Govt to issue inflation linked bonds; pressure of from bond yields The Government on Monday announced plans to issue bonds linked to the Consumer Price Index (CPI), a measure of inflation. The announcement was part of its overall fiscal strategy.

The government revealed a borrowing plan of Rs 2.88 lakh crore for the April to September 2018. The figure for the corresponding period of the last financial year was Rs 3.72 lakh crore.

The borrowing figure announced by the Government for the first half is 47.56% of the budgeted borrowing for FY 2018-19. Following the announcement, the estimated borrowing for the full year will stand reduced by Rs 50,000 crore from earlier estimates.

Following the announcement of the government’s reduced borrowing, the benchmark 10-year bond yield collapsed in early trading on Tuesday from 7.62% to 7.35%. This marks the biggest intraday fall since December 9th, 2013. The rupee also rose from 64.87 to 6.77 to a dollar.

The government’s reduced borrowing is also likely to factor into the RBI’s monetary policy decision on 5th April. The central bank is close to making a decision on hiking the limits for Foreign Portfolio Investment (FPI) in government bonds. FPIs have used up 96.9% of the current limit.

To fund this programme, it made few key announcements:

  1. Government securities of 1 – 4 years duration will be introduced. Traditionally, government securities have maturities of 10 years or more.
  2. It would withdraw Rs 1 lakh crore from the National Small Savings Fund (NSSF), Rs 25,000 crore more than the current financial year. The NSSF is where your money from savings such as National Savings Certificates (NSCs) and PPF (Public Provident Fund) goes.
  3. It will issue bonds linked to the Consumer Price Index (CPI).

What it means for you

  • The policy announcements are likely to relieve some pressure on the overall bond market. This can have a positive effect on debt fund returns as bond prices rally due to lower than expected government borrowing.
  • The inflation-linked bonds can also provide you with a low-risk savings option that is protected from inflation. Much will depend on the details of the new bonds.
Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.