Inflation-indexed bonds to get better for you & me
Aug 06 2014 , Mumbai
Frequent interest payments, easy exit mooted
The Reserve Bank of India (RBI) said on Wednesday that it is in talks with the government to arrive at a consensus on changing the existing features of the CPI-linked IIBs, such as providing higher real interest rate to investors, changing the frequency of interest payments and providing exit facility.
Speaking to Financial Chronicle during a media interaction, RBI governor Raghuram Rajan said, “We could re-launch these (CPI-linked IIBs) with different features: for example, interest payment every six months, perhaps slightly higher real interest rate and some flexibility for entities that want to get out of these bonds in the immediate term. So what could be the rules? We can examine some and see whether these can be re-launched.”
The RBI said that it would issue a wholesale index-linked bond to get a better sense of what might be acceptable real interest rates in for the IIBs.
Rajan also said that the central bank is sorting out distribution issues and would be incentivising banks to sell them.
“There are also some issues about the distribution process and certainly the extent of the forms that have to be filled, this has to be simplified — it can’t be more than one or two pages, if possible. We will also look at the bank's incentives to sell these bonds, look at whether we should have other distribution channels, these are issues we will examine,” said Rajan.
“We knew what it (real interest rate) was for WPI bonds but we didn’t get a good sense for CPI-linked bonds. So we will take a number of actions on all this. Hopefully soon,” said Rajan.
Rajan said that the government has to agree to some of the changes being proposed. “Maybe, what we put last time (the coupon rate) was lower than what they (investors) were willing to accept given the features of the bond. We were hoping to put it more on par with some of the debt funds in terms of the tax implications. But of course the debt funds now have different tax implications. Also the government has said that it will do less of tax-free bonds this year. So again that will not be big competitor with IIBs,” said Rajan.
The idea behind IIBs is to channel household savings into government debt instruments and protect them from inflation. After launching bonds linked to the WPI last year, the government in December 2013 launched bonds linked to CPI but these they failed to take off. IIBs have a tenure of 10 years with face value of Rs 5,000. The maximum amount you can invest is Rs 5 lakh.
The interest rate is 1.5 per cent per annum above the CPI. The interest is compounded semi-annually but paid cumulatively at redemption. The IIBs are for investors who are seeking to protect their long-term debt portfolio from the effects of inflation.