Protection from Price Demon


The Budget has proposed introduction of bonds or National Savings Certificates whose returns will be linked to inflation. In these instruments, the principal rises with inflation, though it is still not clear whether these bonds will be linked to the consumer price index (CPI) or the more closely-watched wholesale price index (WPI). The interest, called coupon, is calculated on the adjusted (to inflation) principal. The coupon rate may or may not rise with the price index.
For example, if the annual coupon is 8 per cent and the principal is Rs 100, the investor will be paid Rs 8 a year. If the inflation index rises 10 per cent, the principal will become Rs 110. The coupon will remain 8 per cent, resulting in an interest payment of Rs 110 x 8 per cent = Rs 8.8.
Inflation-indexed bonds give returns that are more than the rate of inflation, ensuring that price rise does not erode the value of investors' savings.

The exact structure of these instruments will be announced later.

Vivek Gupta, research head, CapitalVia Global Research, says, "This is encouraging for investors as most of the times the returns which investment funds showcase are not discounted for inflation. So, for a common man, it becomes difficult to know the real returns."

AMIT SINGH
PGDM 2ND SEM