RBI to allow 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 recently said at the 13th FIMMDA-PDAI Annual Conference 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. As inflation remained high during the past two years, gold had emerged an favourite investment avenue as it provided an insurance to investors against inflation.

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.

Banks told to lower NPA

The Reserve Bank has also asked banks to improve their ability to manage stressed assets, but said there was nothing alarming about an unexpected rise in the non-performing assets (NPA) levels this fiscal.

“Concerns (on NPA) are there. Banks have to improve their ability to manage NPAs. We have told banks what is their lacuna. They have to improve their information system. But we see that the situation is not alarming. Though this is our concern. Hope banks will be able to manage them,” Deputy Governor KC Chakrabarty told reporters on the sidelines of a function organised by Yes Bank here.

The country’s largest lender SBI had reported record gross NPAs in Q3 at Rs 40,080 crore and saw an 87.5 percent spike in its provisioning. But private lenders are better off.
The total NPAs in the system are set to top 3 per cent of the total assets this fiscal, against a 2.3 per cent last fiscal at Rs 98,000 crore.

But what’s worrying the regulator is the an over 300 percent spike in corporate debt recast this fiscal, which has already touched Rs 76,251, against Rs 25,054 crore in the previous fiscal. This makes the overall CDR asset in the system to over Rs 1.9 trillion.

Foreign investment eased

The Reserve Bank relaxed various norms on overseas direct investments to offer more flexibility to the Indian companies and individuals.

“To grant more flexibility to the Indian party, it has been decided to further liberalise various provisions or regulations of overseas direct investments...” the RBI said in a notification. “...proposals from the Indian party for creation of charge in the form of pledge or mortgage on the immovable or movable property and other financial assets of the Indian Party and their group companies may be considered by the RBI,” it said.

On bank guarantee for computation of financial commitment, the RBI said, “...the bank guarantee issued by a resident bank on behalf of an overseas JV or WOS of the Indian party, which is backed by a counter guarantee or collateral, shall be reckoned for computation of the financial commitment.”

Keeping in view the nature of the compulsorily convertible preference shares (CCPS), the RBI said, CCPS shall be treated at par with equity shares and the Indian party is allowed to undertake financial commitment based on the exposure to JV by way of CCPS.

Meanwhile, the RBI also relaxed various norms overseas investments by resident individuals as well.

“It has been decided to grant general permission to resident individuals various norms such as acquiring qualification shares of an overseas company for holding the director post, acquiring shares in a foreign company through ESOP scheme etc...” it added.