception of future inflation trajectory. This will help the central bank understand the inflation expectations of the marketplace and formulate its monetary policy accordingly
Investment instruments
The bonds were announced in the Budget in February. They will be first auctioned to the institutional investors to find the benchmark rates
On the basis of benchmark rates, National Security Certificate will be issued to retail investors through retail outlets such as post-offices.
Collection from such bonds will be part of Central Government’s borrowing
Such bonds were first issued in the UK in 1981.