Wednesday, March 26, 2014

Inflation Indexed Bonds (IIBs)

Inflation Indexed Bonds (IIBs)

IIBs will provide inflation protection to both principal and interest payments. Inflation component on principal will not be paid with interest but the same would be adjusted in the principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the face, whichever is higher, would be paid. Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation.
capital protection will be provided by paying higher of the adjusted principal and face value (FV) at redemption. If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital will get protected. The consumer price index (CPI) reflects the inflation people at large face and therefore, globally CPI or Retail Price Index (RPI) is used for inflation target by the Central Banks as well as for providing inflation protection in IIBs.WPI series is being revised after every 10 or more years.WPI series is being revised after every 10 or more years Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds. IIBs would be Government securities (G-Sec) and the different classes of investors eligible to invest in G-Secs would also be eligible to invest in IIBs. FIIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in G-Secs (currently USD 25 billion). As IIBs are G-Sec, they can be tradable in the secondary market like other G-Secs. Investors will be able to trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges.

Latest updates on the bonds

The Reserve Bank of India (), in consultation with the government, has decided to increase the maximum limit for investment in  Indexed National Saving Securities-Cumulative (IINSS-C) to Rs 10 lakh per annum from Rs 5 lakh earlier for eligible individual investors and Rs 25 lakh per annum from Rs 5 lakh per annum earlier for institutions such as Hindu undivided families, charitable trusts, education endowments and similar institutions which are not pro-profit in nature.

The subscription will close on March 31, RBI said.

The RBI in consultation with government had launched the bond in December. Earlier, the bond was open for subscription during December 23-31, but was later extended to March 31.

 on the bonds are linked to Consumer Price Index ().

These securities will be issued in the form of Bonds Ledger Account (BLA).