- Inflation-Indexed Bonds (IIBs), which are popular globally because of the inflation hedge and real interest rate returns it provides to the investors, is set to be re-launched by RBI.
- Last year it received lukewarm response because:
- They were linked to wholesale price index (WPI) and not consumer price index (CPI).
- Uncertainty of cash flows.
- They were non-transferable, and there was no provision for it to be traded in the secondary market. Even premature redemption, which was penalised, was only allowed after three years.
- It provided only protection of capital against inflation and not the coupon.
- It provided no indexation benefits.
- Inflation itself had decreased in the past months.
- Even in the retail segment where Inflation Index National Savings Securities, (linked to CPI) were available to up to Rs.1,000 crore, it failed to garner interest.
- Steps to be taken to brighten its prospects:
- Make it investor-friendly and attractive to brokers / distributors, insurance companies, pension funds and banks.
- Create a sizeable liquidity through continuous issuances, particularly interest payouts.
- Straighten out taxation issues as many other products such as fixed maturity plans and tax free bonds provided better returns than IIBs.
- Read at: http://www.thehindu.com/
todays-paper/tp-business/ markets-await-revamped-iibs- from-reserve-bank/ article5945649.ece
- What are Inflation-indexed bonds?
- What is liquidity?
- What are indexation benefits?