Inflation indexed bonds

Abstract

The budget proposed for the financial year 2013-2014 proposes the introduction of inflation indexed bonds in India. The finance minister in his budget speech mentions introduction of inflation indexed bond for the following reason: “Increasing savings and their optimal allocation for productive uses lead to higher economic growth. After touching a high of 36.8 percent in 2007-08, gross domestic saving fell by 6 percentage points in 2011-12. The private sector, comprising households and corporate, remains the main contributor to saving. The household sector must be incentivised to save in financial instruments rather than buy gold. Hence, I propose the following measure: In consultation with RBI, I propose to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. These could be Inflation Indexed Bonds or Inflation Indexed National Security Certificates. The structure and tenor of the instruments will be announced in due course” Inflation Indexed security are securities that guaranty a return higher than the rate of inflation if it is held to maturity. Inflation-indexed securities link their capital appreciation, or coupon payments, to inflation rates. Investors seeking safe returns with little to no risk will often hold inflation-indexed securities.