Stock Market · Currency, Commodity & GSec

Inflation-indexed bonds

Inflation-indexed bonds protect you from rising prices by linking the principal and/or interest payments to an inflation index. In India, the RBI has issued Inflation Indexed Bonds (IIBs) and Capital Indexed Bonds in the past.

How they work

Regular bond: ₹100 principal × 7% coupon = ₹7 per year, regardless of inflation.

Inflation-indexed bond: Principal adjusts with CPI inflation each year.

• Year 1: CPI rises 5%. Principal becomes ₹105. Coupon (say 3%) paid on ₹105 = ₹3.15.
• Year 2: CPI rises 4%. Principal becomes ₹109.2. Coupon = ₹3.28.
• At maturity: you receive the inflation-adjusted principal.

> The real yield (after inflation) is guaranteed. With a regular bond, inflation eats your real return.

India's experience with inflation bonds

RBI issued IIBs for institutional investors in 2013-14. Retail version (Capital Indexed Bonds) had limited success. Low awareness, illiquid secondary market.

Currently, the most accessible inflation-protected product for retail is:

• Sovereign Gold Bonds (gold is a partial inflation hedge)
• RBI Floating Rate Savings Bonds (interest rate resets every 6 months, linked to NSC rate)

Why they matter conceptually

Even without direct access to IIBs, understanding real yields (yield minus inflation) helps you evaluate whether any fixed income investment is actually growing your wealth after inflation.

Real yield positivewealth growing in real terms

Real yield negativesavings account losing value in real terms

Takeaway. Inflation-indexed bonds protect purchasing power by adjusting principal with inflation. India's retail access is limited, but understanding real yield (nominal yield minus inflation) is essential for evaluating any fixed-income investment.