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Retail Inflation Indexed Bonds aim at giving you higher returns than the CPI around that time which is a good way to safeguard savings against inflation. RBI is launching them in mid-December. If you have surplus money, you can think of investing in these bonds provided you do not need this money for a long time.
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The Reserve Bank of India (RBI) plans to launch retail inflation-linked bonds in the second half of December. As we all know, inflation is high in India. As per Livemint, retail inflation, based on CPI, accelerated to 10.09% in October from 9.84% in September. This is mainly due to higher food prices. RBI has launched these bonds with an intention to shield people against negative returns on savings.
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How much can I invest?
The 10-year bonds will be made available through banks. As per RBI, they will have a face value of Rs.5,000. The maximum investment in the bonds that can be made is Rs.5,00,000 per applicant per year. Tax will be levied on the interest and principal of these bonds. |
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- Interest on these bonds would be based on the Consumer Price Index (CPI) with a three-month lag (i.e. the CPI number 3 months before) plus 1.5%. It is compounded in the principal on a half-yearly basis and paid at the time of maturity. To understand further, long-term fixed income plans pay around 9% interest normally. But if the inflation rate is 10%, the fixed income plan delivers a return of minus 1% on the investment using simple calculation. So in current scenario, your savings are being eroded. The CPI-linked bonds will pay 1.5% above the inflation rate thus protecting savings from inflation.
- They are meant to be pure savings instruments as trading is not allowed. You as a holder of these bonds can nominate one or more persons and the bonds can be transferred to the nominees in the event of death.
- The bonds can also be used as collateral for loans from banks and non-banking financial companies.
- They have a more realistic benchmark in CPI, which is closer to reality than WPI (Wholesale Price Index)
What are the arguments against these instruments?
- These bonds have fixed and floating interest rates and these have to be explained clearly to investors, as such interest rates are a new concept.
- When the inflation rate is low, savers don’t stand to earn much through these bonds and once people are used to higher rates, they may not like the lower rates.
- Interest is paid only at redemption or maturity so these bonds cannot be a source of regular income
- Early redemption is possible after one year for senior citizens and after three years for others but a penalty will be charged. Moreover you have to be 65 or above to be considered as senior citizen in case of these bonds.
Considering all features, these are a good hedge against inflation which is not available to retail investors till now. But one should invest surplus money only in these instruments and not remove money from other long-term instruments and invest in these bonds.
Vidya Kumar
GettingYouRich.com
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