RBI says next series of IIBs could be linked to CPI, too

The Reserve Bank Monday said the soon-to-be-launched inflation index bonds could also be linked to consumer price index in the future.

Mumbai: The Reserve Bank Monday said the soon-to-be-launched inflation index bonds could also be linked to consumer price index in the future.

"The new instruments to be issued down the line when perhaps CPI index stabilises, we may move over (to consumer price inflation). But currently, the choice is for WPI inflation for the current series which is going to be issued (on June 4)," Reserve Bank Executive Director R Gandhi said.

Gandhi, who oversees the internal debt management department, was speaking during a specially-arranged conference call with market participants to clear doubts surrounding inflation index bonds (IIBs), the first tranche of which is to be issued on June 4.

The plan came to fruition after Finance Minister P Chidmabaram in the FY 2014 Budget announced that RBI would launch inflation indexed bonds to help public hedge themselves against price increases at a time real interest rates are still negative, thus crimping their savings.

IIBs are pursuant to the Budget proposal to "introduce instruments that will protect savings of poor and middle classes from inflation and incentives household sector to save in financial instruments rather than buy gold".

Both the government as well as the RBI are concerned over the rising gold imports as its putting pressure on Current Account Deficit (CAD), which widened to historic high of 6.7 percent in third quarter of 2012-13.

There is a strong wedge between the consumer and wholesale price-based inflation indices. Experts are of the view that linking them to the CPI will entice retail investors more.

He said the RBI has increased the non-competitive portion
of the first trance, which would be of retail investors' liking to 20 percent from the earlier 5 percent. One will have to contact a primary dealer and preferably have a demat account to buy these instruments.

The RBI is also mulling over introducing a special series of bonds for retail investors after October 2013, he said.

The RBI, which is targeting to issue up to Rs 15,000 crore through the issuance of IIBs this fiscal, will think of additional ways of marketing the retail centric issue, Gandhi said.

This is the Reserve Bank's second shot at launching inflation bonds and with gold, whose high imports are causing concern to the economy by way of record high current account deficit, being seen as a hedge against inflation due to the negative real rates of interest, a lot is being aimed to achieve from an instrument like IIBs.

Gandhi said IIBs are like any other government security and the money raised through the issue will be a part of the government's half yearly borrowing calendar.

It will not enjoy any special tax benefits and all the taxes which will be applicable will be at par with any other government security, Gandhi said, adding they will also be considered in the statutory liquidity ratio requirements of banks.

He further said foreign investors will be able to buy these bonds, but within the existing total investment limits of USD 25 billion of government debt.

While government bonds are issued on a weekly basis, the inflation-linked bonds will be issued separately on a monthly basis.

Inflation bonds will also be eligible for short-selling and repo transactions, the RBI official said. The instrument will also be traded like any other government security, giving investors a scope to exit their investments.

To clarify additional doubts, the Reserve Bank will come up with a FAQ (frequently asked questions) list by the weekend which will clarify on any doubts for the investors, he said.

Even the Economic Survey also called for IIB as saying "the rising demand for gold is only a 'symptom' of more fundamental problems in the economy. Curbing inflation, expanding financial inclusion, offering new products such as inflation-indexed bonds, and improving saver access to financial products are all of paramount importance".