After weak response, RBI now plans revamped inflation bondshttps://indianexpress.com/article/business/economy/after-weak-response-rbi-now-plans-revamped-inflation-bonds/

After weak response, RBI now plans revamped inflation bonds

IIBs, which were introduced last year by the RBI, were not well received due to its complex structure and interest payment issues.

The Reserve Bank of India (RBI) is planning to revamp the inflation-indexed bonds which have failed to attract retail investors. “We had launched inflation-indexed bonds (IIBs) that were not successful. We are coming out with the revised version,” RBI deputy governor HR Khan said.

IIBs, which were introduced last year by the RBI, were not well received due to its complex structure and interest payment issues. Khan said that timing of the bonds launched last time was possibly not right and there were issues regarding understanding of the product and also related to interest pay out. “We have suggested few things to the government. One, in terms of increasing the spread and whether we can have non-cumulative option. They (government) are considering, let us see,” Khan said at the SBI Capital Market summit.

While, not providing any timeline for the launch of the revised IIBs, he said that the central bank was looking to offer quarterly interest pay out unlike last time.
In the current IIB format, inflation component on principal will not be paid with interest but the same would be adjusted in the principal by multiplying principal with index ratio (IR).

At the time of redemption, adjusted principal or the face, whichever is higher, would be paid. Interest rate will be protected against inflation by paying fixed coupon rate on the principal adjusted against inflation in the existing format.

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Khan said the RBI is not considering raising the foreign investment limit in government bonds immediately. “Right now there is no such discussion,” he said. Currently, India allows FII investment of up to $30 billion in government bonds, including $20 billion for all and $10 billion for specific investors like foreign central banks, sovereign wealth funds, pension funds and insurance funds.

He said the first payment bank, as prescribed by a committee headed by Nachiket Mor to look into financial inclusion, would be approved soon. “We have lot of internal discussion going on. We are also in dialogue with the government. We have some framework given by the Nachiket Mor committee which are being discussed intensively within the RBI and with the government,” he said.