The wait for the launch of inflation-indexed bonds (IIBs) as proposed in this year’s Budget gets over as the government is all set to launch the bonds next week, but the promise to protect savings of the poor and middle-class from inflation is a far cry as the bonds to be issued on June 4 are not meant for any individual or retail investors.
The first series of IIBs of Rs 1,000-2,000 crore will be sold to the institutional investors such as Pension Funds, Insurance and Mutual Funds.
The first tranche of these bonds will be issued on June 4. Thereafter, they will be issued regularly through auctions on the last Tuesday of each month during 2013-14. These bonds will have a tenure of 10 years. The second series of these bonds, which will be meant exclusively for retail investors, will be issued in the second half of the financial year, beginning October.
Hence, Inflation-stung investors, who sought refuge in gold and real estate, may finally begin to save more in financial products after the launch of these bonds by the end of the current calendar year.
“I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle-classes. These could be Inflation-Indexed Bonds or Inflation-Indexed National Security Certificates,” Finance Minister P Chidambaram had said in his Budget speech this year, thus raising hopes and aspirations of an average Indian investor for the launch of such bonds.
But, RBI maintains that it is necessary to issue comparable instruments through auctions to the institutional investors. This will create demand for IIBs and help in making them tradable in the secondary market.
“It is therefore proposed to issue initial series for all categories of investors including institutional investors and, later, another series, exclusively for retail investors,” RBI has said.
The central bank has also said that the bonds will be linked to wholesale price index (WPI). The calculation will take the WPI index with four months’ lag. For instance, the final WPI for December 2012 and January 2013 will be used as reference WPI for adjusting the principal on June 2013 and July 2013 respectively.
But, the analysts have questioned the relevance of such bonds for an individual investor or household, who is directly impacted by the Consumer Price Index (CPI) rather than WPI. It is the consumer prices that matter majority of Indian investors in day-to-day life than wholesale prices, especially at a time when WPI has declined below 5 per cent but CPI continues to hover near double digits. At this juncture, even if the coupon rate for such bonds is 10 per cent, the investor, on maturity, will get an amount based on 5 per cent rate of inflation print at WPI index and not the CPI index which is nearly 10 per cent, according to the latest official data.
And the fact that IIBs will be part of government borrowing programme every year, has left analysts apprehensive whether the instrument is meant to be used as one which collects money from poor investors at 4-5 per cent interest rates and provide loan to government at cheap interest rates.