The CIBs issued in 1997 provided inflation protection only to principal and not to interest payment.

New product of IIBs will provide inflation protection to both principal and interest payments.

Inflation component on principal will not be paid with interest but the same would be adjusted in the principal by multiplying principal with index ratio (IR). At the time of redemption, adjusted principal or the face, whichever is higher, would be paid.

Interest rate will be provided protection against inflation by paying fixed coupon rate on the principal adjusted against inflation.

An example of cash flows on IIBs is furnished below.

Yes, capital protection will be provided by paying higher of the adjusted principal and face value (FV) at redemption.

If adjusted principal goes below FV due to deflation, the FV would be paid at redemption and thus, capital will get protected.

The consumer price index (CPI) reflects the inflation people at large face and therefore, globally CPI or Retail Price Index (RPI) is used for inflation target by the Central Banks as well as for providing inflation protection in IIBs.

In India, all India CPI is being released since January 2011 and it will take some time in stabilizing. Monetary policy has also been continuing to target WPI for its price stability objective. In view of above, it has been decided to consider WPI for inflation protection in IIBs.

Index ratio (IR) will be calculated by dividing the reference WPI on the settlement date with the reference WPI on the issue date.

The formula for the same is as under:

Final monthly WPI will be used as reference WPI for 1st day of the calendar month. The reference WPI for intermittent days, i.e. dates between 1st days of the two consecutive months will be computed through interpolation.

For interpolation, two months final WPI should be available throughout the month. As final WPI is available with a lag of about two and half months (e.g. final WPI February 2013 will be released in mid-May 2013), two months final WPI could be available only with a lag of four months.

In view of above, the four months lag has been chosen for final WPI to be considered as reference WPI for 1st day of the calendar month. For example, December 2012 final WPI will be taken as reference WPI for 1st of May 2013 and January 2013 final WPI will be taken as reference WPI for 1st of June 2013.

For calculating the index ratio for a specific date, daily reference WPI values would be linearly interpolated using ‘Ref WPI’ for the first day of the calendar month and the first day of the following calendar month.

The formula for computing the reference WPI for a particular day is as under:

[Ref WPI_M = Ref WPI for the first day of the calendar month in which Date falls, Ref WPI_M+1 = Ref WPI for the first day of the calendar month following the settlement date, D = Number of days in month (e.g. 31 days in August), and t= settlement date (e.g. August 6)]

WPI series is being revised after every 10 or more years (e.g. base year revision in WPI series took place in 1981-82, 1993-94 and 2004-05).

Any revision in the base year would be tackled by splicing the base years so that a consistent WPI series with the same base year is available for indexation purpose since the issue date of the bond.

Extant tax provisions will be applicable on interest payment and capital gains on IIBs.

There will be no special tax treatment for these bonds.

A non-competitive scheme has been devised for participation of such investors in the auction. Under this scheme, investors are required to indicate the amount of their bids and not the price at which they want to subscribe. Allocation to such investors is made at the weighted average price emerged in the competitive bidding.

Presently in auction, up to 5 per cent of the notified amount is reserved for non-competitive bidding, while up to 20 per cent of the notified amount will be earmarked for such bidding in case of IIBs to encourage retail participation.

The retail investors will be able to participate in non-competitive bidding through primary dealers (PD) and banks. They can open a gilt account with PDs and banks or demat account for such participation.