Market Anticipating Restructured RBI IIBs

  • 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.
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Exams Perspective:

  1. What are Inflation-indexed bonds?
  2. What is liquidity?
  3. What are indexation benefits?