RBI Issue Inflation Indexed Bonds for Retail Investors on December 23, 2013

Government of India (GoI) is issuing CPI linked bonds with 10 years maturity called Inflation Indexed National saving securities (IINSS) only for retail investors.This issue will open for subscription on December 23, 2013 and close on December 31, 2013.

Minimum Investment Rs. 5,000

The coupon rate will be 1.5% above CPI inflation

Interest earned on the bond taxable.

The Reserve Bank of India will issue Inflation Indexed bonds for retail investors on December 23. The subscription will be closed on December 31 however, the central bank retains the right to close it earlier with prior notice.

The coupon rate will be 1.5% above CPI inflation – but the interest, both the fixed part and the inflation-linked part, will be cumulated and compounded every six months and paid only when the bonds mature.

Analysis suggest that if CPI stays constant at 10 % throughout a 10 year period, the annualized yield is 11.83 %.  However CPI is not expected to stay at 10 % levels as if it does, the economy will flounder and nominal rates would be much higher than 11.83 %.

CPI inflation would ideally come off from 11.24 % levels as of November 2013 to levels of 6 % and below as government and RBI focuses on keeping down CPI.

In this scenario annualised yields would be well below 11.83 %, and may even go down to 8 % to 9 %. The risk to returns would arise if CPI goes below 6 % in a short period of time, thereby lowering returns further.

Given that inflation expectations would fall from here on, it does not make a great investment choice. However compared to PPF (Public Providend Fund) or /  Post Office Savings Schemes, it fares reasonably well though there is no steady cash flows and liquidity come at a price.

Retail investors who invest in PPF and Post Office Savings Schemes can look at CPI linked bonds as another savings avenue.

The bonds have a 10-year tenure, with a lock-in of one year for senior citizens (65+) and three years for the rest.

If you exit early, you lose 50 percent of the interest earned in the year before. Early redemption is possible for these bonds. But after one year from date of issue for senior citizens above 65  years of age and 3 years for all others. The penalty charges at the rate of 50% of the last coupon payable for early redemption. Early redemptions to be allowed only on coupon dates. I

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