Do you know about Inflation- Indexed Bonds ?

Are Inflation-Indexed Bonds really helpful for the common investors..?

As per the promised by our finance minister Mr. P. Chidambaram in the budget speech, India’s first inflation indexed bonds to be launched on 4^th June. The objective of these bonds is to protect the savings of the poor the middle class as said by our finance minister. These 10 year bonds will have a fixed coupon rate and the principal value of the bond will be linked to the WPI (Wholesale Price Index). According to releasing RBI statement, these bonds will prove better option than gold and also protect the savings of poor from inflation.

In Inflation indexed bonds coupon rate will remain fixed but face value will be changed with the inflation. The RBI referred to a four-month indexation lag, which means January WPI would be used as a reference for bonds issued in June.

For example, if the face value of the bond is Rs 1,000, coupon rate 5% and maturity 10 year. So if inflation rises 8% then the face value will adjust to Rs 1080 and coupon rate 5% will calculate on new face value Rs 1080. So after adjusting the face value the investor will get Rs 54.

So now it has been clear that if inflation increases you will get higher coupon and higher principal as well at the time of maturity. If inflation drop then you will get less coupon but your capital is protected. It means you will get back your principal amount at the time of maturity if inflation drops.

Now come to the most critical part of this bond. These bonds are linked to the wholesale price index (WPI) and not to the consumer price index (CPI). At present according to latest govt. released data WPI is at 4.89% and CPI is 9.39%. Some analyst said that the government is not protecting the poor it is protecting itself from inflation and paying less then CPI to the poor and the middle class. WPI only include food, fuel and manufactured products but it does not include many all the common services.

Initially, the bond will be issued to only institutional investors. But after few months, retail investor having demat a/c can invest in it with minimum amount Rs10,000.

So in short, these bonds may not be fulfill its objectives to protect the poor and the middle class segment from inflation as it has not linked to the CPI and it is not available in simple medium like from banks, post offices.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com