In a bid to check demand for gold and route savings instead to productive assets, the government will launch inflation-indexed bonds, instruments designed to protect investor savings from inflation.
“In consultation with the Reserve Bank of India (RBI), I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be inflation-indexed bonds or inflation-indexed National Security Certificates. The structure and tenor of the instruments will be announced in due course,” said finance minister P Chidambaram as he unveiled the budget on Thursday.
Inflation-indexed bonds, which government plans to launch on June 1, insulate investors from the corrosive effects of inflation by providing for increased interest payments if inflation were to rise.
As the details are yet to be released, it remains to be seen that which index the bonds will track. At present, there are two measures of inflation widely published in India, the Wholesale Price Index or WPI and the Consumer Price Index or CPI. For January, the WPI came in at 6.58% and CPI was at 10.79%.
“Savers invest in gold in order to hedge their savings against inflation. Inflation-indexed bonds will be able to attract savers’ money as these bonds will protect their money from inflation,” said Rajiv Bajaj, MD, Bajaj Capital.
“Introduction of inflation-indexed bonds or security certificates is a good step for savers that may entice them to move away from gold and help the government reduce the gold import duty,” said Naresh Makhijani, partner, tax, at KPMG in India.
Experts believe that if the government wants to make these bonds attractive, the term of the bonds should not be very long. “The tenure of bonds should be 3-5 years,” said Bajaj. “Indian retail investors do not like to lock their money for long time, so retail investors may not go for it.”