Inflation Indexed Bond-A Bond with the Best??

Inflation is a dreaded word, the mere mention of which can shake the confidence of economists, investment bankers, policy makers, government as well as investors alike. Sustained inflation makes all of us poorer in the long run. Thrift has not been a rewarding proposition for Indian investors in recent years, as interest rates on debt instruments have failed to keep up with runaway inflation. The introduction of Inflation Indexed Bonds in June this year is much awaited for the small investors as their real return for last few years were in negative zone. Retail investors would be expecting to finally earn positive real returns (excess of returns over inflation rate) from their debt instruments. It is true that these provide hedge against inflation but partially since these are linked to wholesale price index instead of investors’ more relevant consumer price index; these do not offer any special tax concessions, towards at the maturity the full benefit could be realized and moreover, the higher bank deposit rates and moderate inflation rate may make these unattractive. This paper intends to analyze the pros and cons of the bond and to suggest the retail investors how to design their portfolio during the high inflation era.