Budget Box: Proposal to introduce IIBs ‘Inflation-Indexed Bonds’ to encourage savings
The Budget 2013-14 has proposed to introduce Inflation-Indexed Bonds or IIBs with the aim to control rising Current Account Deficit, fiscal deficit and inflation. The move by the government has been lauded by the RBI saying that the step is in line with government’s commitment to lowering inflation.
What are IIBs?
Inflation-Indexed Bonds or IIBs are are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment. These bonds will be linked to the inflation index of the country (Wholesale Price Index or WPI) and serve as a better investment option as compared to physical assets like real estate and gold. Higher the inflation, higher the returns.
How would IIBs help?
As per RBI, IIBs would help in:
- Boosting domestic savings and reversing the declining savings-to-GDP ratio.
- Providing households and other investors a competitive option against gold and real estate. In the wake of rising inflation last year, there was considerable flow of investments from financial savings to safe-haven assets like gold that resulted into higher imports of the metal. This led to current account deficit or CAD widening to 4.9% of GDP at the end of September 2012.
- Giving investors choice to use IIBs as good hedging instruments against inflation.