RBI open to using CPI for providing inflation protection in Inflation Indexed Bonds

Currently, WPI inflation will be issued in the first tranche of bonds which will be auctioned on June 4

The Reserve Bank of India (RBI) is open to the idea of using the Consumer Price Index (CPI) inflation for providing inflation protection in Inflation Indexed Bonds (IIBs). “New instruments will be issued down the line next year and if the CPI stabilises we may move over to that,” said Rajendra Kumar, deputy general manager of RBI in a conference call on Monday.

Currently the Wholesale Price Index (WPI) inflation will be issued in the first tranche of bonds which will be auctioned on June 4. There is a gap in the WPI and CPI numbers. Wholesale Price Index inflation for April came at a low of 4.9 per cent while Consumer Price Index inflation moved to 9.4 per cent.

The RBI will also release an FAQ on these bonds this week which will provide more details on these bonds.

The participating in these bonds will be through constituents' subsidiary general ledger (CSGL) for institutional investors and through demat account for retail investors.

RBI said last week in a press release that based on the experience in the initial issuances which begins from June 4 second series of IIBs for the retail investors is proposed to be issued around October.  

The minimum lot of retail participation will be Rs 10,000 and there is a limit for individual participation in non-competitive bidding which is Rs 2 crore. But buying in the secondary market or buying through primary dealer in primary auction has no limit, said Kumar.

The settlement of IIBs will be on T+1 basis. RBI also said in the conference call that in the second half they will decide if another tenure needs to be issued. According to the central bank that will be decided when the second half borrowing calendar is decided. To begin with, these bonds will be issued for tenor of 10 years but down the line IIBs will be in different tenures.

There will be underwriting of IIBs like government bond auctions. But presently there are certain technical issues due to which there will not a when issue market for these bonds, said RBI officials in the conference call. These bonds are eligible for maintaining the Statutory Liquidity Ratio (SLR) requirement by banks.

According to RBI officials who participated in the conference call in case the bonds become illiquid there will be a theoretical price at the end of the day for these bonds.

IIB will be part of government borrowing programme every year it will be decided every year when the market borrowing of the government is decided, said RBI officials.

The coupon on these IIBs will be paid every half year. In the market when these bonds are bought and sold then these bonds can move over to any institutional investors. But in the second series issued specifically for retail segments there could be some restrictions, said RBI officials in the conference call.