RBI to test inflation indexed bonds in market

The Reserve Bank of India (RBI) is all eager to test inflation indexed bonds in the market. CNBC-TV18’s Gopika Gopakumar finds out whether this product will be feasible. D Subbarao, Governor, RBI says, “Banks told us that there is not much of an appetite for floating rate deposits and by extension there may not be much of an appetite for inflation indexed bond. But our view is that we have to test this once again. There may be a tipping that did not work in the past.” Governor Subbarao's keenness to launch inflation indexed bonds is quite obvious. With inflation touching nearly double digits, he expects good demand for these bonds. Unlike government securities or fixed deposits, inflation index bonds give real returns as its coupon and principal payments are linked to the current wholesale price index. Experts say this move will benefit retail investors. Anjan Barua, Deputy MD, SBI says, “Historically in India inflation has been an issue. If you look at deposit rate structure for the last 15-20 years and also credit interest rate structure. Over the years even the present times, depositors are compensating the corporate as far as interest rates are concerned. So they are subject to inflation. Real rate of return over a period of time has been negative.” However, experts say inflation indexed bonds will not make much difference to institutional investors. Liabilities of banks and insurance companies are not linked to inflation and therefore don't feel the need to hedge these liabilities. But experts say this could inspire investors to launch innovative inflation linked products.  B Prasanna , MD, I-Sec Primary Dealership adds, “You have an asset which gives you a return based on inflation, this will encourage commercial banks to encourage them to borrow in the retail liability space using inflation or floating rate liability or insurance companies to look at inflation linked annuity plan. When these are launched if they are able to garner money, come and hedge these liabilities in the inflation index bond. From that perspective it helps commercial banks and institutions to look at different kind of liabilities.” The proposal to launch inflation indexed bonds comes at a time when RBI and government have been criticised for their poor inflation management. Experts say inflation indexed bonds form a big market in developing countries which face the crisis of rising inflation. Out of the USD 1.4 trillion outstanding in the government debt, USD 400 million account for inflation indexed bonds. But experts say it will be a while before it becomes a success in India.

Moneycontrol