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Concepts & Tutorials

Consumer Price Inflation Indexed Securities Are Here

[blurb-capmind-prem]

Note: After the product was launched, I put in a more detailed analysis here.

After launching Wholesale Price Inflation Indexed Bonds in Jun 2013, RBI with the Government will now issue Consumer Price Inflation Indexed Bonds. Note that CPI inflation has been running way above WPI and therefore such bonds might actually benefit end-users.

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But obviously the devil is in the details.

If this is a TL;DR for you, here’s the low-down:

  • Return: Consumer Price Inflation + 1.5% per year, compounded half yearly and paid after 10 years. Pretty good [10 points]
  • Risks: Low in general, but there is some interest rate risk if bank rates go above CPI+1.5%. [8 points]
  • Liquidity: Low. Can’t sell the bonds. High prepayment penalty. [2]
  • Taxes: Not tax efficient. Pay every year on interest deemed to be received. No TDS (maybe). [3]
  • When? Last half of Dec 2013. Exact Dates later.
  • Where to buy? Bank branches, Stock Holding Corporation of India Ltd.
  • Online? May happen if RBI, banks or agencies decide to let you.
  • How much: 5,000 per bond. Rs. 500,000 max. Only individuals and trusts. No corporates or banks or such.
  • My view: Good product, but low liquidity. Useful for low income individuals (taxes <30% bracket).

I’ve deleted the rest of this analysis which was based on what was known before the product was launched. 

Read this post for more details

  • abcxyz says:

    I too was thinking of buying it as a bond portfolio for my children, and finding you thinking in similar lines makes me smug 😉
    Nevertheless, let me come back to my actual reason of commenting.
    I need your and the fellow boarders opinion on whats the flaw in this plan ?
    Plan :
    For those who have taxable income –
    – Buy it on the name of your parents (who are 60+) and have no taxable income (or income which even after this cpi-bond interest is less than taxable limit).
    – Make your child (i..e parent’s grandchild) as a nominee.
    Pros –
    1. No tax to be paid.
    2. Returns greater than tax-free bonds provided inflation remains high.
    3. Extension of point 2, this is a sort of insurance for adverse effect of high inflation on returns from fixed income instruments.
    Risk –
    1. No liquidity.
    2. Though in case of unfortunate demise of your parent, the bonds will get transferred to the child and if s/he is still a minor at that time, then the interest will be clubbed in your income.

  • Neeran says:

    Deepak,
    ValueResearch is reporting that the inflation component will be added to the principal and treated as capital gains (and therefore will be tax-free beyond 3 years, or WPI-inflation-adjusted, right?). Only the 1.5% on top is what will get taxed at your marginal rate. If that’s true, this becomes a phenomenally attractive investment even for the 30% bracket.

  • Px says:

    Minors income need not be clubbed with the parent !
    The grandparent has to write a valid will and clearly mention the assets s/he wants to give the grandchild to avoid clubbing provision.
    One has to see whether the bonds would be properly explained and understood by target audience…On interest rates rbi will still look to the fed and to yellen’s policy i guess … never mind if the tone will be hawkish as experience points out
    On onion inflation and money supply this post is interesting
    As the rupee began strengthening we saw onion prices come up in some cases 30-40 percent in a week or a week and a half,” recalls Soloff. “It was pretty awesome to instrument the real world,
    http://www.firstpost.com/politics/the-onion-trackers-of-delhi-what-sheila-dikshit-should-have-been-watching-1261901.html

  • NIHAL MOHANDAS says:

    Hi friends,
    I think with a 10 yr horizon, blue chips, gold and silver look to be a better option.