Coming soon, real inflation-adjusted bonds
Despite the blaring headlines about more expensive loans, Raghuram Rajan’s monetary policy statement last week said something that should cheer you up about the prospects of your savings. Dhirendra Kumar writes.india Updated: Sep 23, 2013 00:59 IST
Despite the blaring headlines about more expensive loans, Raghuram Rajan’s monetary policy statement last week said something that should cheer you up about the prospects of your savings.
Guaranteed, inflation-linked savings for the ordinary saver are about to become a reality. Inflation-linked investments were first promised in this year’s budget. In his speech, the finance minister proposed ‘to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes’.
Three months later, when the RBI announced the launch of those bonds, it made mockery of the budget statement. It said that the bonds would be linked to the Wholesale Price Index (WPI) and would be available through ‘normal institutional channels’. In an economy where wholesale inflation runs around 5% and consumer inflation double of that, the RBI’s inflation-linked bonds appeared designed to impoverish the poor by taking their money and paying far less interest than the inflation rate!
However, new governor Raghuram Rajan’s first day statement made it clear that the inflation-indexed bonds would be based on the new Consumer Price Index, which is the best index that’s available in India. Last week, as part of the monetary policy statement, the central bank promised that the bonds were in the works. The statement referred to these not as bonds but as ‘inflation indexed retail certificates’, from which one can expect that they should be available easily to individual savers in reasonably small face values.
The statement said that there would be two variants, one which would pay interest as a lump sum at the end of the maturity period and the other which would pay interest periodically. Such bonds are common in many countries and the general structure is similar. Like any bond, there is a face value and an interest rate. However, the face value adjusts upwards along with inflation and the interest rate is likely to be quite small, perhaps just 1%. The saver’s total nominal gains would be equal to the inflation adjustment plus the interest. Given the inflation situation, the sooner these are launched, the better.