Fact Box: Inflation Indexed Bonds (IIBs)

RBI to launch Inflation Indexed Bonds in June 2013

As stipulated in the Budget 2013-14, the government, in consultation with the RBI, has decided to launch Inflation Indexed Bonds (IIBs) to wean away investors from the yellow metal (Gold) to paper-based savings instruments. This new investment instrument with provide an alternative for those who were in recent times going in for investment in gold as a hedge against inflation.

IIBs with a maturity period of 10 years will be launched each month by RBI with the objective of diverting household savings from gold into these hedged bonds up to Rs.15,000 crore this fiscal.

For appropriate price discovery and market development the IIBs will also be auctioned to institutional investors such as Pension Funds, Insurance, and Mutual Funds as it will create demand for IIBs and help in making them tradable in the secondary market.

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.

Why this step?

The step is being taken to de-motivate investments in gold as bulging imports of the yellow metal has been adversely affecting the country’s Current Account Deficit (CAD), which had surged to a historic high of 6.7% in the third quarter of 2012-13. Last month, imports of gold and silver soared by 138% on an annual basis to $ 7.5 billion.

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 estateIn 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.

How will the Index ratio be determined?

The IR (index ratio) will be computed by dividing reference index for the settlement date by reference index for the issue date, and the final inflation data based on the Wholesale Price Index (WPI) will be used for providing inflation protection. Besides, in case of revision in the base year for WPI series, base splicing method would be used to construct a consistent series for indexation.

Month: Categories: Banking Current Affairs 2018


Devas investors move The Hague against Antrix

Investors companies of  Devas have moved the Permanent Court of Arbitration (PCA) in The Hague (Netherlands) against Antrix Corporation — the Indian Space Research Organisation’s (ISRO) commercial arm. The Court has formed a panel to hear the multi-million dollar claim slapped by Devas Multimedia and its U.S. associates (who invested in the deal through foreign direct investment routed via Mauritius) against the Government of India following the cancellation of the deal for the launch of two satellites and the allocation of S-band spectrum to Devas.

What is the issue?

In 2005, Devas and Antrix had struck a deal which had provided for the launch of two satellites allowing Devas to establish a hybrid satellite and terrestrial communications network to supply wireless audio-visual, broadband and mobile internet service across India. But later, Antrix terminated the contract citing changes in Indian policy and that the allocation of S-band Spectrum to companies unconnected with India’s space programme was now regarded as a risk to national security. As per Antrix , the change in policy constituted a “force majeure” event (inevitable event or act of God). But Devas countered this argument of Antrix contending that the national security and force majeure issues are “contrived excuses”.

Devas seeks damages amounting to $ 1.6 billion under the UNCITRAL (United Nations Commission on International Trade Law) Arbitration Rules. The case is against the Government of India as it has been hauled as parent of Antrix and DoS, into the international arbitration citing breach of BIPA (Bilateral Investment Protection & Promotion Agreement) signed with Mauritius.  The Mauritius-based firms filed for arbitration in July 2012 under the Mauritius-India Bilateral Investment Treaty following the cancellation of the contract.

Who is on the arbitration panel of Justices at Hague?

  • The Hague arbitration panel will be chaired by Canada’s Marc Lalonde QC and will comprise Francisco Orrego of Chile and former Rajasthan High Court Chief Justice Anil Dev Singh.

What is BIPA?

In order to encourage foreign capital flows and provide safe business environment for their own investors abroad, many countries are signing investment treaties or agreements. Bilateral Investment Promotion and Protection Agreement (BIPA) is one such bilateral pact which is defined as an agreement b/w two countries (or States) for the reciprocal encouragement, promotion and protection of investments in each other’s territories by the companies based in either country (or State).

Purpose: To create such conditions which are favorable for fostering greater investments by the investors of one country in the territory of the other country. Such agreements are beneficial for both the countries because they energize their business initiatives and thus enhance their prosperity.

BIPA provides a legal basis for enforcing the rights of the investors in the countries involved. They give assurance to the investors that their foreign investments will be guaranteed fair and equitable treatment, full and constant legal security and dispute resolution through international mechanism.

Month: Categories: International Current Affairs 2018Persons in News 2018