Fm Spikes Inflation-Linked Bonds Proposal

The RBI had forwarded the proposal to the ministry as part of its efforts to protect the savings of fixed-income groups in a high inflation rate regime.

Sources said that the minister had noted that the time is not ripe for the issue of such new-generation debt instruments.

President Bill Clinton is currently spearheading his re-election campaign by promising to issue inflation protection bonds with the slogan that ``not a penny of value will ever be lost to anyone who buys these bonds''. Inflation-indexed bonds are unfamiliar even to the US public and media reports have described it as ``a little-known financial instrument being bent by President Clinton into a tool for his re-election campaign''. The Clinton administration has promi-

 

sed to issue these bonds in January with a 10-year maturity, designed to pay investors an interest rate above the consumer price index.

Sources said Chidambaram was of the opinion that the Indian markets were far too immature, and the instrument far too sophisticated, for the government to even consider its issue at this juncture.

The interest earnings on inflation-indexed bonds are adjusted for inflation, unlike bonds with fixed interest. The bonds may be indexed to the consumer or the wholesale price indices. In the Indian context, RBI had favoured pegging the bonds to the WPI till the Department of Statistics introduced its proposed new index.

The apex bank had forwarded the proposal based on a study, which detailed the experience of two countries, the United Kingdom and Australia, where capital-indexed bonds and interest-indexed bonds are on offer.

Under capital-indexed bonds, both principal and interest are adjusted for inflation, while in interest-indexed bonds, investors get compensated only in respect of interest payments.

Even before the proposal was accepted, the government had decided against permittingFIIs to invest in this instrument following the Mexican experience. Officials expected a following for this instrument initially only from the domestic institutional buyers but it had also been in favour of selling these bonds to retail investors.

The tool had primarily caught the attention of policy makers since it could be of immense utility while deciding on issues such as long-term plan transfers or devolution of resources to states. Ministry officials had favoured this instrument since inflation-indexed bonds were also expected to bolster savings.

The apex bank had favoured these bonds on the grounds that with the liberalisation of the financial sector, monetary management relied on more indirect tools like open market operations.