Inflation Indexed Bonds (IIBs)
May 18th, 2013
RBI to launch Inflation Indexed Bonds in June 2013
As stipulated in the Budget 2013-14, the government, in consultation with the RBI, has decided to launch Inflation Indexed Bonds (IIBs) to wean away investors from the yellow metal (Gold) to paper-based savings instruments. This new investment instrument with provide an alternative for those who were in recent times going in for investment in gold as a hedge against inflation.
IIBs with a maturity period of 10 years will be launched each month by RBI with the objective of diverting household savings from gold into these hedged bonds up to Rs.15,000 crore this fiscal.
For appropriate price discovery and market development the IIBs will also be auctioned to institutional investors such as Pension Funds, Insurance, and Mutual Funds as it will create demand for IIBs and help in making them tradable in the secondary market.
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:
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.
The conflict b/w International Olympic Committee (IOC) and the Indian Olympic Association (IOA) is expected to end soon with both the Indian representatives from the government and sports bodies reached an agreement in a meeting with IOC officials. The IOC has agreed to lift the ban on IOA once it holds fresh election as per the amended constitution of the IOA.
What is the issue?
The membership of the IOA was suspended in December 2012 owing to differences in election procedures of IOA administration body. IOC wanted that election for top posts of IOA to be held as per Olympic Charter, which insists that organizing committees for each country remain autonomous and free of government influence. But India’s national sports code does not adhere to these requirements, and consequently, a New Delhi court ordered the IOA to hold an election as per government’s sports code instead of adhering to the IOC’s charter.
What is the solution reached?
The IOA has acquiesced to the demand of IOC to amend its constitution in line with the government’s Sports Code. Following this a fresh election will be held for top administrative posts of IOA.
As stipulated in the Budget 2013-14, the government, in consultation with the RBI, has decided to launch Inflation Indexed Bonds (IIBs) to wean away investors from the yellow metal (Gold) to paper-based savings instruments. This new investment instrument with provide an alternative for those who were in recent times going in for investment in gold as a hedge against inflation.
IIBs with a maturity period of 10 years will be launched each month by RBI with the objective of diverting household savings from gold into these hedged bonds up to Rs.15,000 crore this fiscal.
For appropriate price discovery and market development the IIBs will also be auctioned to institutional investors such as Pension Funds, Insurance, and Mutual Funds as it will create demand for IIBs and help in making them tradable in the secondary market.
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.
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.
The conflict b/w International Olympic Committee (IOC) and the Indian Olympic Association (IOA) is expected to end soon with both the Indian representatives from the government and sports bodies reached an agreement in a meeting with IOC officials. The IOC has agreed to lift the ban on IOA once it holds fresh election as per the amended constitution of the IOA.
What is the issue?
The membership of the IOA was suspended in December 2012 owing to differences in election procedures of IOA administration body. IOC wanted that election for top posts of IOA to be held as per Olympic Charter, which insists that organizing committees for each country remain autonomous and free of government influence. But India’s national sports code does not adhere to these requirements, and consequently, a New Delhi court ordered the IOA to hold an election as per government’s sports code instead of adhering to the IOC’s charter.
What is the solution reached?
The IOA has acquiesced to the demand of IOC to amend its constitution in line with the government’s Sports Code. Following this a fresh election will be held for top administrative posts of IOA.
No comments:
Post a Comment