The RBI’s move to launch inflation-indexed bonds based on the consumer price index is timely. The bonds issued so far, based on the wholesale price index, haven’t quite caught the fancy of investors.
The first series of these bonds — meant to help investors hedge their savings against rising prices and wean them away from gold — was launched by the central bank in early June. Subsequently, there have been six more monthly auctions of these bonds.
Despite rising inflation, institutional participation in bond auctions has been falling, and those bidding have been demanding higher returns.
Retail investors, for whom the bonds were primarily intended, have been conspicuous by their poor participation in the auctions.
Falling bids
Consider the numbers. In the first auction of the series in early June for Rs 1,000 crore, institutional investors put in 167 bids totalling Rs 4,616 crore.
Twenty six bids were accepted, based on which a coupon rate of 1.44 per cent per annum was determined.
But in the subsequent six auctions, the number of bids from institutional investors more than halved and total bid amounts fell sharply. In the latest November auction, there were just 60 bids worth Rs 2,187 crore, of which 33 were accepted.
In fact, in August and September, with accepted bids falling short of the issue size, underwriters had to step in to see the issues sail through.
Participation by retail and mid-segment investors never really took off — despite the segment being provided with the non-competitive window. Under this, applicants are to be allotted bonds based on prices discovered in the institutional auctions.
Though allowed up to 20 per cent in each issue, the maximum participation by retail and mid-segment investors so far has been 1.4 per cent (eight bids worth Rs 14 crore in the first auction in June). In four of the following six auctions, no bids were received from this segment.
Investor demand
Weak investor demand also showed in the lower prices offered by institutional investors. In July, the RBI did not accept any bids — perhaps due to the low price. But then it seems to have reconciled to the situation.
Since August, the price for the bonds having face value of Rs 100 was determined at Rs 82-85.
This pushed up the yield-to-maturity (effective rate) to 3.33-3.66 per cent, much higher than the coupon rate (1.44 per cent) on the bonds.
The tepid response to the bonds is primarily, due to the use of an unsatisfactory measure of inflation.
Rather than the wholesale price index, it is the consumer price index which captures inflation that impacts retail investors.
Since June, consumer inflation has been nearly 3-5 percentage points higher than wholesale inflation. No surprises then on why retail investors gave the current crop of inflation-indexed bonds a miss.
Retail participation
Also, currently, most brokers do not encourage retail participation.
The product’s complexity may be keeping small investors at bay. Bonds, which compensate for inflation at the consumer level, to be launched in December, should likely find more buyers.
Even institutional investors now seem to be pricing their bids based on retail inflation.
A yield-to-maturity of around 3.5 per cent, together with the wholesale inflation of around 7 per cent, translates to a nominal return of around 10.5 per cent, not too off the mark from the consumer level inflation.
anand.k@thehindu.co.in