Inflation-linked saving certificates soon to protect middle class earnings

The Finance Ministry and the Reserve Bank of India (RBI) are in discussion to launch inflation-indexed saving certificates for retail investors that will protect the savings of the poor and middle-class people from inflation, and offer them an alternative to investment in gold.

These securities will be designed to provide returns in excess of inflation.

“If everything goes alright, the saving certificates may be launched in October-December quarter and will be targeted at the middle-class,” a senior Finance Ministry told Deccan Herald. The government hopes to sell saving certificates worth Rs 15,000 crore in the current financial year.

“The saving certificates will be part of the government’s overall borrowings in FY14,” he added.

The saving certificates will carry marginally higher interest rates than the inflation-indexed bonds.

However, the Finance Ministry is confident that the saving certificates would not add to the government’s interest burdens.

“We could also raise some government securities at lower interest rates and balance additional burden due to saving certificates,” the official added.

Finance Minister P Chidambaram had proposed to launch inflation- indexed bonds (IIBs) as a hedge against rising inflation in the Budget this year targeting the poor and middle-class population. 

The certificates, which are expected to give returns higher than inflation, will work in the following manner: If a person buys the certificate of Rs 1,000 with a 7 per cent coupon rate at maturity, then in case of a simple certificate, he will receive Rs 70 as an interest at the end of the year. But, in case of inflation-linked certificate, if inflation rises to 9 per cent in that year, the interest will be calculated at Rs 1,070 instead of Rs 1,000. The interest of 7 per cent will be paid on the inflation adjusted principle.

The government had launched inflation-linked bonds in June this year, but they were targeted only at retail investors such as pension, insurance and mutual funds. This time around, these will benefit the retail investors.

India had also experimented with such inflation-indexed bonds in 1997, but it did not meet with any success. At that time, only the principal repayments at the time of redemption were indexed to inflation and not the interest payments.

In recent years, higher inflation has resulted in diversion of savings from financial markets to physical assets like gold and property. Analysts said, it was a good idea to launch bonds when people were investing in gold to hedge against inflation and the government wanted to stop that practice as it was putting a burden on its balance of payment.

But concerns also emanated from the fact that there were downside risks for households in case of inflation coming down drastically.