Beat inflation with bonds

With inflation galloping at 12 percent, fixed deposits (FDs) offering a meagre 7-8 percent returns do not meet the needs. Such fixed interest instruments tend to give negative real returns, and the worst affected are fixed income earners who have no indexation facilities. In view of this, a committee of the Reserve Bank of India (RBI) has proposed the introduction of fully inflation (price movements) indexed bonds (IIB) for institutional investors with maturities of 10-12 years. This is intended to ensure inflation-linked returns to investors as both the principal amount and interest payments are indexed to inflation. The interest rate is usually lower than that of fixed rate bonds with comparable maturity. Though, as the principal amount grows, the payments increase with inflation. In India, a variant of indexed bonds, called the Capital Index Bond (CIB) 2002, was issued on December 29, 1997 wherein only principal repayments at the time of redemption were indexed to inflation. Based on the experience and feedback from market participants, a new version of IIB has been designed with both interest payments and principal repayments linked to Wholesale Price Index (WPI) for all commodities, and hence protected from inflation.