New bonds will insulate govt from inflation, not the poor

After the initial views that welcomed the Reserve Bank of India’s (RBI) inflation indexed bonds (IIBs), experts are now seeing the devil in the details. A column in The Economic Times by Direndra Kumar, CEO of Value Research, says that these planned IIBs will not protect the savings of the poor as they are not indexed to the right inflation.

Instead of linking the bonds to consumer price inflation index (CPI), it is actually linked to wholesale price index (WPI). As per the latest data, the CPI inflation was 9.8 percent in as per latest data, while the WPI was a much lower 4.89 percent.

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By launching bonds that are keyed to the WPI inflation, the government is actually saving itself from inflation by robbing the poor. “Effectively, it is borrowing from the said poor and the middle class and underpaying them by something like four to five percentage points,” the article said.

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However, with the RBI planning to sell the IIBs only through institutional investors, the government will not, at least in the initial phase. The objective behind such a strategy is “to test the rate it (RBI) will to pay above the WPI.

“In this first issuance, RBI is trying to discover how the bond market treats this proxy link in setting the value of these bonds.” the article said. The bonds, if and when they will be issued for retail investors, will carry this market-discovered coupon, which will not help solve the inflation problem for the poor.

You can read the article here.