Thursday, Oct 30, 2014

‘Investor-friendly’ inflation indexed bonds on the anvil

Written by Surabhi | New Delhi | Posted: April 3, 2014 1:56 am

A new series of inflation-indexed bonds (IIBs) are set to debut this fiscal for which the finance ministry will seek the Election Commission’s approval.

“These will be more investor-friendly in nature with additional features such as tradability. The plan is to launch it in the first quarter of the fiscal if we get the go ahead,” said a senior government official.

The bonds are, at present, not allowed to be traded in the secondary market, which is seen as one of the drawbacks of the instrument. Launched last year, the bonds have a tenor of 10 years and are seen to be suitable only for long-term investors as early redemptions face a penalty charge at half the rate of the last coupon payable.

The finance ministry and the central bank have already made provision for the new bonds in the Centre’s borrowing programme for FY14 although the amount is yet to be decided. Bonds linked to both the wholesale price index-based inflation and retail inflation will be launched.

The launch of the new series of IIB was also discussed at a meeting of finance ministry and Reserve Bank officials late last month and it was decided that the plan would first be taken to the poll panel.

The RBI, in its monetary policy statement, on Tuesday, too, had said that design changes are being introduced to the IIB to make them more attractive for investors.

“Other (changes) such as tradability (and consequently, the benefit of indexation for capital gains tax) and issuance of securities with regular coupon flows are being contemplated,” RBI Governor Raghuram Rajan had said.

The RBI had last month hiked the investment cap for these bonds to Rs 10 lakh for individuals and Rs 25 lakh for Hindu Undivided Families, charitable trusts, education endowments and similar non-profit organisations.

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