RBI may reintroduce inflation-indexed bonds

To provide an alternate option to hedge against inflation other than gold, the Reserve Bank is planning to allow launch of Inflation Indexed Bonds (IIBs).

"There is a plan to launch IIBs - a new long-term instrument wherein both capital and interest would be provided protection against inflation," RBI Deputy Governor Harun R Khan said at the 13th FIMMDA-PDAI Annual Conference on January 27 at Kuala Lumpur.

IIBs provide insurance to investors from inflation and cost savings for the government on account of reduction in coupon payments with lowering inflation rate, elimination of uncertainty risk premium, and containing inflationary expectations, according to a technical paper floated by RBI on these bonds.

"It is expected that institutional investors, such as, pension funds and insurance companies would exhibit interest in investing in the IIBs," Khan said.

The expectation, Khan added, is based on the fact that the IIBs give investors long-term assets with a fixed long-term real yield, insulating them against inflation as their real yields are indexed to actual inflation.

"Further, it is also being contemplated to increase the non-competitive portion for IIBs to have significant participation of retail investors in these instruments," Khan added.

As inflation remained high during the past two years, gold had emerged a favourite investment avenue as it provided an insurance to investors against inflation.

India's gold and silver imports during first 11 months of the current fiscal stood at $54.5 billion. It had imported gold worth $40.5 billion in the last fiscal. In the budget, to discourage imports of the yellow metal, the government in the budget doubled the customs duty on gold to 4 per cent.

IIBs, which were issued in United Kingdom during 1981, became popular over the last two decades with an increasing number of countries issuing these bonds.

In India also, one variant of indexed bonds, capital index bond (CIB), 2002 was issued on December 29, 1997 wherein only principal repayments at the time of redemption were indexed to inflation.