Inflation Indexed Bond to inflation proof your wealth

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20% of each issue will be for retail investors

INFLATION-indexed bonds, proposed in this year's budget, will be launched on June 4. One of the objectives of the bonds is to provide an alternative financial instrument to wean household investors away from gold.

On that day sale of bonds worth between Rs 1,000 crore and Rs 2,000 crore will begin, to be followed by monthly sale of an equal amount on the last Tuesday of every month. The government will issue up to Rs 15,000 crore of such bonds this financial year.

This first series of the bonds will be issued till September, which will help determine the coupon rate for the bonds through auction. This will also help in benchmarking the bonds, according to a government statement.

These will be mostly for institutional investors like pension funds, insurance and mutual funds. Only 20 per cent will be sold to retail investors.

Based on the experience from the first series, a second series exclusively for retail investors will be issued in October. The terms of issue for retail investors will be announced later.

Inflation-indexed bonds, also known as inflation linked bonds are debt instruments where the principal is usually indexed to inflation. They are designed to mitigate the inflation risk of an investment.

Such bonds came into be ing for the first time in England in 1780. Various nations have issued such bonds worth over $1.5 trillion in the global debt market. Generally, these are sovereign bonds.

The bonds, to be issued by the Reserve Bank of India, will have 10-year maturity and index the principal to the wholesale price index with a four month lag.

The coupon rate will be fixed, according to the government statement. The bonds will be tradable in the secondary market.

The first series is open only to financial institutions so as to increase liquidity and for appropriate price discovery.

At present, retail participation in government securities is allowed only up to 5 per cent of an issue. In the case of inflation-indexed bonds this has been enhanced to 20 per cent to allow more retail participation.

Similar bonds did not work earlier in India because they were not fully indexed; nor were they marketed properly.

The statement said the bonds would have real coupon rate and nominal principal value adjusted against inflation. Periodic coupon payments will be made on the adjusted principal. Thus these bonds will provide inflation protection to both principal and coupon payment. At maturity the adjusted principal or the face value, whichever is higher, will be paid.

The coupon rate will be announced at the time of bonds issue.

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