RBI Plans to Reintroduce Inflation-Indexed Bonds

MUMBAI -- The Reserve Bank of India plans to reintroduce inflation-indexed bonds that aim to shield investors from chronic pricing pressures, Governor Duvvuri Subbarao said Tuesday. He, however, didn't say by when the central bank would do so. "One cause of concern is that in a period of relatively high inflation, which we are in now, whether they would be successful," Mr. Subbarao said at a conference. "So we will think through this but we will certainly reintroduce them." Inflation-indexed bonds are linked to the price index and help insulate their coupon payments from inflation. Such bonds were introduced some years ago but weren't successful due to feeble market interest. Moses Harding, head of global markets group at IndusInd Bank, said the issuances at this juncture won't appeal to investors as inflation may not accelerate much higher. "These kind of products will have demand when there is a fear of runaway inflation," Mr. Harding said. But expectations are that inflation may peak during October-December, which may cull demand for such securities, he added. Inflation in July was 9.22% from a year earlier, and is likely to remain between 9% and 10% until around December before easing to 7% by March. RBI Gov. Subbarao also reiterated that the central bank aims to gradually reduce the statutory liquidity ratio, or banks' mandatory bond holding requirement. "SLR at 24% and CRR (banks' cash reserve ratio) at 6% are still considered to be high," he said. "There is an objective to bring it down in a calibrated manner." Growth in Asia's third-largest economy has been moderating due to the sustained monetary tightening by the RBI to control uncomfortably high inflation. Economists worry the central bank's aggressive anti-inflationary stance could badly crimp credit growth and lead to a sharper slowdown in the economy. "It's not that SLR should be thrown away but certainly we should bring it down so that there is credit availability and the private sector [borrowing] is not crowded out," Mr. Subbarao said. The central bank would also continue to move gradually on achieving full capital account convertibility, he said. The Indian rupee is fully convertible on the current account but only partially convertible on the capital account to protect against sudden outflows of foreign capital in times of crisis that can destabilize the economy.

WSJ