Money & Banking

RBI to introduce inflation-indexed bonds soon

Our Bureau Mumbai | Updated on March 12, 2018 Published on October 12, 2012

H.R. Khan, RBI Deputy Governor

To protect the returns of investors from the vagaries of inflation, the Reserve Bank of India plans to introduce inflation-indexed bonds (IIBs), said a top central bank official.

The principal on the IIBs will be indexed to inflation and the coupon will be calculated on the indexed principal.

H.R. Khan, Deputy Governor, RBI, explained that the capital (principal) will be adjusted (to inflation) and investors will earn interest on the enhanced capital based on the reference rate.

“This (IIBs) is being discussed between the joint group of the RBI and the Government. It will be notified soon,” said Khan at a capital markets summit organised by FICCI.

IIBs will benefit both the issuer and investor. For the issuer the uncertainty premium goes, so they can raise the capital in a cost effective manner and for the investor it is a hedge against inflation, said Khan.

Corporate bonds

The RBI Deputy Governor said primary dealers (PDs) will be allowed to play the role of market-makers (offer buy and sell quotes) in corporate bonds only if the Government’s fiscal deficit comes down.

PDs support the Government’s borrowing programme by underwriting of securities issuances and trade in a range of fixed income instruments.

Khan said that if PDs are allowed to play the role of market-makers now, then their focus in the government securities could get diluted.

Withholding tax

The Government is considering a proposal whereby only five per cent withholding tax would be applicable to rupee infrastructure bonds.

“In the Budget it was announced that the withholding tax will be notified for ECB and foreign currency infrastructure bonds. That has now been notified.

“The issue is that there are other infrastructure bonds, like the rupee bonds in which foreigners are investing. It is a rupee exposure. They have taken additional currency exposure. They don’t get the benefits whereas in the foreign currency infrastructure bonds issued overseas there is no currency risk,” said Khan.


Published on October 12, 2012
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