The Reserve Bank of India proposes to reintroduce capital indexed bonds with inflation-linked returns to deepen the government securities market.
In December 1997, six per cent CIB of five year tenure was initially introduced and now it is proposed, in consultation with the government, to reintroduce a modified CIB with structured features of similar instructions prevalent internationally, Reserve Bank of India said in a discussion paper on CIB, released in Mumbai on Monday.
Subsequent to that issuance, there was no further issuance of CIB mainly due to lack of enthusiastic response of market participants for the instrument, both in primary and secondary markets, it said.
Some of the reasons cited for the lacklustre response are that it only offered inflation hedging for the principal, while the coupons of the bond were left unprotected against inflation, and complexities involved in pricing of the instrument.
The proposed CIB would offer inflation-linked returns on both the coupons and principal repayments at maturity. The basic feature of bonds would be that the coupon rate for the bonds would be specified in real terms.
Referring to the coupon, RBI said the interest on CIB would be payable on a semi-annual basis at a fixed real rate of interest throughout the tenure of the bonds. The fixed real rate of interest would be applied not to the par amount of the security, but to the inflation-adjusted principal.
RBI said the CIB would be sold through auction under which competitive bidders would be required to bid in terms of a desired real yield. Specific terms and conditions for the auction, including auction date, issue date, tenure and the notified amount would be announced prior to each auction.
The first issuance of a CIB may be at par - at Rs 100. The price of re-issued bond would be determined in the auction and may be at, below par or above par.
Referring to taxation, it said the value of investment in the CIB and the coupon payable thereon would be governed by the provisions of tax laws as applicable from time to time.
In the developed debt markets such as the United Kingdom, United States, New Zealand, Canada, Sweden, and South Africa, the 'Inflation Indexed Bonds" issued by the government are one of the popular debt instruments.
These governments undertake issuance of CIBs at a regular interval with an aim to -- provide a new instrument to investors that offers hedging against inflation risk; enhance credibility of anti-inflationary policies; provide an estimate of inflation expectations and; create an additional avenue for fund deployment and thereby facilitating widening of government securities market.
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