RBI to issue inflation-linked bonds

The Reserve Bank of India (RBI) will issue inflation-linked bonds of Rs.12,000 crore to Rs.15,000 crore in the current financial year to protect the savings of the poor and middle classes from the general price rise and help curb gold imports.

The central bank said Wednesday it will begin the sale of the inflation-indexed bonds from June 4. In the first tranche, the RBI will issue bonds of Rs.1,000 to Rs.2,000 crore. The bonds are a new type of debt that Finance Minister P Chidambaram had announced in the budget in February.

The bonds will have a fixed real coupon rate and a nominal principal value that is adjusted against inflation. Periodic coupon payments will be paid on the adjusted principal. Thus, the bonds will provide protection against inflation on both principal and coupon payments.

"At maturity, the adjusted principal or the face value, whichever is higher, will be paid," the RBI said.

The central bank said the new financial instrument will "protect savings of poor and middle classes from inflation and incentivise the household sector to save in financial instruments rather than buy gold."

On the investment period in the new bonds, RBI said: "Issuance would target various points of the maturity curve in order to have benchmarks. To begin with, these bonds will be issued for a tenor of 10 years."

The RBI will issue the bonds every month, beginning from June. Each tranche will be for Rs.1,000 crore to Rs.2,000 crore.