Fintotal News Analysis | Inflation Indexed Bonds or Certificates- What to Expect
Inflation Indexed Bonds or Certificates- What to Expect
Ruby Jacob, 28 Feb 2013

Finance minister P C Chidambaram has proposed to introduce an interesting savings instrument called Inflation Indexed Bonds in his budget speech for 2013-14. Details of the same are yet to be announced after consulting with RBI.

You can expect the proposed Inflation Indexed Bonds or Certificates to have floating interest rate in tandem with inflation rate. Interest rate of these could be revised periodically, say once every year or every 6 months etc, like it is the case currently with NSC, PPF and other Postal Savings Schemes.

Inflation Indexed Bonds might have a cap on annual income of persons who can buy them if they are meant to serve the 'poor and middle' classes.

But the catch lies in what inflation yardstick the government would choose to match the interest of Inflation Indexed Bonds. It might go with Headline Inflation, which is the Wholesale Price Index (WPI) or benchmark rates to yield on Treasury Bonds instead of Consumer Price Index (CPI) which reflects inflation for the common man. CPI indicates inflation in food, clothes, fuel and such items of consumption.

Inflation Indexed Bonds or Certificates are being introduced to woo people away from gold and gold-related instruments. In the recent past household savings moved away from shares, equity mutual funds, bonds and other debt products to gold. 

The big reason for this is that gold became a 'safe haven' for households as returns from the other assets were comparatively less and also very unstable. Increased buying of gold has been a big concern to the government because majority of gold buying is met through imports.

Inflation Indexed Bonds might gather much hype around the time further announcements are made about it however we do not expect it to be a thriller going ahead. Yet this is definitely a move worth cheering for retirees and other investors who would like to channelize their savings to conservative instruments like bonds. 

But for the rest, Inflation Indexed Certificates can be no match for beating inflation compared to shares and equity mutual funds.

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