Inflation indexed bonds, a financial instrument which can act as a hedge against inflation by the RBI.,lets go in detail.Google

Before I describe their pros and cons Let us know what are they – They are the enhanced version of Capital Indexed bonds issued in 1997 by RBI. Capital indexed bonds provided inflation protection only for the principal while inflation indexed bonds provide inflation protection for interest payments as well. Theoretically, inflation indexed bonds could indicate the willingness of the government to maintain optimal Inflation numbers.

After the initial auction, inflation indexed bonds are traded in the secondary markets. A normal government security bond carries an inflation risk which the inflation indexed bonds are free from. So the difference between the rates of nominal rate of return from a normal government security bond would denote the inflation expectations of the market. Monetary policy makers can take cue from these market expectations to control the inflation rates.  Continue reading