All About "Inflation Indexed Bonds" :

Pursuant to the announcement made in the Union Budget for 2013-14 to introduce instruments that will protect savings of poor and middle classes from inflation and incentivize household sector to save in financial instruments rather than buy gold, RBI, in consultation with Government of India, has decided to launch Inflation Indexed Bonds (IIBs).

In the light of above, the RBI would

 Ø Issue Inflation Indexed Bonds (IIBs) in two series during FY 13-14 for an amount aggregating to Rs. 12,000 Crores – Rs. 15,000 Crores

Ø The First series of IIBs would be issued in first half of the current financial year with first tranche to hit the market on June 04^th ’13 with Rs. 1,000 Crores – Rs. 2,000 Crores

Ø Each tranche of IIBs will be for Rs. 1,000 Crores – Rs. 2,000 Crores in 2013-14 and the same would be issued regularly through auctions on the last Tuesday of each subsequent month during 2013-14

Details of First Series Inflation Indexed Bonds (IIBs):

Ø IIBs will be having a fixed real coupon rate and a nominal principal value that is adjusted against inflation. Periodic coupon payments are paid on adjusted principal

Ø The adjusted principal would be arrived at by multiplying the applicable indexation ratio

Ø The indexation ratio will be computed by dividing reference WPI index for the settlement date by reference WPI index for issue date of the IIB

Ø Here the reference WPI would be the Final WPI with four months lag. For example, Sept 2012 and Oct 2012 final WPI will be used as reference WPI for 1st Feb 2013 and 1st March 2013, respectively. The reference WPI for dates between 1st Feb and 1st March 2013 will be computed through interpolation.

Ø At maturity, the adjusted principal or the face value, whichever is higher, will be paid

Issuance Method:

These bonds will be issued by auction method

Retail Participation:

Non-competitive portion will be increased from extant 5 per cent to up to 20 per cent of the notified amount in order to encourage participation of retail and other eligible investors

Maturity:

Issuance would target various points of the maturity curve in order to have benchmarks. To begin with, these bonds will be issued for tenor of 10 years.

Second series of IIBs exclusively for retail investors will be issued in second half of the financial year. First series of the IIBs will help in determining the coupon rate for the bonds through auction. This will help in benchmarking IIBs.

Source: RBI Press Release, Dt: May 15^th ‘2013