Time for bonds that beat inflation–THE ECONOMIC TIMES

Clipped from: https://economictimes.indiatimes.com/blogs/et-editorials/time-for-bonds-that-beat-inflation/ET Edit

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.

Where is a pensioner to invest? The returns on term deposits and small savings schemes have plummeted. It is time for the government to come out with inflation-indexed bonds (IIBs), protecting both the principal amount and the interest from the corrosive effect of inflation, to help our senior citizens.

Most bank fixed deposits offer about 6% or so for seniors. Of course, the Floating Rate Savings Bonds offer higher returns (7.15%) than on fixed deposits, with the interest being reset every six months at 35 basis points over the National Savings Certificate. High retail inflation leads to negative real returns for investors, hurting the elderly who depend on income from their investments. So, controlling inflation is vital.

The appetite for risk (among the elderly) to invest in equity is low, and some savings must be deployed in bonds. The government must launch IIBs that preserve the value of the principal and offer a rate of interest that is positive in real terms, that is, even after netting out the rate of inflation. This would constitute a decent saving option for retirees in today’s world of volatile asset prices and low yields on debt.

IIBs, known as Capital Indexed Bonds, issued in 1997, offered inflation protection only on the principal and not the interest. It found few takers. Later, when IIBs were issued in 2014, these bonds were made attractive to investors. Investors were offered an interest of 1.5% every year, over and above the rate of inflation as measured by the consumer price index. If launched again, IIBs must have a robust design and also be marketed aggressively. The interest could be made tax-free up to an amount and the penalty for early withdrawal, especially by senior citizens, must not be steep.

This piece appeared as an editorial opinion in the print edition of The Economic Times.

END OF ARTICLE

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s