< Previous | Contents | Next >
To protect the returns of investors from the vagaries of inflation, the Reserve Bank of India plans to introduce inflation-indexed bonds (IIBs)—it was proposed by the Union Budget 2013–14. The government hopes this will help increase financial savings instead of buying gold. In the recent years, the rate of return on debt investments has often been below inflation, which effectively means that inflation was eroding savings. Inflation indexed bonds provide returns that are always in excess of inflation, ensuring that price rise does not erode the value of savings.
In 2013–14, RBI launched two such bonds —the first one in June 2013 linked with the WPI which had a very weak retail response and second one in December 2013 linked with CPI. The latter one is called as Inflation Indexed National Savings Securities-Cumulative (IINSS-C) with a 10 years tenure. These are internationally known as inflation-linked securities or simply linkers. Interest rate on these securities would be linked to final combined consumer price index [CPI (Base: 2010=100)]. Interest rate would
comprise two parts: fixed rate (1.5 per cent) and inflation rate, based on three-month lag to CPI—thus, if a bond is being valued in December, the reference rate will be CPI of September. The new offering should attract higher attention from savers, especially due to its link to CPI instead of wholesale price index (WPI), which is a less accurate gauge of inflation. CPI is considered a more accurate gauge of the impact of inflation on consumers because it takes into account increases in the cost of education, food, transportation, housing and medical care; in WPI, the emphasis is on measuring the prices of traded goods and services.
It was in 1997 that the IIBs were issued for the first time in India—named as the Capital Indexed Bonds (CIBs). But there remains a difference between these two bonds. While the CIBs provided inflation protection only to principal the new product IIBs provides inflation protection to both the components—principal and interest payments.