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Experts doubt CPI-based Inflation Indexed NSC success amid surging prices

The Reserve Bank of India’s (RBI) plan to launch Inflation Indexed National Savings Certificates (NSC) by this year-end, in an effort to wean Indian investors off gold, may not find many takers.

Published: 06th November 2013 03:32 AM  |   Last Updated: 06th November 2013 10:17 AM   |  A+A-

The Reserve Bank of India’s (RBI) plan to launch Inflation Indexed National Savings Certificates (IINSCs) by this year-end, in an effort to wean Indian investors off gold, may not find many takers.

Market participants and investment advisors point out several reasons — from a variable rate of interest to problems in transacting — as to why these bonds may take a while to catch the retail investor’s fancy. Perhaps, most importantly, retail investors may shy away from IINSCs as they are being launched at a time when inflation is very high and there’s seem little of an upside to make such an investment.

“Inflation is at its peak. If some wants to take a view that inflation will go up materially, then it makes sense to rush for protection under these instruments. But, I would say that IINSCs are likely to do well when inflation is at an all time low and demand growth is picking up,” said Angel Broking’s head of research Vaibhav Agarwal.

Raghuram-Rajan_AP.jpgThe RBI unveiled its plan of launching these IINSCs linked to the Consumer Price Index (CPI) when it announced its second  quarter review of the monetary policy 2013-14. It said that the rate of interest on these securities would be compounded half-yearly and paid cumulatively at redemption.

Experts see other problems that may restrict the popularity of this instrument. Investment advisor S P Tulsian said, “We still have to see how these instruments will work. They may be a tad too complicated for retail investors. We have seen so much confusion on differential interest rates offered by the recent spate of tax-free corporate bonds.”

Inflation indexed bonds that were launched in June this year linked to the Wholesale Price Index (WPI) and targeted at institutional investors have not fared well either, according to reports.

Analysts said that it would take some time before the  concept was fully understood by investors.

Marketmen see the IINSCs as instruments that may take a while to catch on but at the same time believe that they are here to stay.

“RBI Governor Raghuram Rajan has mentioned the need for a product that offers a real rate of return several times. He believes that such a product  will divert investments from gold as a medium of saving. If IINSCs don’t succeed, there will be others that will follow suit,” says Ambit Capital’s CEO of institutional of equities Saurabh Mukherjea. He also points out that inflation indexed bonds have been successful to “various extents” in international markets including the United Kingdom.



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