RBI to start sale of inflation-indexed bonds on 4 June

The Reserve Bank of India (RBI) will kick-start monthly sales of inflation-indexed bonds (IIBs) with auction of the first tranche of Rs1,000-1,500 crore of the new type of bonds on 4 June 2013.

Each tranche of IIBs will be for Rs1,000 - 2,000 crore and total issuance would be for about R12,000-15,000 crore for the 2013-14 fiscal.

The bonds will be issued initially for tenor of 10 years and will eventually have various maturities with different benchmarks.

After the auction sale of the first tranche on 4 June 2013, RBI would conduct further auctions of IIBs regularly on the last Tuesday of each subsequent month during 2013-14.

The principal of the IIBs will be indexed to the wholesale price index with a four-months lag, while the real coupon will remain fixed, the RBI said.

Payment of coupon will be made periodically based on the nominal value of the principal that is adjusted to inflation.   Thus these bonds provide inflation protection to both principal and coupon payment.  At maturity, the adjusted principal or the face value, whichever is higher, will be paid.

For sake of price discovery and market making, RBI will sell the first of the IIBs to institutional investors such as pension funds, insurance firms and mutual funds.

Eventually, after gathering experience about the coupon rates, RBI will start selling these inflation-indexed bonds to retail investors, around October.

To target greater retail participation in the auction of IIBs, RBI will also enhance the non-competitive segment for retail and mid-segment investors to 20 per cent from the present level of 5 per cent applicable to auction of usual GoI securities.

The proposal to issue inflation-linked bonds that will protect savings of poor and middle classes from inflation and incentivise household sector to save in financial instruments rather than buy gold, was first announced in the union budget for 2013-14.