Novel idea

Novel idea

The Reserve Bank of India’s plan to launch inflation-indexed bonds linked to the consumer price index is a good idea. The apex bank intends to issue the bonds by the end of this month. The bank has been concerned with the relentless rise of inflation which has adversely hit the economy in different ways. It has tried to tame the beast through monetary policy changes and other measures but the inflation rate is still uncomfortably high. Since it reflects the rise in prices of commodities, it is the most important economic measure for  the common man. Spending power and savings crucially depend on the inflation rate. Therefore bonds which are linked to the CPI are likely to find acceptance among the people as they can serve as a hedge against erosion of the value of savings.

There are instruments which are linked to inflation but these are based on the wholesale price index. The wholesale price index does not reflect retail inflation which is what matters to ordinary people. While the CPI-based real inflation is above 10 per cent  while the WPI-based rate is only 7 per cent. There is no incentive for people to buy the existing WPI-based bonds as they do not protect the value of money. But the proposed bonds are likely to be more rewarding and attractive. It is partly because there is no effective, easily available and safe financial instrument that people are attracted to gold and real estate for investment. It is well-known how the appetite for gold is causing serious damage to the economy.  The various measures taken recently to curb the import of  gold  have only had a limited impact. Investments in gold and real estate are also inextricably connected with the use and creation of black money. They are not productive either.

The details of the bond scheme, including their design, will be important in determining their appeal. But the plan has evoked much interest. The bonds have the potential to become a popular alternative to many current schemes. There is also a view that they may pose a challenge to many bank savings schemes, which do not always give full protection against inflation. That can persuade banks to improve the terms of their schemes and service to the customers. They may also make the government more serious about controlling inflation.

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