New Delhi, May 24: The finance ministry, which plans to issue Capital-Indexed Bonds (CIB) to hedge investments against inflation, has come out with a discussion paper seeking public opinion on the proposed structure of these bonds.

The introduction of these bonds was implied in this year’s interim budget.

CIB offers inflation-linked returns, under which the money paid back at maturity would be the principal invested plus returns. This will be based on how steeply prices have risen during the period, thus protecting the original value of the investment.

“The inflation indexed bonds have been designed to provide real-value certainty to investors,” the paper said.

Leading merchant banker K. K. Sengupta said, “The move is in the right direction ... Pensioners and others with fixed incomes needed investment options which gave them a hedge against the vagaries of inflation. Hopefully, these bonds will become a reality soon, though perhaps the government may need to finetune the options slightly before launching the scheme in the market.”

The value of the government securities market is lower compared with the market value of total assets held by institutional investors, including foreign funds lured by the country’s robust economic growth.

“Developing a menu of instruments to cater to the diverse investment and hedging needs of investors has been one of the components of these measures,” the document said, adding that these bonds enhance “credibility of anti-inflationary policies” pursued by a government.

The bonds, which may have a face value of Rs 100, would be sold through auction where bidders would bid “in terms of a desired real yield, which means an yield prior to inflation adjustment”. The document also said, “The bonds create an additional avenue for fund deployment and thereby facilitate widening of the government securities market.”

Although, a type of CIB was first introduced in 1997, it had to be withdrawn as there was a lukewarm response from both primary and secondary markets mainly because inflation-hedging was only against the principal amount.

“All these issues have been taken into account and bond rates would be specified in real terms...modified structure of the bond takes into account the past experience as well as the internationally popular structure of CIBs,” the paper said.