The inflation index bonds will not enjoy any special tax benefits and all the taxes which will be applicable will be at par with any other government security. They will also be considered in the statutory liquidity ratio requirements of banks, the central bank said

The Reserve Bank of India (RBI) on Monday said the soon-to-be-launched inflation index bonds could also be linked to consumer price index (CPI) in the future.

“The new instruments to be issued down the line when perhaps CPI index stabilises, we may move over (to consumer price inflation). But currently, the choice is for WPI inflation for the current series which is going to be issued (on 4^th June),” RBI executive director R Gandhi said.

Gandhi, who oversees the internal debt management department, was speaking during a specially-arranged conference call with market participants to clear doubts surrounding inflation index bonds (IIBs), the first tranche of which is to be issued on 4^th June.

The plan came to fruition after finance minister P Chidambaram in the FY 2014 Budget announced that RBI would launch inflation indexed bonds to help public hedge themselves against price increases at a time real interest rates are still negative, thus crimping their savings.

IIBs are pursuant to the Budget proposal to “introduce instruments that will protect savings of poor and middle classes from inflation and incentives household sector to save in financial instruments rather than buy gold”.

Both the government as well as the RBI are concerned over the rising gold imports as its putting pressure on the current account deficit (CAD), which widened to historic high of 6.7% in the third quarter of 2012-13.

There is a strong wedge between the consumer and wholesale price-based inflation indices. Experts are of the view that linking them to the CPI will entice retail investors more.

He said the RBI has increased the non-competitive portion of the first tranche, which would be of retail investors' liking to 20% from the earlier 5%. One will have to contact a primary dealer and preferably have a demat account to buy these instruments.

The RBI is also mulling over introducing a special series of bonds for retail investors after October 2013, he said.

The RBI, which is targeting to issue up to Rs15,000 crore through the issuance of IIBs this fiscal, will think of additional ways of marketing the retail centric issue, Gandhi said.

This is the RBI’s second shot at launching inflation bonds and with gold, whose high imports are causing concern to the economy by way of record high current account deficit, being seen as a hedge against inflation due to the negative real rates of interest, a lot is being aimed to achieve from an instrument like IIBs.

Gandhi said IIBs are like any other government security and the money raised through the issue will be a part of the government's half yearly borrowing calendar.

It will not enjoy any special tax benefits and all the taxes which will be applicable will be at par with any other government security, Gandhi said, adding they will also be considered in the statutory liquidity ratio requirements of banks.

He further said foreign investors will be able to buy these bonds, but within the existing total investment limits of $25 billion of government debt.

While government bonds are issued on a weekly basis, the inflation-linked bonds will be issued separately on a monthly basis.