A technical committee of the Reserve Bank of India (RBI) has proposed introduction of fully inflation (price movements) indexed bonds (IIB) for institutional investors with maturities of 10- 12 years.
This is intended to ensure inflation-linked returns to the investors.
If retail investors are allowed to invest in such bonds at a later stage they would be in a position to help the retired and inflation conscious investors to insulate themselves against the unpredictable inflationary movements.
Fixed deposits(FD) and other investments gave negative real returns when inflation shot up to double digits in 2009.
Unlike the existing capital indexed bonds, which propose to protect only the capital/principal against inflation, the new scheme promises investors inflation- based returns, too. For example, an IIB is issued at a face value of Rs 100 with a real coupon rate of 2.5 per cent paid annually. If the cumulative inflation at the time of the coupon payment is five per cent, the principal for calculating the coupon payout will be Rs 105 and coupon payment Rs 2.60.
But if the cumulative inflation is - 5.0 per cent (deflation), then the indexed principal would be 95 and the real coupon payout would be Rs 2.38. In such a scenario, the real coupon will be calculated on the indexed principal that will be lower than its par value, but at the time of redemption the principal repaid will be equivalent to its par value.
"Thus, investors receive inflationadjusted interest payments periodically and also inflation- adjusted principal repayments at the time of redemption or its original par value, whichever is higher," the committee said in its report released on Friday for public feedback.
Earlier, retired people, who invested in FDs used to get returns that were half of the prevailing inflation rate. In 2009, when inflation shot up to 12 per cent, many FDs were fetching returns of about seven to eight per cent per annum, thus, giving five to four per cent of negative returns respectively, throwing the budgets of many a retired persons haywire.
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