Though designed with plenty of good intentions, the new series of consumer price index-linked savings bonds is unlikely to enthuse most of the individuals for whom it is intended. The Inflation Indexed National Savings Securities-Cumulative (IINSS-C) launched by the Reserve Bank of India opened for subscription on December 23 and will close a week thereafter. The bonds have been designed to give investors a return that is 1.5 per cent above the reference consumer price index calculated according to a set formula. Thus there are two components of interest — a fixed 1.5 per cent and a variable return based on the CPI. The IINSS-C with these two return enhancing features, it is hoped, will be a big draw for ordinary persons as well as high net worth individuals. Most of the available savings channels do not give returns that offset inflation. The prospect of getting a negative real return is forcing investors away from conventional financial savings instruments such as bank fixed deposits, to gold, real estate and other physical assets. The country needs to boost its financial savings especially from households to step up the overall investment rate. Besides, the seemingly insatiable demand for gold — from investors and from the jewellery industry — has very recently created serious macroeconomic problems in the form of high current account deficits. Although the threat of an imbalance has receded somewhat, ongoing attempts to channel the demand into productive channels need to be encouraged.
An earlier attempt to protect savers by offering an instrument that pegged return above wholesale price index (WPI) inflation was not really for ordinary individuals. The new series, though offering inflation-beating returns, might still falter for a variety of reasons. Their complexity — a 10-year tenure, lock-in periods of one year for senior citizens and three years for others, compounding of interest every six months but paid only after the full tenure — might drive away many would-be investors. The penalty for foreclosure — 50 per cent of the interest earned in the year before — is stiff. For senior citizens — only those above 65 years qualify for this scheme — as well as the retired, the new bonds are not particularly attractive. Unlike some bank deposit schemes, there is no provision for quarterly or even annual interest payment. For them, getting their principal and compounded interest back after 10 years might make no sense. There are no special tax benefits for investing in the new bonds either. The well-off might find the investment cap at Rs.5 lakh a year too restrictive. It is hoped that the authorities learn by experience and refashion the inflation-linked bonds to give them a wider appeal.