In a bid to wean away people from gold that is increasingly used as a hedge against inflation, the Reserve Bank of India (RBI) today said it is toying with the idea of launching inflation-indexed bonds (IIBs), apart from allowing banks to buy back gold.
"We introduced that (IIBs) some years ago but that didn't take up due to some design flaws. Since then, we have been trying to redesign it...," RBI governor D Subbarao said at the customary post-policy conference.
"From our side, the attraction of the IIBs is to wean people away from gold.... if you provide an asset that gives inflation-indexed return (then they will invest in it)."
Certain issues were to be worked out, he said. "There were several questions apart from the design of the bond. About which inflation index, do we peg to - WPI, CPI - and if we peg it to CPI, which is above 10 per cent then what interest rate will be offered which will attract retail investors?" he said.
Mr Subbarao also spoke about the issues related to timing the launch as the government may want to do it during falling inflation, while customers would want it during rising inflation.
Referring to possibility of disruption of G-Secs market due to launch of IIBs, he said, "One question which hunts us all the time is whether this will disrupt the G-Sec market.
"Because it is a wedge between the yield of IIBs and that of the G-Secs. However, if we educate investors they will see that this is pegged to inflation over a cycle and not to a particular point of time. Then, people will understand and invest in this," he added.
The governor also said the government and the RBI are working on various proposals to reduce the gold import. "We are shortly going to also consider whether we should allow banks to buyback gold. There are some regulatory prescription, where it is implied not very direct, says banks can't buy back gold. That also we are examining."
Higher gold import has taken a heavy toll on the economy with current account deficit touching 5.4 per cent in the second quarter. Recently, the government increased the import duty on gold to 6 per cent from 4 per cent to reduce inward shipments.
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