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Inflation index bonds not very appealing due to WPI link

RBI has issued 12-15,000 crore of Inflation indexed bonds that are linked to WPI. However, retail investors are more interested in CPI than WPI index and hence there is a fundamental disconnect. Read this space to know the opinion of financial expert Suresh Sadagopan on Inflation index bonds.

May 20, 2013 / 03:46 PM IST

Last week, the Reserve Bank of India said it would issue Rs 12-15,000 crore of Inflation indexed bonds (IIB). These would be indexed to Wholesale Price Index  (WPI) and will earn a fixed amount above WPI. Fixed real coupon rate will be offered on WPI (around 5 percent currently). The principal will be adjusted for inflation, with a lag of four months. At maturity, adjusted principal or face value, whichever is higher, is paid.

The inflation indexed bonds are linked to WPI, which is significantly lower than the consumer price index (CPI). The retail investor is more interested in CPI and hence there is a fundamental disconnect. The eventual returns are not expected to be significantly better than existing options due to this - in fact it may be worse off. Hence, the inflation adjusted return is just on paper as this is not probably going to beat CPI even in future.

Also retail investors are put off when the interest rate is not a fixed amount they can expect (the same problem with debt mutual funds due to which their participation here is low).

Taxability aspect is not clear. If it is capital gains tax treatment, there is some benefit to be derived there. Should it be like interest income and taxed, it’s attraction diminishes further.

It is meant for conservative investors.  Those who want to earn a bit more would not come here.

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