Inflation-index bonds may only partially protect your savings
Though the instrument is aimed at preventing inflation from eating into
the returns from investments, the protection may be partial.
Beating inflation along with safety of investment is the primary aim of those who invest in gold. India's love for the yellow metal is hurting the country's economy by increasing the gap between imports (most gold consumed in India is imported) and exports.
In order to create an alternative to gold investments, the Reserve Bank of India (RBI) is introducing government bonds whose returns will be linked to inflation.
On 4 June 2013, the RBI will introduce the first tranche (Rs 1,000-2,000 crore) of inflation-indexed bonds (IIBs) with a maturity of 10 years through an auction. IIBs worth Rs 12,000-15,000 crore will be issued during the current financial year. These will be divided into tranches and auctioned on the last Tuesday of every month. Subsequently, IIBs with different maturity periods will be issued.
The initial issue will be open for all categories of investors, including institutions. The interest rate will be arrived through an auction. For higher retail participation, 20% of these issues will be reserved for the non-competitive segment for retail and mid-segment investors. At present, the non-competitive segment for government securities auctions is limited to 5%. The RBI will issue the second series exclusively for retail investors around October.
"Pursuant to the announcement made in the Union Budget for 2013-14 to introduce instruments that will protect savings of poor and middle classes from inflation and incentivise the household sector to save in financial instruments rather than buy gold, the RBI, in consultation with the government of India, has decided to launch inflation-indexed bonds," the RBI said.
IIBs will have a fixed coupon rate (interest rate), and their principal will be adjusted against wholesale price index-based inflation. The interest payments will be made on the adjusted principal amount, providing protection against inflation. At maturity, investors will get higher of the inflation-adjusted principal or the face value of the bonds.
Though the instrument is aimed at preventing inflation from eating into the returns from investments, the protection may be partial.
This is because for households, the consumer price index provides a better measure of inflation. In April 2013, the wholesale price inflation was around 4.9%, while the consumer price inflation was way higher at 9.4%. In many countries, inflation-indexed bonds are benchmarked to consumer price inflation for better protection against price rise.
These bonds will be tradable in the secondary market, which means anyone investing in a 10-year bond will not have to get locked in for the entire tenure. However, the flexibility of selling the bonds mid-term will depend upon how well the secondary market for the instrument evolves.
In order to create an alternative to gold investments, the Reserve Bank of India (RBI) is introducing government bonds whose returns will be linked to inflation.
On 4 June 2013, the RBI will introduce the first tranche (Rs 1,000-2,000 crore) of inflation-indexed bonds (IIBs) with a maturity of 10 years through an auction. IIBs worth Rs 12,000-15,000 crore will be issued during the current financial year. These will be divided into tranches and auctioned on the last Tuesday of every month. Subsequently, IIBs with different maturity periods will be issued.
The initial issue will be open for all categories of investors, including institutions. The interest rate will be arrived through an auction. For higher retail participation, 20% of these issues will be reserved for the non-competitive segment for retail and mid-segment investors. At present, the non-competitive segment for government securities auctions is limited to 5%. The RBI will issue the second series exclusively for retail investors around October.
"Pursuant to the announcement made in the Union Budget for 2013-14 to introduce instruments that will protect savings of poor and middle classes from inflation and incentivise the household sector to save in financial instruments rather than buy gold, the RBI, in consultation with the government of India, has decided to launch inflation-indexed bonds," the RBI said.
IIBs will have a fixed coupon rate (interest rate), and their principal will be adjusted against wholesale price index-based inflation. The interest payments will be made on the adjusted principal amount, providing protection against inflation. At maturity, investors will get higher of the inflation-adjusted principal or the face value of the bonds.
Though the instrument is aimed at preventing inflation from eating into the returns from investments, the protection may be partial.
This is because for households, the consumer price index provides a better measure of inflation. In April 2013, the wholesale price inflation was around 4.9%, while the consumer price inflation was way higher at 9.4%. In many countries, inflation-indexed bonds are benchmarked to consumer price inflation for better protection against price rise.
These bonds will be tradable in the secondary market, which means anyone investing in a 10-year bond will not have to get locked in for the entire tenure. However, the flexibility of selling the bonds mid-term will depend upon how well the secondary market for the instrument evolves.
