FIIs likely to buy inflation-linked bonds, says RBI

India's new inflation-linked bonds will be sold to foreign investors as part of an up to $25 billion investment limit for government debt allotted for demand from overseas, Reserve Bank of India (RBI) officials said on Monday.

However, inflation-linked bonds will be issued separately from a scheduled weekly auctions of government bonds, the officials said in a teleconference providing details about the upcoming sales of the debt.

The RBI plans to kick-off monthly sales of inflation-linked bonds on June 4, with an inaugural sale of Rs 1,000 crore to Rs 2,000 crore worth.

The central bank may also consider eventually linking inflation-indexed bonds to the consumer price-led inflation (CPI) once the price measure stabilises, said R Gandhi, executive director of the RBI, without providing a timeframe.

The RBI plans to initially index the bonds to the wholesale price index with a four-month lag, unlike elsewhere in the world, where these bonds are typically pegged to CPI. Government's annual consumer price inflation, which was launched in February 2012, slowed for the second straight month in April 2013 to 9.39 per cent, but remains well above the central bank's comfort level.

Inflation bonds will also be eligible for short-selling, repo transactions. Inflation-linked bonds are part of the several measures govt has taken to wean away investors from gold, which is considered a hedge against rising prices. These bonds are being re-introduced after a failed attempt in 1997.