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Inflation bonds get date extension

Mumbai, Dec. 30: The Reserve Bank of India today extended till March 31 the subscription date for inflation-indexed bonds that were pitched at the retail customers — an indication that the response to the new instrument has been tepid.

The inflation-indexed National Saving Securities-Cumulative (IINSS-C) had opened for subscription on December 23. It was slated to remain open till December 31, though the central bank had said that it could be closed before that date with prior notice.

The instrument has been primarily designed to protect retail savings from inflation and wean away individuals and households from the lure of gold, which has often been used as a hedge against inflation. It was, therefore, benchmarked against retail inflation.

The RBI had announced the details of the bond last month. Interest rates offered on the bond consist of two parts: a fixed rate (1.5 per cent) and inflation rate based on the consumer price index (combined).

The face value of one security will be Rs 5,000. Retail individuals can invest a minimum sum of Rs 5,000 and can go up to Rs 5 lakh per annum.

The interest on the new bond will be calculated with reference to the CPI with a lag of three months. Thus, the final combined CPI for September will form the reference CPI for bonds issued in December. The retail inflation in September stood at 9.84 per cent. With the fixed rate at 1.5 per cent, the annualised interest rate stood at over 11 per cent.

Experts believe that the bonds provide a good investment option as the return is higher than that on fixed deposits. They believe that the response may have been poor because neither the banks nor the RBI has carried out an aggressive marketing campaign for the instrument.

These bonds were marketed through branches of the State Bank of India and its associate banks, nationalised banks and three private sector lenders — HDFC Bank Ltd, ICICI Bank Ltd and Axis Bank Ltd — apart from Stock Holding Corporation of India Ltd.

After these bonds were announced, experts had said that one of the drawbacks was that returns could be lower for those falling in the higher income tax bracket as there is no tax incentive for interest earned.

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