What is more significant? The central bank has spoken of attracting the retail investors into the inflation linked bonds. This is welcome. If the new bonds are so crafted as to be readily available for retail investors, this would be a major relief for them. As such, the retail investors have few choices between a bank’s fixed deposits and a post office deposit. Caught between falling interest rates of banks and post offices and high risks of other kinds of instruments, they ordinary saver felt being left in the lurch.

In an earlier period, individual investors had put their funds in corporate debt. However, many of these deposit taking corporates never paid back any interest let alone the principal. So having burnt their fingers in private sector debts, the individual investors have shun away from these debt instruments altogether.

A broad section of individual investors do not have the stomach to place their funds in mutual funds either. The massive liquidation of the Unit Trust of India (UTI) over its lead vehicle, Unit-64 scheme, had been remembered for a long time. Mutual fund investments are predominantly market linked and hence there is an inherent instability in these instruments even when gains could be large.

However, for the senior age groups, the mutual fund investments remain a risky proposal as they have a small window or rather window in case of a wipe out of some parts of their savings. Th number of such investors is not small. The investible funds with this group of investors is not insignificant either.

To make these appealing to the individual, these bonds should be offered through the banks and there should be a ready mechanism for their repurchase at a discount. However, to make these a stable instrument, the Reserve Bank should create a well-worked framework.

RBI had changed the inflation matrix for its policy setting during the governorship of RaghuramRajan. While earlier the wholesale price inflation used to be norm, it was changed to the consumer price inflation. This can have implications for the return for the holders of the bonds. Hence, it should be make clear in advance what would be h measure of inflation for the calculation of returns on the bonds.

With the Indian economy picking up pace, the rates of inflation are also spiking. For the purposes of monetary policy formulation, the RBI had pegged itself to an inflation targeting regime of 4 per cent, plus or minus another 2 per cent. Thus, the CPI should be between 2 per cent and 6 per cent.

On latest reckoning, the CPI was at 4.9 per cent in November thus being within the RBI parameters. However, the wholesale price index stood at a high of 14.2 per cent on year on year basis, which is almost touching the limits of tolerance. A high WPI automatically works itself out subsequently at the retail level and the CPI also rises in step.

The wholesale price index has been rising for the last eight months, thereby indicating that inflation has become somewhat endemic. The consumer price inflation is also rising although at a slower pace, which shows that he high wholesale level price rise has yet to get translated at the retail level. These show the dangers of sustained rise in inflation pressure.

There is no doubt that the Reserve Bank would be drawn into action if the inflation rate is transmitted further. This of course would depend on Reserve Bank’s reading whether the inflation is for here to stay. If the RBI finds inflation will persist in the long term, it should swing into action to rein in price spiral. However, if the price rise is due to temporary shortfalls and bottlenecks, it would desist from inflation targeting measures.

Here lies the dilemma. Inflation containment at this point of time might crimp the recovery process. The Indian economy is only now coming out of the trauma of the pandemic and consumer confidence is edging up. There was severe income loss, particularly among the economically vulnerable segments. These people are just about coming back into the market.

It is likely that the current spate of price rise is more sue to sudden choking of supply lines and disruptions than due to some fundamental imbalances. All over the world proline is under pressure. In the US, prices are rising by around 4 per cent and this has created consternation. In the developed west as well, the prices are rising. All are debating the questions: how to react in response to price rises in context of incipient recovery of the world economy.

In general, the pick up oil prices as a result of ganging up of the oil producers is the core of the current global price rise. Despite efforts of the United States and some others to stem petrol price rises, nothing much has happened as a decades old negligence of investment in the oil and gas sector has really brought down its production capacity. With recovery demand for oil rose ad that resulted in the immediate price hikes. Besides, the restrictions on movements across the world age rise to hikes in commodity prices and physical shortages.

Both these factors are responsible for part of the current price rise in India. Besides, with the economy recovery and gaining at least part of its lost steam, income generation has improved. When people had to stay away from the markets for nearly two years, a little recovery itself has given expression to the underlying latent demand.

Hence, for India the spurt in prices is willynilly related to the nascent recovery of the economy. This is good and this is also opening upscope for fresh investments.

A peremptory intervention by RBI raising policy rates might to be in the best interest of the recovery process. At the same time, such steep rises in inflation rates would surely be noted by the monetary policy committee for its evaluation of intervention moves.

IN the midst of all these developments, the central bank’s talk of a inflation linked bond, including one for the retail investors, gives the impression that RBI believes inflation to remain strong for the immediate future. For the next year at least, when the government of India would be required to mobile large funds, such an inflation linked instrument should become a useful way of tapping the funds at the hands of individuals as well as sucking out some resources from the system. This could be a good bait. (IPA Service)