What are IIBsIJ
Inflation-indexed bonds (IIBs) are a forthcoming instrument wherein the FM wants to create a new tribe of inflation scholars! His idea is to dissuade further accretion into the present tribe already parked into (surer) investments like gold.
Will my investment in IIBsbe better than goldIJ
The frank answer is that no one really knows; especially because your investment horizon in IIBs will have to be 10 years. Also,while gold prices are easing, it is only time before India’s insatiable hunger for the metal pushes its prices northwards. The same is true for real estate. As things stand, gold and real estate will remain havens of black money just as IIBs will require transparent disclosures.
Is the comparison then with fixed depositsIJ
Yes, the main competition could be between existing classes offixed deposits who cater to those happy with regular return, and those who will now seek a reasonable protection from inflation that IIBs represent.
In other words, more enterprising and risk-taking types will continue to find IIBs hard to bet on.
By the way, what’s government’s problem with my goldIJ
Gold imports have contributed to a serious macro-economic problemsan unsustainable current account deficit.
That said gold has consistently beaten inflation, requires no documentation, no TDS or capital gains and, most importantly, has an ecosystem of anonymity! You can buy it in cash even from the official shop inside canalizing agency MMTC.
Is this the first time for IIBsIJ
No, earlier attempts were made in 1997 and 2004, but they flopped because only the principal was indexed to inflation. This time, both the principal and interest are hedged to some extent. However, the expected benchmark is wholesale price index (WPI), which is way below the consumer price index (CPI).
There are unconfirmed reports that CPI, the actual white ant in our lives, may be a possible benchmark.
How much jargon do I really need to understand IIBsIJ
You can start with three.
Bond: In simplest terms your principal deposit of, say, Rs 10,000, which we’ll use in this example.
Coupon rate: A fixed interest rate that will be announced after an auction in early June. This coupon rate will remain unchanged through out the 10-year period.
Periodic coupon payments: What’s given to the depositor on your Rs 10,000, against the fixed coupon rate, say, every six months.
What’s the mathIJ
If the indexed-inflation rate is 5 per cent, the interest will be calculated on Rs.10,500 for that year instead of Rs 10,000.
If inflation climbs to 10 per cent, the 5 per cent coupon will get youreturn that includes an adjusted principal, Rs 11,000, plus Rs 550 as interest.
Thus, it is claimed, the IIBs will give protection to both principal and interest.
What happens after ten years, when the IIB has maturedIJ
On maturity, the adjusted principal or the face value, whichever is higher, is to be returned.
Can I buy IIPs in JuneIJ
Not yet. The first series of these bonds, called Capital Indexed Bonds (CIBs), will be offered to institutional investors. This class of investors will bid for CIBs so that a coupon rate can be found out. Only subsequent tranches will target retail investors.
So, the involvement of institutions is deemed important for price discovery. The IIBs are part of public debt. For example, banks can invest in them to meet their statutory liquidity ratio (SlR) requirements.
And taxIJ
Take a guess! This FM doesn’t give tax concessions for investing. We don’t know if there might even tax deducted at source.
VerdictIJ
Money like this is badly needed for infrastructure areas. But given continued opaqueness around gold and real estate transactions, mostly pension funds and insurance companies might be found holding IIBs. Sad!
(The columnist is CEO & Co-Founder, India Strategy Group, Hammurabi & Solomon Consulting. Tweets @therohitbansal).