The much-awaited inflation indexed bonds linked to the consumer price index (CPI) are here. The Reserve Bank of India has decided to launch Inflation Indexed National Savings Securities-Cumulative (IINSS-C) for retail investors in the second half of this month. The date of actual issuance will be announced soon. In the meantime, we take a quick look at the instrument.
How will this bond differ from the Inflation Indexed Bonds (IIBs) issued in June this year?
True, both these instruments are aimed at providing a hedge against inflation. For the earlier IIBs, the return was linked to the wholesale price index (WPI).
The return on the IINSS-C is linked to the consumer price index (CPI). Since it is the CPI inflation that impacts us significantly, this offers a better hedge against inflation.
However, the CPI inflation used in this case will be a final (new) combined CPI reference that will be decided by the RBI, and so may be somewhere in between the WPI and CPI.
The final combined CPI reference will be taken with a lag of three months (four months for IIBs). The rate of interest will be 1.5 per cent (1.44 per cent for IIBs) plus the inflation rate. Interest will be compounded annually and paid at the time of maturity.
In the case of IIBs, the principal is adjusted for inflation, and then the interest is paid half-yearly.
What are the other features of the product?
The bond will be issued for a tenure of 10 years. Investors will be allowed early redemption — after one year in case of senior citizens and three years for others.
However, penalty charges will levied at 50 per cent of the last interest payable. Also, these bonds can be used as collateral against loans from banks, financial institutions and NBFCs.
The face value of the bond will be Rs 5,000. The minimum amount one can invest is Rs 5,000 and the maximum Rs 5,00,000 per applicant per annum.
Who will be eligible to invest in these bonds?
These bonds are issued only to retail investors — individuals, HUFs, charitable institutions and universities. In comparison, the first series of IIB issued earlier in June, was aimed at all categories of investors. Retail participation was allowed only up to 20 per cent through the non-competitive segment.
However, there has hardly been any retail participation in these bonds so far. In fact, the second IIB series that was meant to be exclusively for retail investors, has yet not been opened.
How can investors buy these bonds?
While the full details are not out yet, it is indicated that the IINSS-C would be sold or distributed through all agency banks, including Stock Holding Corporation of India Ltd (SHCIL) in the form of Bond Ledger Account (BLA). Banks, including SHCIL, would act as an interface for all customer services related to these bonds.