RBI extends deadline to issue inflation-indexed bonds

The Reserve Bank of India (RBI) extended the time for issuance of Inflation Indexed National Savings Securities Cumulative (IINSS-C) bonds (or inflation linked bonds) by three months to March 31, 2014, from December 31, 2013. The issuance can be closed earlier than March 31, 2014 with a prior notice.

Why RBI extended the deadline to issue inflation-indexed bonds?

• The operational guidelines (internal to banks) for selling these certificates at the branch level are still in the works.
• Secondly, it will take time to create awareness among customers in relation to inflation linked bonds.

Inflation linked bonds

• The limit for investment per applicant per annum: Rs 5,000 – Rs 5 lakh.
• Eligibility for subscription: Individuals, Hindu Undivided Family, charitable institutions and universities.
• The interest rate on these bonds would be linked to the Consumer Price Index (CPI).
• The interest rate would comprise two parts — a fixed rate of 1.5% per annum and inflation rate based on CPI with a lag of three months. It would be compounded on the principal on half-yearly basis and paid at the time of maturity.
• For senior citizens (65 years and above of age),  early repurchase will be allowed after one year from date of issue and other investors can redeem them after three years but with penalty of 50 per cent of the last coupon paid.
• RBI will act as a central depository, as these securities will be issued in the form of Bonds Ledger Account (BLA) and held with RBI.
• Distribution or sale of bonds would be through banks: SBI, nationalized banks and three private banks HDFC Bank, ICICI Bankand Axis Bank  and Stock Holding Corporation of India.

Note: Inflation linked bonds are launched as instruments that will protect savings from inflation, especially the savings of the poor and middle classes.