Make Inflation-Indexed Bonds More Attractive

Published: 15th January 2014 06:00 AM  |   Last Updated: 15th January 2014 02:47 AM   |  A+A-

Mere extension by three months of the last date for subscribing to the inflation-indexed bonds (IIBs) is unlikely to make it attractive to the investor. At the time the Reserve Bank planned to issue the bonds, this newspaper had pointed out some of its drawbacks. If those problems had been sorted out in time, the IIBs would surely have been oversubscribed by December 31, 2013. Far from making the bonds attractive to the investing public, the government has thought of only extending the deadline. It is like the national pension system which is bound to flop, if it is not backed by aggressive marketing. There are both fundamental and practical problems associated with the IIBs.

The primary purpose of the bond is to wean the investor from investing in gold and real estate. Most people invest in them to protect their money from inflationary pressures. Since IIBs are linked to the Consumer Price Index and there is also an assured fixed interest income of 1.5 per cent per annum, there is some protection from inflation. But, then, the interest income is taxable, unlike on long-term infrastructure bonds, making post-tax return lower than inflation. The middle class investors would not also be enthused by the high penalty for early withdrawals, almost half of most interest payment.

The government has hardly made any effort to market the IIBs. At present, only the Stockholding Corporation of India and some select banks are allowed to sell IIBs. As they are paid only a nominal handling fee, they are more interested in promoting their own fixed deposit schemes. Marketing logic demands allowing brokers and agents selling financial products to sell the IIBs. Proper incentives and a wide distribution network will help in the sale of the IIBs. Since the minimum amount required for investment is only `5000, millions of people can be expected to invest, provided the IIBs are made really attractive to them. That is the challenge for the RBI.

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