Doubts on Inflation Index Bonds? RBI's FAQs out

The Reserve Bank of India’s (RBI) plan to launch Inflation Indexed Bonds (IIBs) is old news and a lot has been written about . However, little was known about the fine points. The RBI has sought to bring some clarity on the scheme by bringing out a set ofFAQ, we bring you ten most important fine points, you should know:

1) Unlike Capital Indexed Bonds (CIBs) which were launched in 1997, IIBs will provide inflation protection to both principal and interest payments. CIB did so only for principal amount.

2) TheRBI website says, “Inflation component on principal will not be paid with interest but the same would be adjusted in the principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the face, whichever is higher, would be paid. Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation.”

3) In case of deflation in the future if the adjusted principal went below the face value, you would still be paid face value and hence your capital would be protected.

4) As far as tax treatment goes,there will be no special tax treatment for these bonds. In face, the RBI website says, “Extant tax provisions will be applicable on interest payment and capital gains on IIBs”

5) As a retail investor you will be able to participate in non-competitive bidding through primary dealers (PD) and banks. For that you need to open a gilt account with PDs and banks or demat account to participate.

6) IIBs will be issued for a tenor of 10 years. But RBI may think of more maturities later on.

7) An exclusive series only for retail investors is going to be launched around October 2013, which is in the second half of the current fiscal year.

8) As far as valuation guidelines of these bonds go, Fixed Income Money Market and Derivatives Association of India (FIMMDA) will do so shortly.

9) If there is a revision in the base rate of WPI series, it will be taken care of by splicing the base years in such a way that a consistent WPI series with the same base year is available for indexation purpose.

10) Like the fixed rate conventional bonds, IIBs will have a settlement cycle of T+1.

For more finer details read this.