Inflation-indexed bonds will become an effective addition to Indian authorities’ policy tool kit for addressing macroeconomic imbalances, Moody’s Investors Service has predicted.

The launch of these bonds last week is a credit positive step, the international rating agency said in its latest credit outlook report.

Such bonds could help correct the macroeconomic imbalances caused by domestic investors’ widespread use of gold as an inflation hedge, according to Moody’s.

But the credit effect is only expected to be incremental and gradual as the additional Rs 12,000-Rs 15,000 crore of planned inflation indexed bonds issuance equals only 2 per cent of Government debt issued this year.

Last week’s issuance for Rs 1,000 crore was RBI’s first attempt at inflation-indexed issuance since an unsuccessful effort in 1997.

Effective hedge

“If Indian households are persuaded that inflation-indexed bonds are an effective hedge against inflation, they may diversify their investments away from gold over the next several years”.

Indian households across income levels have had a long-standing preference for gold as an asset.

However, any tempering in gold imports in the near term is more likely to come from the recently extended import curbs than from inflation-indexed bonds, according to Moody’s.

Moody’s expect India’s gold import bill this year to be around Rs 3 lakh crore .

On the other hand, the total inflation-indexed bonds issuance will be only around Rs 15,000 crore.

srivats.kr@thehindu.co.in