'Inflation indexed bonds may curtail widening trade gap'

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SME Times News Bureau | 16 May, 2013
Inflation Indexed Bonds would incentivise the household sector to save in financial instruments rather than buy gold and also reduce widening trade deficit, President, FIEO, M Rafeeque Ahmed said in a statement.

While commenting on the Inflation Indexed Bonds (IIBs) to be issued on June 4th 2013, FIEO chief stated that these bonds would incentivise the household sector to save in financial instruments rather than buy gold and also reduce widening trade deficit, which in April went up to $17.8 billion as compared to $14 billion, up 27.1 percent year-on-year with gold and silver imports up by 138 percent to $7.5 billion last month compared to a year earlier, as retail consumers in the world's biggest gold importer went on a buying spree after global prices fell.

The Reserve Bank of India (RBI) will start issuing inflation-linked bonds of Rs.12,000 crore to Rs.15,000 crore from next month to protect the savings of the poor and middle classes from the general price rise and help curb gold imports.

The central bank said Wednesday it will begin the sale of the inflation-indexed bonds from June 4. In the first tranche, the RBI will issue bonds of Rs.1,000 to Rs.2,000 crore. The bonds are a new type of debt that Finance Minister P Chidambaram had announced in the budget in February.

The trading pattern in the IIBs will serve as an indicator of the market players' perception of future inflation trajectory and will help the central bank understand the inflation expectations of the marketplace and formulate its monetary policy accordingly.

FIEO chief stated that Government may also consider capping gold loans for Individuals from banks/financing companies not only to curtail trade deficit but ensure that savings of householders/retailers are put to use in more productive sectors of the economy like banks and stock exchanges at a time when GDP levels are at a decade low.

The Government had earlier tried to issue inflation-indexed bonds (IIBs) in 1997 and 2004. These had failed to attract much retail interest, since only the principal was inflation-indexed. This time around, while the principal will be linked to the Wholesale Price Index (WPI), the interest rate will be linked to the principal, thereby insulating both capital and interest from inflation impact.