The idea behind the recently-launched inflation-proof bonds, with a complex nomenclature, Inflation-Indexed National Savings Securities-Cumulative (or IINSS-C for short) is laudable. It is meant to address a specific and pressing requirement of domestic savers. For long, there has been a felt need for a savings instrument through which ordinary investors can hedge against inflation. Popular savings avenues such as bank fixed deposits are not inflation-proof. Investors in these, in fact, get negative returns. To illustrate, a three-year fixed deposit with a commercial bank today fetches no more than 9.5 per cent. Consumer price inflation (CPI), on the other hand, is nudging 11 per cent (in November). So, the fixed deposit investor loses at least 1.5 per cent.
For a majority of savers, for all practical purposes, bank deposits (and deposits with a few top non-banking finance companies) have been the only option. There is another way the government encourages this financial repression. Tax concessions for the most accessible investment avenues are practically non-existent. The government’s intention is clear — to mop up as much deposits at lowest possible interest rates.
There are very many manifestations of this approach. There is practically no one to lobby for depositors with banks. At the time of credit policy statements of the Reserve Bank of India (RBI), there is always a clamour for lower interest rates on loans but seldom if ever for higher deposit rates. In fact, banks cannot increase deposit rates and simultaneously keep their loan rates low.
A fair deal for deposit-holders is not on anyone’s agenda even though in that category are some of the most vulnerable sections such as pensioners. It is in that context that a case for a higher-yielding, inflation-beating instrument has been made out. Inflation has been an inescapable part of recent macro-economy. It impacts more severely on the poor and the vulnerable.Tepid response
An earlier launch of similar bonds but based on WPI (wholesale price index) index was not really for individuals. Despite all the points in its favour, the consumer inflation-linked bonds have had a tepid response when they opened for subscription on December 23. Originally kept open for just a week, it has now been extended to end-March 2014. Almost certainly the lack of investor enthusiasm has been reflected in the meagre collections so far. It is also true that marketing efforts have been sloppy. Even banks which have been asked to receive applications for the bonds are reportedly not familiar.Complex and unfriendly
There is no doubt at all that the inflation bonds are complex. The instrument is designed to beat inflation will run for 10 years. To the reference CPI index, a minimum spread of 1.5 per cent will be added. Total returns will be compounded half-yearly and paid at the end of 10 years. Eligible investors can apply for between Rs.5,000 and Rs.5 lakh.
For ordinary investors, the complexity of the instrument as well as the fact that returns can be had only after 10 years will be deterrents. Pre-payment is allowed but only after three years for ordinary investors and one year for senior citizens (defined for this scheme as those above 65 years). Pre-payment charges are huge: the investor is only paid 50 per cent of the previous year’s interest.
There are no special tax advantages. In this connection, earnings from other savings instruments such as the PPF are not taxed at all. The recent offers of tax-free bonds by certain public sector undertakings have been a big draw even though they offer interest only once a year. But the main disadvantage is the lack of provision for more frequent interest, at least half-yearly.
The CPI-linked bonds need to be more customer-friendly. It is clearly not for all. A senior citizen will logically have very little use for an instrument that delivers returns after 10 years. For the well-heeled, the cap of Rs.5 lakh will be a deterrent. But it is true that many other categories will benefit from a bond which is shorn of its complexity, is marketed with more vigour, and has a greater orientation towards its investors.