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Fixed Income

Inflation Indexed Bonds At 1.44%

The first auction of Inflation Indexed Bonds has gone through successfully with the discovery of the yield at 1.44%. Remember, that while this sounds small, the bond’s face value is indexed to inflation – what you will get is WPI Inflation + 1.44%.

Please read: Inflation Indexed Bonds in India.

Rs. 1000 cr. (10 billion) worth bonds have sold in today’s auction, the first of many. There will be one on the last Tuesday of every month, for between 1,000 and 2,000 cr. Retail investors who can only bid as “non-competitive bidders”, might have bid a maximum of Rs. 14 crore, the rest coming from banks, institutions and primary dealers.

Already, the market has traded Rs. 75 cr. of this security and the price has risen to Rs. 100.30 which corresponds to a yield of 1.4077%.

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This could mean that inflation expectations are around 5.78%, since the 10 year bond yield is at 7.19% currently.

Will the bond’s price rise further? If inflation expectations remain the same, the price should track the current 10 year bond – if the 10 year yield falls by 10 bps, this bond’s yield will fall by 10 bps.

However, the only thing known currently is the starting “index” for this bond. The starting reference index for the 1.44% IIB 2023 is 170.38.

The initial index for May will be known in mid-June, and will be further revised in later months. You can expect the IIB price to jump as the inflation numbers are released and revised.