Mumbai: In a bid to wean away people from gold that is increasingly used as a hedge against inflation, the Reserve Bank Tuesday said it is toying with the idea of launching inflation-indexed bonds (IIBs), apart from allowing banks to buy back gold.
"We introduced that (IIBs) some years ago but that didn't take up due to some design flaws. Since then, we have been trying to redesign it...," RBI Governor D Subbarao said at the customary post-policy conference.
"From our side, the attraction of the IIBs is to wean people away from gold.... If you provide an asset that gives inflation-indexed return (then they will invest in it)."
Certain issues were to be worked out, he said. "There were several questions apart from the design of the bond. About which inflation index, do we peg to-- WPI, CPI-- and if we peg it to CPI, which is above 10 percent then what interest rate will be offered which will attract retail investors?" he said.
Subbarao also spoke about the issues related to timing the launch as the government may want to do it during falling inflation, while customers would want it during rising inflation.
Referring to possibility of disruption of G-Secs market due to launch of IIBs, Subbarao said, "One question which hunts us all the time is whether this will disrupt the G-Sec market.
"Because it is a wedge between the yield of IIBs and that of the G-Secs. However, if we educate investors they will see that this is pegged to inflation over a cycle and not to a particular point of time. Then, people will understand and invest in this".
The Governor also said the government and the RBI are working on various proposals to reduce the gold import. "We are shortly going to also consider whether we should allow banks to buyback gold. There are some regulatory prescription, where it is implied not very direct, says banks can't buy back gold. That also we are examining."
Higher gold import has taken a heavy toll on the economy with current account deficit touching 5.4 percent in the second quarter. Recently, the government increased the import duty on gold to 6 percent from 4 percent to reduce inward shipments.
The company had in 1997 issued a 100-year bond, and last year a 30-year bond, the official said.
The bonds which hit the markets yesterday were sold globally, and received bids worth USD 3 billion. However, the focus was Asian investors comprising HNIs and insurance companies, he said, who lapped over 50 percent of the book.
Bank of America, Citi, HSBC, Barclays, Deutsche Bank, JP Morgan and RBS were book-running lead managers to the issue.
Asked about the rationale for limiting the quantum of the funds at USD 800 million despite getting historically low pricing and getting nearly four-times more the book size, he said the company was testing the waters and going forward it would look at more of such really long-terms funds.
He also said that global market is flushed with liquidity and the company wanted to diversify its debt profile to non-bank sources. Another reason for the issue is the fact that the government recently had done away with withholding tax, he said.
Currently, 80 percent of RIL's debts are from banks, while the remaining 20 percent are via public funds.
"The objective is to make our debt profile 50:50 going forward," the official said.
The funds will be used to meet the capex requirements of the company that runs the world's largest refinery at Jamnagar. The company had announced a Rs 1 trillion capex at the last AGM over the next three-five years.
The senior unsecured perpetual notes have 'BBB' rating from S&P, the rating said in a note.
"The proposed notes will rank equally with all the company's other present and future unsecured and unsubordinated obligations," S&P said in a note.
When asked why it is raising debt despite sitting on over Rs 84,000 crore surplus cash, the RIL official said, the interest rates are at historical lows and hence it's a good time for Reliance to raise long term money. Besides, the long term nature of the bond is in line with the long term assets of the company, he added.
The transaction extends Reliance's maturity profile and establishes Reliance's credit curve in 10 year, 30 year and perpetual bonds, he said.