The government will launch its first tranche of proposed inflation indexed bonds (IIBs) amounting to Rs 1,000 crore on June 4, 2013. Retail investors can buy them to tune of 20% of bond sales.
The government of India will auction its first tranche of proposed inflation indexed bonds (IIBs) amounting to Rs 1,000 crore on June 4, 2013. Retail investors can buy them too in a limited way but not through acution process. Those bonds are aimed at curbing investment in gold by generating inflation adjusted returns on investments.
"The Government of India have announced the sale new inflation indexed government stock-2023 for a notified amount of Rs 1,000 crore through yield based auction. The auction will be conducted using uniform price method. The auction will be conducted by the Reserve Bank of India, Fort, Mumbai on June 4, 2013," the Finance Ministry said in a notification.
This is how IIBs work:
For example, a Rs 100 bond carries a coupon rate of 4 percent. If annual inflation is pegged at 10%, the face value of the bond will increase to Rs.110. At the same time, the interest payment will also increase to 4.4 percent, providing investors protection against inflation on principal and interest both.
IIBs would form part of the government's borrowing programme for the first half of the current fiscal, it said. Auction bidders will have to apply through electronic mode of RBI's core banking solutions - E-Kuber.
The result of auctions will be announced on June 4, 2013 and successful bidders have to make payments on June 5.
20 percent for retail
However, the authorities has earmarked 20 percent (Rs 200 crore) of bond sales for non-competitive bidders including retail and select institutional investors (like non-banking finance companies and others). The rest 80 percent is for large institutions, which will be engaged in the bidding process.
Non-competitive bidders can buy those bonds at the notified cut-off price while institutions have to bid higher price over and above that participating in the auction. Currently, non-competitive bidders can buy government securities to the tune of 5 percent of notified amount.
"The coupon rate for IIBs will be set at the cut-off yield to maturity rate decided in the auction. The interest will be payable half-yearly on December 5 and June 5. The principal will be adjusted against inflation by multiplying with index ratio (IR) and the coupon will be paid on the adjusted principal," FinMin said.
Earlier this month, the government had announced plans to issue IIBs worth Rs 12,000-15,000 crore this fiscal. The maturity period of these bonds will be 10 years.
While the first series of the bonds will be open for all class of investors, the second series, expected in October, would be reserved for retail investors.
In the Budget 2014, Finance Minister P Chidambaram had announced the introduction of IIBs to protect savings of poor and middle classes from the high rate of inflation.
Both the government as well as the RBI are concerned over the rising gold imports adding to a record high current account deficit (CAD) at 6.7 percent in October-December quarter of FY13. India is the largest consumer of gold.