What are Inflation Indexed bonds?

By Research Desk
about 4 years ago

Introduced in the Budget for the year 2013-14 by Finance Minister P Chidambaram, inflation-indexed bonds or inflation-indexed national security certificates are instruments issued by government to protect savings from inflation.

 

In recent years, real rate of return on debt instruments has been negative as inflation eroded household savings. Inflation-indexed bonds will provide returns that are in excess of inflation, ensuring that price rise does not erode value of savings. Thus, Govt. hopes to increase financial savings as also shift these away from gold, through inflation-indexed bonds.

 

Following are the objective of issue of inflation-indexed bonds:

  1. Increase choice for savers, particularly for risk-averse investors looking to get assured real returns.
  2. Like gold, it is a hedge against inflation.
  3. Encourage household savings to shift away from gold that is largely un-productive for economy.
  4. Address current account deficit (CAD) risk as high gold imports in recent years has significantly widened CAD.

The structure, tenor, taxability of the instruments will be announced on 1st June in consultation with the RBI. These bonds are likely to be linked to the country’s wholesale price index.

 

RBI had introduced inflation-indexed bonds in 1997, and again in 2004, but failed to take off. Many Governments worldwide such as US, UK, France, Germany, Canada, Australia, Japan and Sweden have issued such bonds in the past. Even developing economies of Brazil and South Africa have issued such bonds.

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