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Inflation bonds may be linked to CPI in future: RBI

RBI may link the proposed inflation index bonds (IIBs) to CPI - inflation as and when it stabilizes but currently, those are linked to WPI - inflation, a senior official from the central bank said. Linking it to WPI, many believe, will not serve its basic purpose of IIBs.

May 21, 2013 / 09:56 AM IST

Moneycontrol Bureau

The Reserve Bank of India (RBI) may link the proposed inflation index bonds (IIBs) to Consumer Price Index (CPI) as and when it (the rate of inflation) stabilizes but currently, those are linked to Wholesale Price Index (WPI), a senior official from the central bank said.

A panel of senior RBI officials including R Gandhi – the executive director and others addressed market participants and the media on Monday explaining IIBs, which will be issued on June for institutional investors. Retail investors would get this investment option in October this year.

"At the time of issuing those for retail investors, we may consider including mutual funds as well. As of now, bonds will be auctioned for institutional investors. Tax treatment will be same as it applies to other bonds. So far, there is no special tax dispensation for IIBs," Gandhi said.

The latest data shows, WPI is 4.89 percent while CPI is at 9.39 percent. Some critics are of opinion that the basic purpose of IIBs to save the poor from high rate of inflation stands nullified if IIBs are linked to WPI but not CPI.

Also read: Inflation Indexed Bonds- Retail investors eagerly demands

Overseas investors are expected to buy IIBs within the existing total investment limits of up to USD 25 billion for government debt. Those will be issued separately on weekly basis in line with other government bonds. The RBI will set a half-yearly coupon on these bonds.

The Union Government had earlier announced that it would borrow Rs.3.49 lakh crore, or 58% of the total borrowing programme of Rs 5.79 lakh crore, in the first half of fiscal 2014. The proposal was inclusive of inflation-indexed bonds worth Rs 12,000-20,000 crore.

In the Union Budget 2014, Finance Minister P. Chidambaram mentioned the introduction of such bonds in consultation with the RBI. IIBs will qualify for short-selling and repo transactions, the official said in the teleconference.


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