The Finance Minister, in his budget speech, has announced a proposal to introduce inflation-indexed bonds (IIB) or inflation-indexed national security certificates to protect savings from inflation. The structure and the tenor of the instruments will be announced in due course in consultation with the Reserve Bank of India.

Investors, especially in the middle-class, invest their savings in gold, which, in turn, has created a huge demand for the yellow metal. This necessitated imports, resulting in foreign exchange outgo, causing concerns for the RBI and the government. Like gold, the investment in IIBs would help hedge against inflation.

The RBI had introduced inflation-indexed bonds some years ago, which, however, did not take off due to poor response. It was then decided to re-design the instrument. India is the largest importer of gold in the world as people view it as a hedge against inflation. It is felt that the introduction of such bonds would take place once the inflation moderates. It remains to be seen how these bonds would evoke response from investors this time around.

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