Anand Adhikari
Will the Reserve Bank of India's much hyped
inflation-indexed bonds really protect the savings of the poor and the middle class from inflation? Do they offer enough incentives to the not-so-poor to
turn away from investing in gold and real estate and instead hedge their funds from inflation by buying these bonds?
First, let's look at the timing of the launch of Rs 12,000-15,000 crore inflation indexed bonds.
The timing clearly favors the government as inflation has already been showing signs of easing in the last six months. Expectations are that wholesale price index (WPI) inflation will soften further from the current level of 4.89 per cent recorded in April this year, which is already a 41-month low.
In fact, the Reserve Bank of India had come out with a technical paper on launching of inflation indexed bonds way back in 2010, but it refrained from actually launching the scheme because inflationary expectations were on the higher side.
The second important aspect of these bonds is the adjustment of principal as well as interest payment with the WPI. Under the scheme, the principal amount of these 10-year bonds will be
adjusted against inflation and periodic coupon payments will be made on the adjusted principal.
At maturity, the adjusted principal or the face value whichever is higher will be paid.
In reality, the consumer price index (CPI) - not the WPI - represents the real inflationary pressure on households.
There is wide divergence between the WPI and the CPI in India. While WPI has fallen to 4.89 per cent in April, the CPI is still high at 9.39 per cent. Many countries use CPI as a benchmark for linking payments on inflation-index bonds.
Linking the principal to the WPI is actually not a good deal for small investors.
Finally, there is the use of the 'auction method' for determining the coupon rate for the inflation-indexed bonds. So the first tranche of Rs 1,000-2,000 crore bonds slated for June 4 is not for retail investors. They will have to wait till October this year to apply for the inflation index bonds. By that time, inflation will definitely have reached a comfort zone for the RBI, the government and households as well.
So will there be a demand for the bonds?
It actually took almost one and a half decades for the government to launch capital indexed bonds. Many say the new refined inflation indexed bonds could follow in the footsteps of the capital indexed bonds issued way back in 1997. This five-year product with a six per cent coupon rate was a non-starter. The reason for the poor response was the hedging of the principal amount and not the interest payments.
Special 
