Inflation-indexed bonds will help investors hedge their savings against inflation

THE Reserve Bank of India (RBI) is expected to launch within month the inflation-indexed bonds (IIBs), with seven to 15 years maturity, which will help investors hedge their savings against inflation.

"This was announced in the budget. We have also announced in our auction calendar and we hope (to issue IIBs) within a month's time," RBI deputy governor H R Khan said on the sidelines of an event organised by National Housing Bank here.

"Bonds will have their own guidelines and features. As of now it will be linked to wholesale price index. Every six months, it will be indexed," he said.

Khan said there are one or two design features that are being discussed with the government.

On the maturity period of these bonds, Khan said it would range between seven and 15 years.

"Right now, the plan is that it will be issued like any other government security... What we are proposing is that non-competitive portion (retail portion), we have higher percentage of bidding, it could be 10 per cent, it could be 15 per cent, or 20 per cent. So, it will be earmarked for the small fellows, trusts or individual, those who have gilt accounts," he said.

Retail investors can get the bonds without participating in the auction at the cut-off price, Khan said.

"Then after few months, we will think of some certificate based on this," he added.

The central bank, for some time, has been planning to introduce IIBs to wean away investors from gold as a hedge against inflation.

Finance minister P Chidambaram in the budget speech had said: "I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be inflation indexed bonds or inflation indexed national security certificates." On external commercial borrowings (ECBs) for affordable housing, Khan said: "We have come out with the $1 billion scheme and this year we are going to continue that." He further said that RBI will adopt "a cautious approach because housing doesn't generate foreign exchange." "So, we have to see that we have really viable projects and we don't get into difficulty. We have to balance the requirement as well as the currency mismatches. We have to take a balanced approach," he added.