Agencies/Mumbai


India’s central bank announced yesterday it would launch inflation-linked bonds to try to break the country’s love affair with gold and narrow the ballooning current account deficit.
The Reserve Bank of India said the first tranche of inflation-indexed bonds, a new type of debt for India, would be released on June 4.
The aim is to protect “savings of poor and middle classes from inflation and incentivise the household sector to save in financial instruments rather than buy gold,” the RBI said in a statement.
Inflation has been uncomfortably high for a number of years, prompting savers to seek shelter in gold.
The main wholesale inflation index fell to 4.89% last month, within the central bank’s “comfort zone,” for the first time in over three years but consumer price inflation is still nudging 10%.
Many Indians - especially in rural areas where there are few banks - buy gold in the form of jewellery, bars and coins as a hedge against inflation and India is the world’s largest purchaser of gold, importing some 900 tonnes.
Indians also buy gold for important religious ceremonies and for weddings.
But the bullion imports are one of the main contributors to the deficit in the current account - the broadest measure of trade - that the central bank has described as the biggest risk “by far” to the economy.
Gold imports soared 138% in April to $7.5bn from a year earlier after Indians went on a buying spree following a fall in the global price.  India aims to sell some Rs120bn to Rs150bn ($2.2bn to $2.7bn) of inflation-linked 10-year bonds by the end of the fiscal year in March 2014, the central bank said.
The bonds will have a fixed real coupon rate and a nominal principal value that is adjusted against inflation. Periodic coupon payments will be paid on the adjusted principal. Thus, the bonds will provide protection against inflation on both principal and coupon payments.
“At maturity, the adjusted principal or the face value, whichever is higher, will be paid,” the RBI said.
On the investment period in the new bonds, RBI said: “Issuance would target various points of the maturity curve in order to have benchmarks. To begin with, these bonds will be issued for a tenor of 10 years.”