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INDEXED RATE NOTES/BOND

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Introduction: Inflation risk has been a potential problem with fixed income securities (like fixed deposits, bonds). If the inflation rate is higher than the interest rate being received on the fixed income products, it diminishes the purchasing power of the consumer. Therefore Inflation indexed bonds are introduced to counter the inflation risk. 

The main difference between fixed deposits and inflation indexed bonds is the principal adjustment and interest payment. In case of a fixed deposit, a pre – defined static interest rate is mentioned and at the end of the tenure an investor can withdraw the invested amount along with the interest rate accumulated. In case of inflation indexed bonds, the principal is adjusted to wholesale price index (WPI) and a fixed coupon rate or interest rate is paid on the periodically adjusted principal amount. 

Beneficial to the Companies: These instruments are beneficial to a company in a high interest rat environment, if the interest rates are expected to decline between the date of commitment and the date of takedown. 

Beneficial to the Investor: These instruments are beneficial to the investors in a low interest rate environment, if the interest rates are expected to increase between the date of commitment and the date of takedown.

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