Inflation Indexed Bonds: Points to remember

Below is the verbatim transcript of Mashruwala's interview with CNBC-TV18.

Q: How retail investors should approach inflation indexed bonds and what are the points that should be kept in mind?

A: The Reserve Bank of India (RBI) has made an announcement about inflation-indexed bonds and the finance minister spoke about this. However, it is a bit early to say. I appreciate the product and it is much better compared to a standard bond whereby principal amount remains intact, same throughout the tenure irrespective of inflation and to that extent if one loses to inflation then they are talking about linking it to Wholesale Price Index (WPI).

The problem is that wholesale price index is not the inflation that a common man suffers. He suffers much higher inflation but it is still better than not having anything. The principal amount will nominally get adjusted based on the inflation numbers. So, if inflation goes up as it usually does then principal amount will be automatically treated to be a higher amount and on that one would pay the interest rate.

Things that a common man should look into while investing into it is (a) what is the initial coupon rate, what is the initial rate of interest because while principal amount nominally will keep going up if the rate of interest is lower compared to what is being offered in other bonds right now then it is not too much of any interest to a person (b) is there liquidity option. There is a good possibility of this happening whereby there will be listing on the stock exchange though we yet to get complete details but after that do small size trade happen.

Therefore, what a retail investor should look for is what is the eventual coupon rate that comes up and the liquidity having said that this is a better product compared to a product whereby for a 10-year the principal remains irrespective of rate of inflation. So, better product but wait and watch.

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Tags: Gaurav Mashruwala, RBI, inflation indexed bonds, Wholesale Price Index, WPI, equity, debt, gold

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