RBI is responsible for the development of the Government Securities market. Although, debt market in India is not matured; but RBI is taking steps in the good direction to address key concerns.
What Are Inflation Indexed Bonds:
In the developed debt markets, such as, United Kingdom, USA, New Zealand, Canada, Sweden, and South Africa the Inflation Indexed Bonds issued by the Government are one of the popular debt instruments. These Governments undertake issuance of the bonds at a regular interval with an aim to:
(a) provide a new instrument to investors that offers hedging against inflation risk,
(b) enhance credibility of anti-inflationary policies,
(c) provide an estimate of inflation expectations and
(d) create an additional avenue for fund deployment and thereby facilitating widening of Government securities
market.
Out of several variants of Inflation Indexed Bonds, the Capital Indexed Bonds (CIB) is the most popular and widely issued debt instrument internationally. In India also one variant of CIB (viz., 6 per cent Capital Indexed Bond 2002) was issued for the first time on December 29, 1997. Subsequent to that issuance, there was no further issuance of CIB mainly due to lack of an enthusiastic response of market participants for the instrument, both in primary and secondary markets.
Some of the reasons cited for the lackluster response are:
- it only offered inflation hedging for the principal, while the coupons of the bond were left unprotected against inflation and
- complexities involved in pricing of the instrument. Taking into account past experience as well as the internationally popular structure of Capital Indexed Bonds a modified structure of Capital Indexed Bonds has been designed.
Proposed Structure of new Capital Indexed Bonds
In line with the international standards, the proposed CIB would offer inflation linked returns on both the coupons and principal repayments at maturity.
The Basic feature of bonds would be that the coupon rate for the bonds would be specified in real terms.
Such coupon rate would be applied to the inflation-adjusted principal to calculate the periodic semi-annual coupon payments. The principal repayment at maturity would be the inflation-adjusted principal amount or its original par value, whichever is greater, thus with an in-built insurance that at the time of redemption the principal value would not fall below par. The inflation protection for the coupons and the principal repayment on the bond would be provided with respect to the Wholesale Price Index (WPI) for All Commodities (1993-94=100), the leading measure of inflation in India.
Based on the Wholesale Price Index for All Commodities, the principal value of CIB would be adjusted.
The inflation-adjusted principal value of the bonds can be obtained for any date by multiplying the par value by the index ratio applicable to that date. The inflation adjustment to the principal would not be payable until maturity.
At maturity the CIB would be redeemed at its inflation adjusted principal amount or its original par value, whichever is greater, with an inbuilt insurance that the redemption value would not be below par.
Taxation
The value of the investment in the CIB and the coupon payable thereon would be governed by the provisions of tax laws as applicable from time to time.
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