Inflation-indexed bonds and derivatives: A comparative study across nations

Abstract

High inflation continues to be a major threat to the Indian population, especially to the working class and the senior citizens, who have been experiencing erosion in the real value of their savings. Many countries around the world have introduced inflation-linked securities as a long term solution and structural tool to hedge against inflation. In order to protect the real value of savings, while at the same time ensure continued economic growth, inflationindexed bonds should be considered as a prospective solution. In this contemporary concerns study, we have studied the inflation-indexed bonds and derivatives systems launched in various parts of the world. We started by studying the working of inflation indexed bonds and derivatives in general. We then proceeded to research the inflation bond systems in place across different countries, with specific focus on the systems in a few countries. We used quantitative data pertaining to USA and UK and evaluated the inflation index bonds in those countries. We then examined the current macroeconomic environment in India, especially the hurdles to introduction of inflationindexed bonds, such as the lack of a corporate bond market, minimal trading in government securities and indexation problems. Finally, we allied the quantitative and qualitative study of inflation indexed bond systems across various nations to the macroeconomic environment analysis in India and created a framework for phased implementation of inflation-indexed bonds in India.