By Archana Narayanan and Suvashree Dey Choudhury
MUMBAI (Reuters) - India is set to start the long-awaited sale of inflation-linked government bonds next month, while Larsen & Toubro became the first domestic company to issue such debt, offering higher effective yields in an economy plagued by high inflation.
The Reserve Bank of India will sell 10-20 billion rupees of bonds linked to the wholesale price index (WPI) on June 4 to both domestic and foreign institutional investors.
The central bank will then sell a similar amount each month and raise 120-150 billion rupees by the end of the fiscal year in March 2014.
The sales mark India's re-introduction of such bonds after a previous attempt at inflation-linked government bonds in 1997 struggled to find demand because of what analysts call a flawed structure.
India has been keen to sell inflation-indexed bonds to wean investors off gold as a hedge against rising prices. Gold imports have been a key reason behind a record high current account deficit.
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"There should be good demand from insurance companies and retail investors, given that this will provide real positive return," said Anindya Dasgupta, treasurer at Barclays Capital in Mumbai.
"FIIs (foreign institutional investors) are also quite interested in holding linkers since this provides a natural hedge against inflation."
KEY DIFFERENCE FROM 1997
India plans to link the principal of the sovereign bonds to the wholesale price index with a four-month lag, while the coupon rate will remain linked to the principal.
That marks a key difference from the inflation bonds sold in 1997, which had also indexed the principal to WPI, but had fixed the coupon rates. The payout should be bigger this time because of the new structure of the coupon, according to analysts.
Larsen & Toubro , meanwhile, is looking to raise 1 billion rupees by selling 10-year inflation-linked debt, according to a source with direct knowledge of the deal, who declined to be identified because the sale is not public.
L&T will index the principal payments to the moving average of the WPI over the previous 12 months, while the coupon will be fixed at 1.65 percent over the WPI, according to the source.
The engineering company will sell its debt ensuring a minimum return of 3 percent and a maximum return 12 percent at the time of redemption, the source said.
The sale is being arranged by IDFC Ltd, said the source, with the settlement for the bonds set for May 21. An L&T spokesman declined to comment. An IDFC spokesman had no immediate comment.
The details of both the sovereign and L&T bonds come a day after the headline wholesale inflation fell below 5 percent in April, dropping within the RBI's comfort zone for the first time in more than three years.
Yet data on Monday showing a jump in gold and oil imports has revived concerns about the current account deficit, which widened to a record in the December quarter.
India plans to sell sovereign inflation-indexed bonds to retail investors around October, after gathering experience about the coupon rates from initial sales, the RBI said.
The decision to link inflation-linked bonds to wholesale prices had been widely expected, but some analysts say it could hit demand for the debt given consumer prices are much higher.
Data this week showed April consumer price inflation at 9.39 percent but wholesale price inflation at 4.89 percent.
"There could be some debate that these instruments track WPI inflation, while retail inflation remains high," said Radhika Rao, an economist with DBS Bank in Singapore. "To that extent, the returns of these instruments might prove insufficient."
(Editing by Rafael Nam and Ron Popeski)