What is an Inflation Indexed Bond?
An Inflation-Indexed Bond is a Bond i.e. indexed with inflation and its rate of interest goes up and down with the level of inflation in the country. This bond is specially designed to safeguard an investor’s investment from future uncertainties about the inflation rate. The idea of Inflation Indexed Bonds was first coined by Massachusetts Bay Company in 1780, and in India, it was first introduced by RBI in 1997 as Capital Indexed Bonds (CIB). However, there is a slight difference is in the older CIB, and the newly introduced IIB, as CIBs tend to provide inflation protection to interest only. While IIBs provide inflation protection to both interest and principal amounts.
Inflation Indexed Bonds
Investors usually invest in various thematic bonds to earn decent interest on their capital investment, but in such thematic bonds, there is always a risk of loss due to various factors. For example, if an investor invests in a stock exchange and the inflation rate rises then the stock market tends to fall and the investor may bear huge losses. Inflation is one such factor that severely affects almost all kinds of investments, except the Inflation Indexed Bonds. Inflation Index Bonds (IIB) are specially designed to provide security to an investor against inflation.
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