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This article is more than 1 month old.

RBI trying to gauge appetite for inflation-linked bonds yet again: Report

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India had last issued inflation-linked bonds in 2013, but they were not very popular among some large institutional investors.

RBI trying to gauge appetite for inflation-linked bonds yet again: Report
The Reserve Bank of India (RBI) is trying to figure out if large financial institutions may be interested in inflation-linked bonds (ILBs) in the backdrop of rising inflation, reported The Economic Times. This marks a renewed effort from the central bank to offer inflation-indexed government securities after they were issued for the last time in 2013.
Inflation-linked bonds are government securities where the principal is indexed to inflation or deflation during a certain time period. This provides the holders of the bonds financial security that can be used as a hedge to protect savings in environments of higher inflation. Bonds of such kind are often popular with financial institutional investors, like life insurance companies and mutual funds, and also with retail investors.
"RBI is trying to figure out whether there would be takers for such inflation-linked bonds, what kind of instrument could appeal to investors -- particularly after the experience of 2013-14," a senior industry official told The Economic Times.
When the RBI had launched the Inflation Indexed National Saving Securities - Cumulative (IINSS-C) bond in 2013, the interest rate was fixed at 1.5 percent per annum plus the inflation rate every six months. The bonds are due to mature in 2023.
The central bank has been looking at reintroducing the bonds as a way of controlling the government borrowings at a time when government bond yields have soared as a result of rising inflation across the country and even the globe.
“The borrowing exercise could be tricky next year, with RBI expected to mop up liquidity it has so far infused. Of course, inclusion of GOI papers in the global bond indices could make it easier for the government (to borrow)," the official added.
The previous set of ILBs quickly proved to be unpopular with some institutional investors who cited lower compensation against the illiquidity risk and believed the bonds to be a poor hedge against rising prices due to the bonds being indexed against the Consumer Price Index (CPI).
Former RBI governor Raghuram Rajan had changed the index of the bonds from Wholesale Price Index (WPI) to CPI during his tenure.
While many in the industry believe that the RBI or the government should have come out with ILBs earlier, perhaps even last year, most believe that RBI would need to index the bonds with a CPI and WPI, which is a harmonised index.
Harmonised indices like the Harmonised Indices of Consumer Prices (HICP) are used in European markets. The inflation rates in India stand at 4.48 percent for CPI inflation and 12.54 percent for WPI inflation in November.
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