A New Product to Beat Inflation - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 9 November 2013
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A New Product to Beat Inflation A  A  A


- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
Inflation is a big problem in India, and has been for a long time. Inflation tends to be high and volatile too, and this increases the uncertainty of our investment returns. The real return is defined as the nominal return minus the inflation rate. It reflects the gain in real spending terms. For example, if you invest in a fixed deposit paying an 8% return, your real return is uncertain because it depends on inflation. If inflation ends up at 5%, you make a 3% real return. But if inflation ends up at 10%, you make a 2% real loss!

Now there is a new product that can eliminate inflation risk. The government has recently announced that they are planning to issue retail inflation bonds to consumers in the near future. These bonds will allow customers to protect themselves against inflation, and earn a fixed real return. To start with, these bonds will have a 10 year maturity.

How will these bonds work? Rather than paying a fixed interest rate like a normal fixed deposit, the rate of return is linked to the consumer price index, a measure of inflation. The consumer price index measures the change in the price of a basket of consumer goods over time. The return on the bond is the inflation rate plus a fixed rate.

Suppose for example that the bond pays 3% plus inflation. If inflation ends up at 5%, then the bond will pay an 8% return. If inflation ends up at 10%, the bond will pay a 13% return. The idea is that your real return (nominal return minus inflation) is constant at 3%. From the perspective of an investor, this is beneficial because the real return determines the spending power of your money.

By investing in these inflation indexed bonds, you can eliminate the inflation risk for yourself. For those individuals who are looking for a safe investment that will protect them from inflation, the retail inflation bonds are an excellent choice.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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13 Responses to "A New Product to Beat Inflation"

Dinesh Misra

Nov 16, 2013

Will Income Tax Deptt allow to account for real income as taxable income instead of gross income? certainly no, than your real income + some thing will be taken away by ITO, Govt is very smart.

Like 

Ashok Dalvi

Nov 13, 2013

Still better than a normal FD where the returns are eroded by inflation and may give negative returns,whereas in inflation bonds the returns will always be positive

Like 

r v iyengar

Nov 11, 2013

All the calculations come to a naught if you take tax into account. If as per example inflation is 9 % and the actual interest paid is 12 %, the tax at say 20% 0f 12 comes to about 2.4 %. Thus actual rate of returns would dwindle down to 0.6 % . You could practically keep the money under your pillow rather than invest in such Inflation Indexed Bonds and lock it up for a good ten years.
These bonds become meaningful only if they are taxfree

Like 

Balmukund

Nov 11, 2013

Inflation bonds are linked with wholesale price index which is much less than retail price index. i think it will not protect common man ag retail price inflation.

Like (2)

Byram Godrej

Nov 10, 2013

Dear Mr. Dossani,

You have not commented on the tax implications of these inflation indexed bonds. If tax is to be paid then the 3% is further reduced and the only beneficiary of this scheme would be the Govt. by way of increased tax liability.
Your comments would be appreciated.

Like (2)

Alphones

Nov 10, 2013

This is a good one and thanks to Assad for his weekend edition.

Like (2)

Murugan

Nov 10, 2013

The period of maturity is another factor to be considered. If you make it 19 years, you totally eliminate Senior Citizens. With so much uncertainity about their health and longevity, Seniors are not keen to invest in products of long maturity.In fact, most of the products of investment never combine safety and reasonable return to attract Seniors who have the ability to invest big sums just after their retirement.

Like (2)

H K Prakash

Nov 10, 2013

The Govt's idea of typical item in basket to measure inflation DOES NOT match with yours! One such item is cost of woolen blanket sold to Army jawans in CSD. How many retail consumers can buy in CSD, even illegally? The best way to beat inflation is a) buy property, b) trade in equity during normal times, switch to gold during boom, switch back to equity during bust and keep inspecting your portfolio for ways to improve it

Like (1)

Dhanaraju

Nov 10, 2013

Thing is that always government projects (manipulates) the inflation rate lesser than actual inflation. Unless this practice of govt. is stopped, there may not be much benefit to the small investor.

Like (1)

V K Malhotra

Nov 10, 2013

Dear Mr.Dossani, In India every scheme like this by the govt. is laced with sweet poison and the same goes for this bond too. It is too easy for the Govt. to manipulate the figure of inflation over 10 years period and then be able to fleece the investors of their legitimate earnings.Experience shows that never to trust schemes of the Indian Government.

Like (1)
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