Let's see some details of these IIB (or TIPS) bonds in India.
What are Inflation-Indexed Bonds IIB (or TIPS) bonds in India
People make investment. The aim is to generate better returns for future. The problem is that many saving returns are eaten up by inflation and Inflation-Indexed Bonds IIB (or TIPS) bonds are expected to offer the protection against the inflation.
For e.g., let's say there is a bond which is offering annual 5% interest rate (or coupon rate). So if you invest 100 Rs. in this bond, after a year you will get Rs. 105.
Suppose tea is costing Rs. 100 per Kg today. So today, you can buy 1 KG tea with the 100 Rs. you have.
But suppose, instead of buying tea today, you invest your money in the above mentioned bond. Beacuse of inflation, suppose the cost of tea rises to 120 Rs. per Kg in one year. Then, the money which you got after the bond matures after 1 year (Rs. 105), will be insufficient to purchase the same 1 Kg Tea. This is where the inflation hits and causes problems with the savings. It hits the purchasing power of the money.
The Inflation-Indexed Bonds IIB (or TIPS) bonds aim to provide a shield against the inflation, by offering a return linked to inflation rate. See example and types below.
Inflation-indexed securities link their capital appreciation, or coupon payments, to inflation rates. Investors seeking safe returns with little to no risk will often hold inflation-indexed securities.
What are the different types of Inflation-Indexed Bonds IIB (or TIPS) bonds in India?
This is still in the design stage, so no concrete details are available about what kind and types of features will be available for 2013 issues of Inflation-Indexed Bonds IIB (or TIPS) bonds in India.
However, there are some general guidelines available from the past issues of Inflation-Indexed Bonds IIB (or TIPS) bonds in India. Here is one example available:
Assume that a Rs 100 par value Inflation-Indexed Bond has a 9 per cent coupon rate when the bond was issued.
Suppose that the inflation is at 8%. If this had been a normal bond you would have got Rs. 90 as an interest.
But because this is Inflation-Indexed Bond, the principal amount will be adjusted to take inflation rate into consideration. It will now be Rs 1080 (1.08*1000) and the interest (coupon) rate of 9 per cent will be paid on this inflation adjusted principal amount (Rs 1080). This shows that you will receive Rs 97.2 as an interest at the end of year, which is higher than that of Rs 90 had this been a normal bond.
IIB Inflation-Indexed Bonds India (TIPS Bonds India) DetailsBut a word of caution - the above is just one of an examples. There can be a lot of variety in the types of Inflation-Indexed Bonds IIB and the details are yet to be finalized by the issuing authority.
For example, there can be a case where both PRINCIPLE amount as well as COUPON (interest rate) offered was adjusted. For the above mentioned example, it will mean adjusting Rs. 1000 to 1080 and also adjusting 9% to 9.72%.
Other case can be adjusting only the coupon rate.
Then comes the question of which inflation value is considered? WPI (Wholesale price index) or CPI (Consumer Price Index) or any other varient of inflation measure?
Other variations can come in terms of period, duration and timing. Suppose WPI is taken, but value is taken from which date (1 March or 1 January each year) and for how long (3 months, 6 months, etc.)?
All these form the features of Inflation-Indexed Bonds IIB and details will be updated in this section once the offering is made available.
As per the news available at the moment, WPI (Wholesale price index) will be used for inflation measure and will be indexed every six months.
What is the typical maturity period for Inflation-Indexed Bonds IIB (or TIPS) bonds in India
It is expected to be long term. The maturity period can range from 7 years to 15 years.
What is the purpose for which Inflation-Indexed Bonds IIB (or TIPS) bonds are being introduced in India
- Gold is being used as a hedge against inflation by individuals as well as organizations and even countries. But it has been volatile. These Inflation-Indexed Bonds IIB will offer an alternate to gold
- Goverment will be able to collect funds by offering Inflation-Indexed Bonds IIB
Should investors go for Inflation-Indexed Bonds IIB (or TIPS) bonds in India
These are a few points to consider while investing your money in IIB:
- Its a game of numbers. Investors need to be cautios about the nos. of WPI (inflation measure). What if at the time of consideration, the WPI is low (say on 1 Jan it is at 5%), but Feb onwards it start shooting up and reaches high. Investors may still end up taking on 5% rate.
- Good thing is that indexing is expected to be at 6 monthly basis. The more frequent it is (1 month, 3 month) the better.
- Exit conditions need to be checked. Inflation-Indexed Bonds IIB are expected to be long term investments (7 to 15 years). As of now, early exit details are not yet available. Are investors good to lock their money for long periods, if early exit is not available?
Above details need to be checked by individual investors before putting their money in Inflation-Indexed Bonds IIB (or TIPS) bonds in India