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Substitute for gold

Mumbai, Jan. 29: The Reserve Bank of India (RBI) plans to introduce inflation-indexed bonds for retail investors who usually use gold as a hedge against inflation.

Both the principal and the interest on these bonds may be indexed to the inflation rate, which will make the bonds more attractive.

The apex bank is working out the details of the bond, which is expected to bring down the demand for gold for investment purposes.

The move is likely to benefit the government, which is facing a record current account deficit mainly on the back of large gold imports.

“The RBI said that both crude oil and gold imports have an impact on the entire economy and the question is how to reduce the gold imports. One answer is inflation-indexed bonds, which is a hedge against inflation, and the expectation is that it will reduce the demand for the metal,” said a senior banker after the meeting with the RBI where these bonds were discussed.

Gold has always been viewed as a hedging tool against inflation, and this has been one of the factors behind the investment demand for the metal.

A joint group from the Reserve Bank and the government has been working on bringing out the inflation-indexed bond.

Work on such a bond comes at a time the Reserve Bank has warned that a huge current account deficit posed a threat to monetary policy easing.

The monetary policy saw the RBI revising downwards its GDP (gross domestic product) forecast for the current year to 5.5 per cent from 5.8 per cent.

The central bank also lowered the inflation forecast for March to 6.8 per cent from 7.5 per cent on expected moderation in non-food manufactured products inflation and global trends in commodity prices.

 
 
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