Changes possible in next tranche, says RBI

Based on initial experience, open to using CPI as base

The Reserve Bank of India (RBI) is open to the idea of using Consumer Price Index (CPI) inflation as the basis for inflation-indexed bonds (IIBs). "New instruments will be issued down the line next year and if the CPI stabilises, we might move over to that," said Rajendra Kumar, deputy general manager of RBI, in a conference call on Monday.

Wholesale Price Index (WPI) inflation is to be the basis for the first tranche of these bonds, to be auctioned on June 4. There is a gap between WPI and CPI numbers. WPI inflation for April came at a low of 4.9 per cent; CPI inflation moved to 9.4 per cent. RBI will issue a fact sheet in the form of 'Frequently Asked Questions' on these bonds this week. Participation in these bonds will be through Constituents' Subsidiary General Ledger for institutional investors and through demat accounts for retail investors. Last week, RBI said a second series of IIBs for retail investors was proposed to be issued around October, based on the experience in the initial issuances from June 4. The minimum lot of retail participation will be Rs 10,000 and there is a limit for individual participation in non-competitive bidding, of Rs 2 crore. But buying in the secondary market or buying through primary dealers in primary auctions has no limit, said Kumar.

The settlement of IIBs will a day after the transaction ('T+1 basis'). RBI said in the conference call that in the second half, they'd decide if another tenor needs to be issued.

This decision will take place when the second half borrowing calendar is decided. To begin with, these bonds will be issued for a tenor of 10 years. Down the line, IIBs will be in different tenures.

There will be underwriting of IIBs, as with government bond auctions. These bonds are eligible for maintaining the Statutory Liquidity Ratio requirement by banks. According to RBI officials, if the bonds become illiquid, there will be a theoretical price at the end of the day for these.

IIB will be part of the government borrowing programme every year, said RBI officials.

The coupon on these IIBs will be paid every half year. When bought and sold, these can move over to any institutional investors. There could be some restrictions in the second series, issued specifically for retail segments. Participation by foreign institutional investors in these bonds will be in line with the present instructions on government bonds, said officials.