RBI auctions Inflation Indexed Bonds

RBI auctions Inflation Indexed Bonds

June 26th, 2013

The government has announced the sale of 1.44% ‘Inflation-Indexed government stock 2023’ for a notified amount of Rs.1,000 crore through price-based auction on June 25, 2013. The results of the auction, to be conducted using the uniform price method by the Reserve Bank of India in Mumbai, will be announced on the same day.

Up to 20% of the notified amount of bonds on sale will be allotted to eligible individuals and institutions as per the scheme for non-competitive bidding facility in auction of government securities.

Both competitive and non-competitive bids for the auction are to be submitted in electronic format on RBI’s Core Banking Solution (e-Kuber) system.

What are IIBs?

Inflation-Indexed Bonds or IIBs are are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. These bonds will be linked to the inflation index of the country (Wholesale Price Index or WPI) and serve as a better investment option as compared to physical assets like real estate and gold. Higher the inflation, higher the returns.

Why this step?

The step is being taken to de-motivate investments in gold as bulging imports of the yellow metal has been adversely affecting the country’s Current Account Deficit (CAD), which had surged to a historic high of 6.7% in the third quarter of 2012-13. Last month, imports of gold and silver soared by 138% on an annual basis to $ 7.5 billion.

How would IIBs help?

As per RBI, IIBs would help in:

• Boosting domestic savings and reversing the declining savings-to-GDP ratio.
• Providing households and other investors a competitive option against gold and real estate. In the wake of rising inflation last year, there was considerable flow of investments from financial savings to safe-haven assets like gold that resulted into higher imports of the metal. This led to current account deficit or CAD widening to 4.9% of GDP at the end of September 2012.
• Giving investors choice to use IIBs as good hedging instruments against inflation.

How will the Index ratio be determined?

The IR (index ratio) will be computed by dividing reference index for the settlement date by reference index for the issue date, and the final inflation data based on the Wholesale Price Index (WPI) will be used for providing inflation protection. Besides, in case of revision in the base year for WPI series, base splicing method would be used to construct a consistent series for indexation.