Most Banks Fail to Push RBI’s CPI-linked Bonds

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Investing in Inflation-Indexed National Savings Securities

Reserve Bank of India governor Raghuram Rajan may be trying his best to provide fair returns to savers through bonds linked to the consumer price index (CPI), but the message does not appear to have travelled across the banking system with many staff at branches remaining ignorant of the product.

Acheck at some branches of State Bank of India, ICICI Bank and Axis Bank in Mumbai, Kolkata and Chennai suggests that they are not marketing the so-called Inflation-Indexed National Savings Securities–Cumulative. In fact, some bank employees are not even aware of the existence of such a bond. Although most staff are not selling the product to customers walking into their branches, some banks such as HDFC Bank, ICICI Bank, and Axis Bank are offering an option to download application forms either from their websites or through their online securities trading platform.

HDFC Bank, which had 3,251 branches as of September 30 across the country, has designated about 200 branches to sell these bonds. "There are around 200 coordinating branches through which we are selling those (retail) bonds. If applications come from other branches, they are routed through (the designated branches.

E-mails sent to ICICI Bank and Axis Bank seeking comments on the matter remained unanswered. A chief general manager at SBI declined to comment.

CPI-linked bonds are seen as one of the revolutionary moves initiated by the central bank to entice savers to invest in financial instruments instead of gold, after heavy imports of the yellow metal drove the country's current account deficit wider and pushed the rupee lower. Thegovernment had to put several curbs on gold imports as the rupee fell to an all-time low against the dollar in late August.

Retail investors can buy CPI-linked bonds from banks and subscriptions, which opened on December 23, will close on December 31. The actual demand for the bonds will be known only after the issue closes.

The central bank is doing its bit to market these bonds. "We have issued print advertisements in 14 languages. We are promoting (the bonds) through FM radio channels all over India," an RBI spokesperson said.

Banks, faced with slowing deposit growth and having many other financial instruments to market, do not find promoting the CPI-linked bonds as lucrative since the central bank does not pay any commission.

For this kind of products, a majority of bank-branch officials remain ignorant as it did not fetch any fee. Sometimes customers appear to be more knowledgeable than bank officials.

Also, there are competing products in the market which provide better returns adjusted for taxation, and a fixed rate of return for nearly two decades. For example, if retail inflation, or CPI, is at 9%, an investor will earn an interest of 10.5% (which includes a fixed 1.5% given over the CPI rate). So, the actual interest amounts to . 10.50 on an investment of . 100. Now, an investor in the highest tax brackets (30.9%) will pay a tax of . 3.24 on the interest income. Hence, the tax-free interest income comes to . 7.26, or 7.26%, which is less compared with the tax-free returns of bonds floated by state-owned India Infrastructure Finance Co and Housing and Urban Development Corp (in the range of 8-9%).

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