Inflation-Indexed Bonds

An inflation-indexed bond (IIB) is a government security. Its principal is adjusted for inflation. This card shows how the payments work.

What is fixed and what moves?

The RBI scheme says an IIB has a fixed real coupon rate. It also has a nominal principal value that is adjusted against inflation. Coupon payments are paid on the adjusted principal. So the bond gives inflation protection to both principal and coupon payment.

The inflation part is not paid out with the coupon. It is added to the principal. The RBI FAQ says this is done by multiplying the principal by an index ratio.

How is the index ratio found?

The index ratio is the reference index on the settlement date divided by the reference index on the issue date. The RBI FAQ gives a worked example. It uses a real coupon of 1.50%. The FAQ marks it as being for illustration purpose.

In this example the index rose from 100 to 106 in year 1. The principal rose from 100.0 to 106.0. The coupon of 1.50% was paid on 106.0, so it came to 1.59. The coupon rate stayed the same. Only the principal it applied to moved. The RBI example shows one coupon a year. The note from the Indian Economic Service (IES) says the 1.44% bond paid its coupon half-yearly.

What does the investor get at maturity?

The RBI FAQ said that at redemption the higher of the adjusted principal and the face value would be paid. It said that if deflation pulled the adjusted principal below face value, the face value would be paid. It added that capital would then be protected.

The second RBI example shows this. The index is 99.2 in year 10, below its starting value of 100. The adjusted principal is 99.2. The repayment shown is still 100.

How often is the coupon paid?

The RBI FAQ said the coupon on IIBs would be paid half-yearly, as for other government securities. The fixed coupon rate would be paid on the adjusted principal.

Is there a tax benefit?

In 2013 the RBI FAQ said normal tax provisions would apply to interest payments and capital gains on IIBs. It said there would be no special tax treatment. The IES note says there are no special tax concessions for these bonds.

What else is true of an IIB as a government security?

The RBI FAQ of 28 May 2013 said the following.

• IIBs would be tradable like other government securities (G-Secs).
• They would be eligible for short-sale and repo transactions.
• They would automatically get Statutory Liquidity Ratio (SLR) status.

The idea came from the Union Budget 2013-14. The speech named a worry about the current account deficit. Gold was one of its causes. The speech also set out ideas for savers.

What was the worry about gold and the current account?

The Finance Minister called the current account deficit (CAD) his greater worry. He said the CAD stayed high mainly because of four things. They were oil imports, coal imports, “our passion for gold” and the slowdown in exports. The speech said India had to find over USD 75 billion to finance the CAD that year, and perhaps the next year too.

What did the Budget propose for savings?

Paragraph 61 of the speech is about savings. It says the household sector must be incentivised to save in financial instruments rather than buy gold. Among its measures were instruments that protect savings from inflation. It names the savings of the poor and middle classes in particular.

The speech named two possible forms. They were Inflation Indexed Bonds or Inflation Indexed National Security Certificates. It said the structure and tenor would be announced in due course.

What did the RBI announce in May 2013?

On 15 May 2013 the RBI announced a scheme for IIBs for 2013-14. Business Standard’s report of the scheme says it was made pursuant to the Budget announcement. It says the RBI acted in consultation with the Government of India.

What does the IES note add?

The IES note describes the years 2008 to 2013. It says inflation was a major worry and real interest rates were consistently negative. It says households invested heavily in gold, which needed heavy imports.

The note says the Government launched IIBs on 4 June 2013. It gives two aims. One was to reduce the attractiveness of gold for investment. The other was to reduce the CAD.

India had tried an indexed bond before. It was issued in 1997. This card compares it with the 2013 bond.

What was the 1997 bond?

The Receipts Budget 1998-99 describes a new instrument of 1997-98. It was called “6% Capital Indexed Bonds (CIB) 2002”. It was floated on 29 December 1997.

The document says CIB provide a complete hedge against inflation for the principal amount of the investment. It adds that they also give a regular stream of interest income. It says they were expected to broaden investment opportunities, especially for investors who dislike inflation risk.

How did the 2013 bond differ?

The RBI FAQ compares the two. It says the CIBs of 1997 gave inflation protection to principal and not to interest payment. It says the new IIBs give protection to both. The IES note agrees.

Why did the 2013 scheme use wholesale prices and not consumer prices?

The RBI FAQ answers this. It says the Consumer Price Index (CPI) reflects the inflation that people at large face. It says the CPI or the Retail Price Index (RPI) is used globally for inflation targets and for inflation protection in such bonds.

In India, all-India CPI had been released since January 2011. The FAQ says it would take some time to stabilise. It adds that monetary policy also continued to target the Wholesale Price Index (WPI). So the RBI decided to use WPI for the IIBs.

The RBI planned a monthly series of auctions. This card compares the plan with what the sources report.

What was the plan?

Business Standard’s report of the RBI scheme (15 May 2013) gives the plan. Each tranche would be Rs 1,000 to 2,000 crore. The total for 2013-14 would be about Rs 12,000 to 15,000 crore.

The first tranche would be on 4 June 2013. Later tranches would follow on the last Tuesday of each month in 2013-14. The bonds would start with a tenor of 10 years.

The scheme raised the non-competitive portion from 5% to up to 20% of the notified amount. This was meant to encourage retail participation. The RBI FAQ says retail investors could join through primary dealers and banks.

What happened on 4 June 2013?

The RBI auctioned new 10-year IIBs maturing in 2023. The notified amount was Rs 1,000 crore. The RBI’s notice of 29 May 2013 said the auction would use the uniform price method, where all winning bidders pay one price. It said results would be announced on 4 June and payment made the next day.

The RBI FAQ says investors would bid for a real yield, not a nominal yield. A real yield is the return over and above inflation. Reuters reported that the RBI set the real yield at 1.44%. It said this was lower than the 1.7% expected in a Reuters poll. It also said the Rs 1,000 crore auction was fully subscribed.

The stock was named “1.44 per cent Inflation Indexed Government Stock-2023”. The IES note says the bonds offered an annual return of 1.44% over and above headline WPI inflation. It says the coupon was paid half-yearly.

Did the 27 August 2013 auction sell out?

Business Standard reported on 27 August 2013 that the RBI auctioned the same stock for a notified Rs 1,000 crore. The RBI accepted bids worth Rs 468 crore of that. Primary dealers took up the rest. The report gives a cut-off yield of 3.47% and does not say if it is real or nominal. It is the only report opened for that auction.

How much was issued?

The IES note says IIBs were issued monthly until December 2013. It says about Rs 6,500 crore was issued in 2013. The news agency IANS, citing market data, gives the same figure for IIBs issued since 2013.

The plan for 2013-14 was Rs 12,000 to 15,000 crore. The plan was for the financial year 2013-14. The issue figure is for the year 2013. So the two are not like for like.

The May 2013 scheme proposed a second IIB series for retail investors. What came in December 2013 was a different product, sold through banks. Its name is IINSS-C. The sources opened do not say why the plan changed.

What is IINSS-C?

The full name is Inflation Indexed National Savings Securities-Cumulative. The RBI release of 29 November 2013 says the RBI, in consultation with the Government, decided to launch it for retail investors. The Press Information Bureau (PIB) release of 2 December 2013 puts it the other way round. The launch was planned for the second half of December 2013.

The PIB release says the securities were launched in the backdrop of the Budget 2013-14 announcement. That announcement was about instruments to protect savings from inflation. It named the savings of the poor and middle classes in particular. The sale was to be through banks.

What were its terms?

The RBI release of 29 November 2013 gives the design.

• Face value and minimum: Rs 5,000 each.
• Maximum at launch: Rs 5 lakh per applicant per year.
• Rate: a real rate of 1.5% a year plus an inflation rate. The release says the real rate acts as a floor.
• Index: final combined CPI with base 2010=100, used with a lag of three months.
• Tenor: 10 years, with half-yearly compounding and payment at maturity.
• Base year change: the base splicing method would be used.

The lag works like this. The final combined CPI for September 2013 would be the reference CPI for all days of December 2013.

Could it be traded or redeemed early?

The issue notice says the bonds are not tradable in the secondary market. The bonds are transferable to a nominee on the death of the holder. They are eligible as collateral for loans.

The RBI release said early redemption would be allowed after one year for senior citizens and after three years for others. It gave the senior age as above 65. The Punjab National Bank (PNB) notice says 65 and above. The penalty would be 50% of the last coupon payable. Redemption would be allowed only on coupon dates.

When was it on sale, and how was it taxed?

Banks were told to issue it from 23 December 2013 to 31 December 2013. The Government then extended the closing date to 31 March 2014. It reserved the right to close the issue earlier.

A notification of 25 March 2014 raised the yearly limit. It became Rs 10 lakh for individual investors and Rs 25 lakh for institutions such as Hindu Undivided Families (HUFs) and charitable trusts. It said subscription would close on 31 March 2014.

The RBI release says the tax treatment of interest and principal repayment is as per the extant provisions. The issue notice says the interest is taxable under the Income-Tax Act, 1961.

When would the last securities reach their end date?

Our arithmetic, not a source line: a 10-year security issued by 31 March 2014 reaches its end date by 31 March 2024.

A 2016 report says WPI-linked securities were not reissued after April 2014. This card sets out what the sources say about why. It then reports the plans for 2026-27.

What changed after 2013?

An IANS report of 11 January 2016 says the RBI adopted CPI as its key measure of inflation in April 2014. It says WPI-based securities have not been reissued since then. The IES note also dates the CPI switch to April 2014.

The IES note says IIBs lost attractiveness because inflation moderated significantly from 2014-15. Business Standard reported on 5 February 2016 that the bonds had turned illiquid. It linked this to a lack of interest and to negative WPI inflation. IANS reported on 11 January 2016 that WPI inflation was minus 1.99% in November (2015).

What happened in the 2016 buyback?

The sources give a short run of dates.

• 11 January 2016: the Finance Ministry announced a buyback of the 1.44% IIB 2023. It was for Rs 6,500 crore face value, by reverse auction, in which the Government buys its own bonds back. Bids were due on 14 January.
• 14 January 2016: the Government rejected all bids. A Business Standard report of 5 February 2016 said the RBI received 124 bids worth Rs 6,004 crore. It said investors bid 87 to 89 a piece against a market price of 83 to 84. It gives no unit. It is the only source opened for these figures.
• 5 February 2016: the RBI notified a fresh repurchase of Rs 6,500 crore face value. Bids were due on 11 February. The notice says the stock would be redeemed early using surplus cash balances.
• 17 February 2016: the Finance Ministry announced a repurchase for Rs 3,990.72 crore face value on 22 February. The sources opened do not give the results of the 11 February and 22 February auctions.

The RBI notice calls the repurchase purely ad hoc. It reserved the right to accept less than the full Rs 6,500 crore.

Is any IIB on sale in October 2026?

PIB published the borrowing plan for the first half of FY 2026-27 on 27 March 2026. It says borrowing will be spread over 3, 5, 7, 10, 15, 30, 40 and 50 year securities. This includes Rs 15,000 crore of Sovereign Green Bonds. The release does not mention inflation-indexed bonds. It lists tenors, not product types.

The Tribune reported on 25 September 2026 on the second half. It lists the same tenors and does not mention them either. Both lists give tenors, not product types. Neither says whether an IIB is planned. No source opened for this lesson shows an IIB on sale in 2026.

The IES note says any new IIB would be based on CPI. It gives the reason that the RBI has used CPI as its key measure since 2014.

Both Indian inflation indices changed their base year in 2026. This card asks what that means for inflation-linked securities.

What changed in the CPI?

The Ministry of Statistics and Programme Implementation (MoSPI) issued the first CPI press release on base 2024=100 on 12 February 2026. The base was revised from 2012 to 2024. The item basket and weights come from the Household Consumption Expenditure Survey 2023-24.

The new CPI has 12 divisions in place of 6 groups. The release gave all-India CPI inflation of 2.75% for January 2026 over January 2025 (provisional).

MoSPI links the old and new series with linking factors. The overlapping period is 2025, when both the CPI 2012 and CPI 2024 indices are available.

What changed in the WPI?

On 15 June 2026 a new WPI series with base year 2022-23 was released. It replaces the series with base year 2011-12. The number of items rose from 697 to 957.

The release says WPI is widely used in price escalation clauses. So WPI will be released for five years, along with the Producer Price Index (PPI), and then discontinued. It says this gives users time to switch from WPI to PPI.

The linking factor for All Commodities between the two series is 1.53. It was computed from the twelve-month indices of 2024-25.

What did the old Indian indexed securities say about base changes?

The RBI FAQ on IIBs says WPI is revised after every 10 or more years. It gives 1981-82, 1993-94 and 2004-05 as past base years. It says a revision would be handled by splicing the base years. The aim is a consistent WPI series with the same base year since the issue date of the bond.

The IINSS-C design says the base splicing method would be used if the base year changed. So both products had a rule for this event.

Does a new base year change any bond today?

Our reading, not a source line: the IIB stock was due in 2023. A 10-year IINSS-C issued by 31 March 2014 reaches its end date by 31 March 2024. If both were repaid on time, the 2026 base changes would not touch their payments. No opened source confirms the repayments.

The sources used here say nothing about how a new bond would handle a base change.

This card compares IIBs with two other instruments. One is the Indian Sovereign Gold Bond (SGB). The other is the US TIPS.

What is the Sovereign Gold Bond?

PIB says the Government launched the Sovereign Gold Bond (SGB) Scheme and the Gold Monetisation Scheme in November 2015. A 2016 reply says the aim was to reduce reliance on gold imports and demand for physical gold. A 2018 reply says the launch date was 5 November 2015.

The RBI notice for Series IV of 2023-24 shows how an SGB is priced. The nominal value is based on the price of gold of 999 purity. It worked out to Rs 6,263 per gram for the subscription of 12 to 16 February 2024.

Outlook Business says SGBs pay a fixed interest of 2.5% a year on the initial investment. It says redemption is paid in rupees, based on a three-day average gold price. Business Standard says the tenure is eight years, with early redemption after five years.

Is the SGB still issued?

Outlook Business reported on 1 February 2025 that the most recent issue was on 21 February 2024. It was the fourth tranche of the 2023-24 series. It said no tranche had been issued in the last few quarters.

No official notice ending the scheme was opened. The sources opened are dated 2024 and 2025.

Asked if this meant the end of the scheme, the Finance Minister replied “Yes, in a way”. Outlook reports that the Secretary of the Department of Economic Affairs (DEA) confirmed this. It says he confirmed that gold bonds proved a very high-cost borrowing for the government. It adds that the government decided not to continue issuing tranches.

Business Standard reported on 22 August 2024 that further tranches were unlikely. It quoted an official who described SGBs as complex and expensive.

What is the US TIPS?

TreasuryDirect says the US sells TIPS for terms of 5, 10 or 30 years. The principal of a TIPS can go up or down. At maturity the investor gets the increased amount if the principal is higher. If it is equal or lower, the investor gets the original amount.

TIPS pay a fixed rate of interest every six months. The interest is paid on the adjusted principal, so the payment also varies. Our comparison, not a source line: TIPS and the Indian IIB both adjust the principal for inflation. Both pay at least the original amount at maturity.

How do the Indian instruments line up?

Which question was it?

How do the sources check each statement?

• Statement 1 has no source line. No opened source says the government can cut its coupon rate. The coupon on an IIB is a real rate fixed at the auction. It is paid on a principal that moves with the index.
• Statement 2 holds. The RBI scheme says IIBs give inflation protection to both principal and coupon payment. The IES note says IIBs “safeguard the investor against macroeconomic risks” and give a constant real return.
• Statement 3 does not hold. The RBI FAQ says normal tax provisions apply to interest and capital gains. It adds that no special tax treatment exists.

Statement 3 is false, and options (b), (c) and (d) all contain it. That leaves option (a), 1 and 2 only, by elimination. The official key was not opened.