In what would give retail investors a cover against prevailing high inflation, the government and the RBI are set to offer about R5,000-R10,000 crore worth of securities linked to consumer-price-indexed inflation, starting November.
This series of securities is likely to be sold as savings certificates through banks and post offices and not through open-market auctions as has been the case with the ongoing series linked to WPI inflation.
In his first speech as RBI governor, Raghuram Rajan had said, “Together with the government, we will issue inflation-indexed savings certificates linked to the CPI New Index to retail investors by end-November.” Government sources tell FE that once the current series gets over in October, about R5,000 crore will likely have been auctioned off, primarily to institutional investors.
For the period after that, North Block and Mint Street officials are drawing up a plan to remove institutional investors completely from the picture and focus on the retail investors. The total target for inflation-indexed securities for the year is R10,000-R15,000 crore.
“The RBI is getting a plan ready and we expect to get it soon. Not every retail investor finds it easy to take part in a bond auction. Hence we are likely to change it completely to a savings certificate instead of a bond issue,” a senior finance ministry official told FE. The source also said that both the principal and short-term interest rate will be linked to CPI inflation.
Currently, in inflation-indexed bonds (IIBs), the principal is periodically indexed to the wholesale price index (WPI).
The six-monthly coupon will be paid on the inflation-adjusted principal, so that the investment is protected from inflation.
However, it is CPI inflation, more that WPI, which affects the general public.
Additionally, while the WPI inflation has been within the RBI's 4-5% 'comfort zone' for most of the year (except July, when it was 5.79%), CPI inflation has been stubbornly above 9% for the same period.
“There are no two ways about it that this is a good thing and a product which is much required. The only difficulty which the government will face if they shift completely to savings certificate is that the market of IIBs will cease to exist. Also, in nominal terms, the cost of borrowing will be higher as CPI inflation is above 9% now,” economist A Prasanna of ICICI Securities said.
Inflation-indexed bonds are designed to cut out the inflation risk of an