Editorial

Bond better

| Updated on: Jan 01, 2014

Poor response to the new inflation-indexed bonds has more to do with the lack of proper marketing and communication of their benefits.

The response to the new inflation-indexed certificates (IIC) floated by the Reserve Bank of India (RBI) has been disappointingly lukewarm, leading to an extension of the one-week offer window by three months. This, even as tax-free bonds from other issuers have been eagerly lapped up; National Housing Bank’s recent offering was oversubscribed two times on the very first day. But the RBI must not allow this experience to discourage future issues, given the significant potential of inflation-protected bonds in channelling household savings into financial instruments and away from gold and real estate. The poor response to this offer had more to do with weak marketing efforts, unusually high market yields and an over-crowding of bond offers. A few tweaks to enhance the mass appeal of these certificates will elicit a far better retail response.

Critics have pointed out that the IICs are unattractive because they are illiquid and suffer income tax on interest payments. So, even if they fetch 12.7 per cent as annual interest (taking a mark-up of 1.5 per cent over the prevailing consumer price inflation of 11.2 per cent), post-tax returns to investors in the top (30 per cent) bracket would be just 8.7 per cent. This is against the 9 per cent offered by many tax-free bonds. But policymakers needn’t worry too much about enhancing the bond’s appeal to affluent investors by handing out tax breaks. These investors have many other avenues — from stocks and real estate to funding start-ups — for earning inflation-beating returns. Instead, the IICs need to be targeted mainly at the middle class and lower income groups, who require safety with inflation protection.

To attract these investors, it is necessary to clearly quantify and communicate the likely returns on these bonds. A return of 11 per cent-plus on a sovereign instrument is far from bad, but a lay investor may not be able to gauge this from advertisements talking of a ‘1.5 per cent fixed rate above the reference CPI inflation’. As cash flows matter to small investors, the bonds should offer regular interest payouts in addition to the cumulative option. Procedural hassles in applying also need ironing out. With banks reluctant to promote these bonds citing low commission, they aren’t widely available on online trading platforms and entail cumbersome physical application forms. Access can also be ensured through the post office network, as in the case of small savings schemes. But above all, the IICs lack attractive packaging. The advertisements need to convey the bond’s return potential and safety in simple layman terms. A re-branding exercise would be welcome. As catchy acronyms go, IINSS-C — the abbreviation for Inflation Indexed National Savings Securities (Cumulative) — is quite a mouthful. It is also out of sync with the new RBI Governor’s emphasis on clear communication from the central bank.

Published on March 12, 2018

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you