IIB's

Inflation Indexed Bonds

Inflation-indexed bonds (also known as inflation-linked bonds or colloquially as linkers) are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment.

1.   Inflation Indexed Bonds (IIBs) were issued in the name of Capital Indexed Bonds (CIBs) during 1997. How is the new product of IIBs different from earlier CIBs?

·         The CIBs issued in 1997 provided inflation protection only to principal and not to interest payment.

·         New product of IIBs will provide inflation protection to both principal and interest payments.

2.    How will inflation protection be provided to both principal and interest rate? Whether inflation component will be paid along with interest?

·         Inflation component on principal will not be paid with interest but the same would be adjusted in the  principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the face, whichever is higher, would be paid.

·       Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation.

     3. Whether capital protection will be provided?

·        Yes, capital protection will be provided by paying higher of the adjusted principal and face value (FV) at redemption.

·         If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital will get protected.

     4. Why will WPI be used for inflation protection? Why CPI has not considered for the same?

·       The consumer price index (CPI) reflects the inflation people at large face and therefore, globally CPI or Retail Price Index (RPI) is used for inflation target by the Central Banks as well as for providing inflation protection in IIBs.

·      In India, all India CPI is being released since January 2011 and it will take some time in stabilizing. Monetary policy has also been continuing to target WPI for its price stability objective. In view of above, it has been decided to consider WPI for inflation protection in IIBs.

    5.Whether foreign institutional investors (FIIs) will be allowed to invest in IIBs?

·         IIBs would be Government securities (G-Sec) and the different classes of investors eligible to invest in G-Secs would also be eligible to invest in IIBs.

·    FIIs would be eligible to invest in the forthcoming IIBs but subject to the overall cap for their investment in G-Secs (currently USD 25 billion). 

    6. Whether IIBs will be traded in the secondary market?

·        As IIBs are G-Sec, they can be tradable in the secondary market like other G-Secs. Investors will be able to trade them in NDS-OM, NDS-OM (web-based), OTC market, and stock exchanges.

    7.Whether IIBs will be eligible for statutory liquidity ratio (SLR)?

·     IIBs would be a G-Sec and issued as part of the approved Government market borrowing programme.

·         Therefore, IIBs would automatically get SLR status. 

    8.What will be the maturity of IIBs?

·         To begin with, IIBs will be issued for 10 years.

·     As it is advisable to issue IIBs at various maturity points to have benchmarks and cater to diverse market demands, more maturity points may be explored subsequently. 

    9.What will be the frequency of issuance of IIBs?

·       As indicated in the press release issued by Reserve Bank of India on May 15, 2013, IIBs would be launched on June 4, 2013 and the same would be issued on the last Tuesday of each month during 2013-14. This would also include the last Tuesday of June 2013.