Tips

Inflation-indexed bonds have gained prominence over floating rate instruments as a better hedge against inflation. The UK introduced index linked gilts in 1981, followed by the issue of capital indexed bonds by Australia in 1985.3 The UK also issued a 50-year ‘ultra-long’ inflation indexed gilt in 2005. Canada, the US, France, and most recently, Japan have been some of the other countries from the developed world, which have started the issue of inflation-indexed bonds. Japan issues an inflation-indexed JGB only with one term, i.e., 10 years. The US issues treasury inflation protected securities (TIPS) and Canada issues real return bonds. In index-linked bonds, either both coupon and principal payment (as in the UK) or just the principal (as in Japan) are adjusted for changes in inflation. An adjustment for inflation is particularly beneficial in the case of long-term government bonds, as the risk of variation in price levels of such bonds is high. Most countries have been slowly moving towards the international best practice of a three-month  indexation lag between the publication of the consumer price index information and the actual indexation of the bond as against an eight-month lag earlier.

TIPS are not issued by Indian Govt.

Source RBI.

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