Financial Advisor: Wholesale Price Index

Monday, October 14, 2013

Inflation would play crucial role in next RBI policy..?

Inflation would play crucial role in next RBI policy..?

There is little respite from rising prices. The wholesale price index, the most widely-watched indicator of inflation in India, rose 6.46 per cent in September from a year earlier. That is sharply higher than August's level of 6.10% and 5.85% in July’s level. It is well above the RBI's comfort level of 5 percent level. The biggest driver of inflation is still food inflation, which accelerated to a three-year high of 18.40 percent in September from 18.8 percent in August because of supply disruptions due to heavy monsoon and poor storage facilities.

This is the fourth straight month that wholesale inflation has remained above the Reserve Bank of India's comfort zone and could add pressure on it to raise interest rates. A Reuters poll of economists predicted wholesale inflation at 6 percent for the month of September.

The elevated price levels will add more pressure on the Reserve Bank of India – which has clearly signalled that it will target inflation – to raise interest rates even as the economy is growing at its weakest pace in a decade.

At its last policy review on September 20, the RBI's new governor Raghuram Rajan had surprised everyone by increasing its main lending rate by 0.25 percent and clearly signaled that the central bank's focus would be on bringing down inflation. The RBI would be closely watching the September inflation numbers to determine its next rate action. The RBI's next policy review is scheduled for October 29. Economists polled by Reuters have forecast a further 50 basis points of increases in the RBI's main lending rate in six months.

Supply disruptions following heavy rainfall in some parts of the country have driven up food prices, particularly vegetable prices, in recent months. A weak rupee, along with increase in fuel prices, has kept upward pressure on inflation. The consumer inflation data will be released later today evening.

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Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Tuesday, May 21, 2013

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.