Inflation-indexed bonds: Need of the hour

In the Budget of 2013-14, Finance Minister P Chidambaram announced that in order to reduce dependency on gold as an investment tool some new investment schemes are required that provide strong guard against ever rising inflation.Inflation-indexed bonds Need of the hour

In the recent budget, Chidambaram introduced a proposal for Index-Inflation Bonds (IIB’s).
For the normal bonds, the rate of interest is fixed and in the presence of high inflation rate the returns are not too encouraging. In addition, the other investment avenues including investment in equities are not paying back too well nowadays amid volatility in the stock market. Therefore, the only option that remains with an average Indian investor is to buy more of physical gold and hedge against inflation. This has led to uncontrolled growth in Current Account Deficit (CAD).
The most recent figure of 6.7 in the
third quarter of the last fiscal year is very disappointing.

Despite government’s tough measures for controlling gold imports, the situation is not improving at all. Therefore, IIB’s would be very effective if designed and implemented properly. In the case of investors who want to protect their long term debt portfolio from impact of inflation they can turn out to be very handy.
In the IIB’s, the redemption period and rate of interest related to bonds would be decided on the base of prevailing inflation. The principal amount is adjusted by an “inflation indexation factor” for each interest payment period.

However, most experts feel IIB’s should be linked to Consumer Price Index (CPI) than Wholesale Price Index (WPI) as against what RBI thinks as CPI has been much higher than WPI for some time now and affecting incomes greatly than WPI.

IIB’s can also help in letting us know the inflation rate in the coming year much efficiently.

Therefore, in order to control rising CAD and provide better investment avenues (than gold) to an average investor,IIB’s are need of the hour.

However, only thing worth note is that the rates of these bonds should be revised monthly otherwise a definite lag would set in that could harm the cause undoubtedly.

Ashish Pandey

I am a business journalist who is currently employed at Zee Business. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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