Need for inflation-indexed bonds,else bank deposits will dry up in favour of gold investments

In India, governments, from time to time, have toyed with the idea of introducing inflation-indexed bonds, but on each occasion the authorities have backed off. The real reason for rejecting the indexation idea is that governments do not trust their ability to control inflation. If the government is serious about the welfare of the disadvantaged segments of society and the elderly, it should be willing to float inflation indexed bonds at least for senior citizens. The scheme should offer a real rate of interest of only 2 per cent per annum; if the CPI at the end of the year shows an increase of 10 per cent, the saver should be paid a nominal rate of interest of 12 per cent for that year.


The elderly need to be protected from inflation through instruments that promise a real rate of return of, say, 2 per cent over the rise in consumer prices. This would also do well to set inflation expectation low. The move will, in fact, signal the government's intent to contain inflation. Instead of being apprehensive about floating an inflation-indexed bond when the CPI inflation rate is high, as at present, the government should launch the scheme at precisely such a time. It would act as a signal that the government is determined to bring down the inflation rate to very low levels. A determined move by the government can alter inflationary expectations.