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Fixed Income

RBI Clarifies on Inflation Indexed Bonds


RBI held a teleconference for Inflation Indexed Bonds (IIBs) where they clarified a few points. In summary:

  • IIBs will work according to the way I mentioned it in my original post. They will release a more detailed FAQ later.
  • It is going to be very tough for you to participate in the auctions directly. You have to find a primary dealer who can bid on your behalf, and then transfer the shares to your demat account.
  • Since the primary listing area will still be the RBI’s platform (NDS-OM) it’s a pain to sell these bonds once you buy them – first you’ll have to transfer from your demat to SGL account, and then sell from there. If there is good trading in the NSE Debt segment, the SGL step is not required.
  • The bonds will qualify for repo, SLR, and short selling. Like any other govt bond, subject to limits like minimum size/liquidity etc.
  • Interest will be paid twice a year (like regular govt bonds)
  • There will be one bond that is continuously reissued for the first six months – the coupon rate will remain the same for them. Subsequently they may issue a new bond or keep the same. In future they may have IIBs of different tenures as well.
  • Foreign investors can participate, with limits that are overall in government bonds.
  • Negative yields are a possibility. In that case the coupon will be positive, but the price will be high enough so that the yield is negative. Remember that in the last 16 years, there were at least three times (see my 16 year inflation vs Bond Yields chart) so even if RBI says this is unlikely, recent history is not with them.

Overall, given that these bonds can be used for SLR and are like regular government bonds, they will be priced to match the 10 year bond yield after subtracting expected inflation. So if the 10 year is at 7.15% and the expected inflation is about 5%, you can expect these bonds to trade around the 2.15% yield levels. But the FAQ is awaited.


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