NEW
SCHEMEN LAUNCHED BY RBI-
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.
Why
do not people invest in bonds ?
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.
Why do RBI created such
type of bonds?
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.
Is
this bond safe?
Yes because investors will
not have a negative returns.
Was
any earlier attempt made to protect the investors?
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.
Was
there any drawbacks?
The new series, though
offering inflation-beating returns, might still falter for a variety of
reasons.
1)
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.
2)
The penalty for foreclosure — 50 per cent of the interest earned
in the year before — is stiff.
3)
For senior citizens — only those above 65 years qualify for this
scheme — as well as the retired, the new bonds are not particularly attractive.
4)
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.
5)
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.
