'No positive impact on sovereign rating from inflation bonds'

Last Updated: Thursday, June 6, 2013 - 22:39

New Delhi: Global rating agency Moody's Thursday said the government's decision to issue about Rs 15,000 crore inflation bonds in the current fiscal in its bid to curb demand for gold is unlikely to have any positive impact on the country's rating.

"The quantum of current and planned inflation-indexed bonds (IIBs) is too small to have a meaningful impact on India's sovereign credit profile," the agency said in a statement.

"We view them as an incremental, modestly credit-positive addition to Indian authorities' policy tool kit. They offer an inflation-hedged financial asset that promotes savings as well as diversification away from gold," it said.

Monthly gold import more than doubled to 152 tonnes in the first two months of the current fiscal, putting further pressure on the current account deficit (CAD). In the last fiscal, the monthly average gold import was 70 tonnes.

High CAD which impacts the country's foreign exchange reserves as well as the rupee value had touched a record high of 6.7 percent in the October-December quarter and is likely to be 5 percent of the GDP for the 2012-13 financial year.

Moody's said by linking government borrowing costs to inflation, inflation-indexed bonds encourage fiscal discipline.

Earlier this week, the RBI, on behalf of the central government, successfully issued Rs 1000 crore in inflation-indexed bonds at a real yield of 1.44 percent over the Wholesale Price Index.

The sale was targeted towards institutional investors, although future issuance will be offered to retail investors as well.

The government proposes to issue about Rs 12,000-15,000 crore in 2013-14.

Inflation indexed bonds will equal only about 2 percent of government debt issued this year, and thus are unlikely to have an immediate, material credit impact, it said.

Over time, however, these bonds could serve as a tool to correct India's macro-economic imbalances, it added.

The agency noted that these instrument offer an alternative to gold to domestic investors seeking inflation-hedged assets.

A reduction in gold import growth, in turn, would alleviate balance of payments and exchange rate pressures, Moody's said.

Second, by linking government borrowing costs explicitly to inflation rates, they provide incentives to curb loose fiscal policies that exacerbate inflation, it said.

Lastly, it said, the availability of inflation indexed instruments would address the disincentive to save created by India?s relatively high inflation.


First Published: Thursday, June 6, 2013 - 22:39
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