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Apr 11, 2013, 04.20 PM IST | Source: CNBC-TV18

Inflation indexed bonds: Will it find buyers?

Rajiv Anand, MD & CEO, Axis AMC feels inflation indexed bond is a good idea to attract retail investors.

Rajiv Anand

MD & CEO, Axis Mutual Fund

More about the Expert...

HR Khan, Deputy Governor of RBI recently announced the government is working on final features of the much-talked about inflation indexed bonds. Rajiv Anand, MD & CEO, Axis AMC feels this is a good idea to attract retail investors.

"The government is certainly looking at inflation indexed bonds from the perspective of diversifying the portfolios for banks and more importantly trying to create products which can wean retail away investors from assets like gold,” he said in an interview to CNBC-TV18.

Inflation index bonds will be linked to the wholesale price index (WPI) and indexation will happen every six months. The maturity period is likely to be in the range of 7-15 years.

But, the calculation of coupons needs to be simple to understand and transparent for it to get more retail participation. Also, the distribution mechanism would play a crucial role.

“It is a saleable product, but the question is how to sell it. We have had success selling bonds like Kisan Vikas Patra and Indira Vikas Patra or RBI Relief Bonds for that matter, so distribution is the key, he added.

Below is the edited transcript of Rajiv Anand’s interview with CNBC-TV18

Q: What is your take on inflation index bonds? It is likely that they will be indexed to the wholesale price index (WPI) and that the indexation will happen every six months. It also says the likely tenure of the inflation index bonds will be 7-15 years. With these, what have you made of the product, do you think it will be an attractive product?

A: It is a good idea. The government is certainly looking at inflation index bonds from the perspective of diversifying the portfolios for banks and more importantly trying to create products which can wean away retail investors away from assets for example like gold.

The real issue is from a retail perspective it should be fairly clear in terms of how exactly the coupons will be paid or will be calculated, so that the investors are able to understand the linkage between inflation and the rate of interest that they are getting.

Q: You suspect it will be designed as one percentage point above WPI average for the first six months, is that how it is likely to be?

A: The last time that the inflation indexed bonds were issued and I have been around in this market for a little while, the way it was done was that there was a fixed coupon and a plus-minus which basically is what we bid for as a function of inflation. So, that bond, there were two issues of that in the early 2000s and those were pretty much taken up by the banks.

Q: But that was an institutional product, wasn’t it? This is envisaged as a retail product so is it likely to be priced differently in the sense benchmark to WPI as Khan has just stated?

A: All I am saying is that the calculation of the coupon needs to be simple to understand and transparent if it is going to be used for the purposes of selling these bonds to retail clients.

Q Turnover rates would be most relevant to analyse the achievement of:
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