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Interest on the securities will be a fixed rate plus inflation based on the consumer price index

The Reserve Bank of India will soon launch an inflation-linked saving instrument for retail investors, offering people an alternative to parking their savings in gold. The central bank plans to launch the 10-year Inflation Indexed National Saving Securities (IINSS) for retail investors in consultation with the government before the end of December, RBI said in its second quarter review of monetary policy on Tuesday.

The rate of interest on these securities will be a fixed rate plus inflation based on the new (combined) consumer price index. The instrument will be distributed through banks.

The move aims to revive small investors' interest in financial assets.

With unabated inflation, investors have been moving away from financial assets such as bank fixed deposits and small savings schemes, instead opting for physical assets such as gold.

Experts say IINSS will offer investors a good option to hedge against inflation. Some say the government can make it more attractive by making the securities tradable. This is a good option for investors who are of the view that inflation is going to rise. However, since the returns will be received only at the time of redemption, these bonds should be made more liquid by listing them on exchanges. This and a wide investor base will make the instrument more attractive.

The Union Budget 2013-14 presented in February had proposed a saving instrument to protect small investors from inflation. RBI governor Raghuram Rajan too had talked about such an instrument when he assumed office last month.

Inflation-linked bonds now available are linked to wholesale price indices. They have not taken off in a big way, partly because the returns on these are lower than consumer inflation, thus eroding the value of one's financial savings.

Inflation based on the wholesale price index for September was 6.46% while consumer price inflation was 9.84%. As for bank deposits, the returns are in the range of 8-9%.

Unlike bank deposits where the individual has an option to receive interest payments at regular intervals, the return on these securities would be compounded half-yearly and paid cumulatively at redemption. Individuals, Hindu undivided families (HUFs), trusts and charitable institutions will be eligible to buy these securities.

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