RBI Advises Govt to Buy Back WPI linked Bonds

RBI feels Inflation Indexed Bonds are no longer the most vital measure of price; such bonds worth Rs 6,500 cr issued since launch

The Reserve Bank of India (RBI) has suggested to the finance ministry that the government buy back Inflation Indexed Bonds (IIBs) linked to the wholesale price index (WPI), reasoning that this is no longer the most important measure of prices. Such bonds worth . 6,500 crore have been issued since ` their 2013 launch.
“We are studying the matter and will look at various options on how this can be done, either through the secondary market or some other mechanism,“ a government official said, confirming the central bank's suggestion.

The central bank adopted the consumer price index (CPI) as the key measure of inflation last year and WPIbased securities haven't been reissued since then. Besides, wholesale inflation has been negative for the last nine months, reducing the attractiveness of the instrument. “There is a lot of pressure from some market participants because they feel they are stuck with these bonds,“ said the official cited above.

RBI adopted CPI as the key measure of inflation in April 2014 after the se ries launched in January 2011 attained stability. “WPI-linked bonds have lost relevance as the RBI policy is now linked to CPI,“ said Lakhsmi Iyer, head of fixed income, Kotak Mutual Fund.With no more issuances, the WPI bond market is highly illiquid, having little investor interest. Since the RBI is not targeting WPI inflation, it will not cut interest rates based on that, said a fund manager who didn't want to be named. Effectively, the yield on WPI-linked bonds will also not decline, the person said. Bond yields and prices move in opposite directions. In an illiquid market, investors are stuck with no exit routes through the secondary market.

“WPI inflation is already in a negative territory , so now there is only capital protection with abysmally low returns,“ said the fund manager. The RBI kept the key repo rate unchanged at 7.25% in its August 4 review, having cut it by 75 basis points since January . A basis point is 0.01 percentage point. The next monetary policy announcement is scheduled for September 29. “One of the options could be to convert the existing bonds to CPI-linked (securities),“ said Iyer of Kotak Mutual Fund.

The WPI-based inflation rate fell to a historic low of -4.05% in July , compared with -2.4% in June. Holders of the instrument include ICICI Prudential, HDFC Mutual Fund, SBI Mutual Fund, Kotak Mahindra Mutual Fund, Deutsche Asset Management and some private insurers, according to market data.

The Economic Times, New Delhi, 26th Augsut 2015

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