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Wednesday, January 30, 2013

RBI to issue inflation-indexed bonds to wean investors off gold

To wean investors away from buying gold, Reserve Bank of India has decided to introduce inflation-indexed bonds (IIBs) in a new avatar.

Gold imports have been a cause of concern for both the Reserve Bank of India as well as the Finance Ministry. Last week, in a bid to restrict gold imports, the Government hiked the import duty on gold to six per cent from four per cent.

“The central bank had introduced IIBs some years ago but it did not take off due to some design flaws,” RBI Governor D. Subbarao said while addressing media persons during the monetary policy conference.

“We have tried to re-design it,” he added.

The most important change is that both principal as well as the coupon rate on the bond will be indexed to inflation.

However, according to bankers, some issues need to be sorted out before the government can go to the market with the IIB.

“Questions like which inflation index to be followed — wholesale price index-based inflation (WPI) or consumer price index-based inflation (CPI) — will have to be addressed,” the governor quoted bankers, who brought up the issue during the policy meeting. While WPI-based inflation was 7.18 per cent in December, CPI-based inflation was 10.56 per cent in the same month. Then there were questions about timing of introduction of IIB. “Can it be introduced when inflation rate is high?” bankers asked.

Few bankers suggested that IIB should be introduced when there is no competition from tax-free bonds.

Bankers have been concerned over flight of savings to non-bank space like substitution of bank savings through purchase of gold.

India is the largest importer of gold in the world as people view it as a hedge against inflation.

Gold imports grew 39 per cent in FY2012 and accounted for almost three-fourths of the current account deficit (CAD). India’s current account deficit was 4.2 per cent of GDP, or $80 billion, in FY 2012.

In first half of FY 2013, the current account deficit grew to 4.7 per cent of GDP. \


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