To protect the savings of poor and middle class from inflation and offer them an alternative to gold, the government on Thursday said it will launch the first tranche of inflation-indexed savings certificate on Monday.

The interest rate on such certificates will be linked to inflation rate based on Consumer Price Index (CPI) and a fixed rate of 1.5 per cent. The interest will be compounded in the principal on half-yearly basis and paid at the time of maturity.

"Early redemptions will be allowed after one year from date of issue for senior citizens (65 years and above of age) and 3 years for all others, subject to penalty charges at the rate of 50 per cent of the last coupon payable for early redemption," the finance ministry said.
The subscription will be open between December 23-31. It could, however, be closed before December 31 on a prior notice.

The minimum limit for investment is Rs 5,000 and the maximum is Rs 5 lakh per applicant per annum.

Individuals, hindu undivided family, charitable institutions and universities are eligible for subscription.

The RBI will act as a central depository of such securities. As distribution or sale of bonds would be through banks, the ministry said investors may approach branches of State Bank of India and its associate banks and all nationalised banks.

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 government had launched inflation-linked bonds in June this year, but they were targeted only at 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.