November 11, 2025
9 mins read
Inflation makes money less valuable and savings less strong. The Reserve Bank of India (RBI) issues Inflation Indexed Bonds, or IIBs, to protect assets against rising costs. The Consumer Price Index changes the principle of these bonds to make sure that the real value of your money stays the same.
Inflation Indexed Bonds are different from normal fixed-income instruments since they link returns to inflation. This makes them a safe way for anyone who wants to preserve their wealth against inflation while still getting steady, inflation-adjusted income.
Inflation makes money less valuable, which means that savings and income lose value over time. Inflation Indexed Bonds were created to deal with this problem. The Reserve Bank of India issues these bonds, which are linked to inflation to make sure that investments keep their genuine value.
Inflation Indexed Bonds are different from regular bonds since they change both the principal and the interest based on the Consumer Price Index (CPI). This mechanism protects investors from inflation by making sure that their profits rise along with prices. Retail investors, businesses, and institutions all consider these bonds as a good way to secure their capital.
It's not a new idea to shield assets against inflation. In the middle of the 20th century, countries started looking for methods to provide investors a real opportunity to protect their money. This is when these specialist bonds first came along.
Brazil launched the first modern Inflation Indexed Bond in 1964 to fight hyperinflation. The notion, however, became well-known across the world when the UK introduced its index-linked gilts in 1981.
These gilts were a game changer because they gave investors a government-backed asset that kept its genuine worth. This action opened the door for other developed economies to do the same and come up with new ideas.
The US launched Treasury Inflation-Protected Securities (TIPS) in 1997, which was a big step forward. The Consumer Price Index (CPI) closely connected both the principal and interest payments on these bonds.
This clear system made TIPS quite popular with conservative investors. It made it perfectly clear that people had the opportunity to earn a consistent income without having to worry about the possibility that prices would go up and reduce their earnings.
The RBI originally offered Inflation Indexed Bonds in India in 1997, but they didn't catch on right away. The year 2013 saw a significant redesign that included improved features that made them more appealing to customers.
The government said that these bonds were a good alternative to real assets like gold. In India, Inflation Indexed Bonds are now seen as a good way to save money for the long term and safeguard capital.
The main purpose of an Inflation-Indexed Bond is to make sure that the return on your investment is higher than inflation. Instead of merely delivering a high fixed interest rate, this is done via changing the bond's principal value.
The primary is linked to an official measure of inflation, either the Consumer Price Index (CPI) or the Wholesale Price Index (WPI). Your bond's principal value goes up when inflation does.
The bond pays interest, or a coupon rate, but this is a set actual rate. This rate is based on the principal that has been adjusted for inflation, not the original face value. This implies that while inflation makes the principle bigger, the amount of cash you get as interest likewise gets bigger over time.
If you put ₹1,000 into a bond with a 2% real coupon rate and inflation is 5% for the year, your principal will go up to ₹1,050. Your interest payment for that year will be ₹21, which is 2% of ₹1,050, not 2% of the initial ₹1,000. This makes sure that your return is always higher than the rate of inflation.
Also, these bonds come with built-in protection against deflation. If there is a time of deflation and the adjusted principal goes below the original face value, you will get at least your initial investment back when the bond matures.
You can find a number of different kinds of inflation-indexed bonds on the market. Even though each type has a different structure, they all follow the same basic rule:
Treasury Inflation-Protected Securities (TIPS): TIPS are U.S. government bonds that protect real returns by changing the principal and interest based on the Consumer Price Index.
Index-Linked Gilts: The U.K. version, which came out in 1981, keeps the value of the principal the same by changing it to keep up with inflation.
Real Return Bonds: Canadian bonds with CPI-based interest. This keeps investors safe from inflation.
Inflation-Indexed National Savings Securities – Cumulative (IINSS-C): The RBI started India's version for retail in 2013. These make sure that the higher of the original or adjusted value is paid back at maturity by changing the principal amount to account for inflation.
Capital Indexed Bonds: These bonds can be purchased in several nations. They only change the principal to keep up with inflation; the interest rate stays the same.
Even though they are made differently, all of these bonds do the same thing: protect savings from inflation. The IINSS-C option has been useful for Indian investors because it offers government-backed security while still giving real returns.
Inflation-indexed bonds are designed to shield investors from the hazards associated with inflation. The RBI gives them out. When you buy a normal bond, you usually get a certain amount of interest on it.
Let's say you buy a bond with a face value of ₹100 and a coupon rate of 10%. In this situation, your nominal interest rate is 10%, but this doesn't take inflation into account. Your return after inflation is 6% if inflation is 4%. But if inflation goes up to 8%, your return after inflation is only 2%.
So, normal bonds put investors at risk of inflation. They can buy inflation-indexed bonds to protect themselves from inflation, which means that inflation won't hurt their net return.
People in India can buy inflation-indexed bonds from the government, banks, and brokers' websites. You can get "Inflation Indexed National Saving Securities - Cumulative (IINSS-C)" from these places. These securities come from the government.
The government changes the principal of these securities based on the CPI to protect investors from inflation. You will get the bigger amount if your primary value is higher than the amount you put in at maturity. But if your primary's value is the same as or less than what you put in, you'll get back the same amount.
Below are the main benefits of inflation indexed bonds:
Protection of real value: Inflation directly affects returns, so your buying power stays the same.
Safety of investment: The RBI issues it, and the government backs it, so your money is safe.
Reliable returns: Real yields stay the same because interest is always paid more than inflation.
Additional Read: Bond Investment Strategies
Inflation indexed bonds are linked to inflation, thus protect against rising prices, but they also have some drawbacks that investors should think about:
Lower base yields: These bonds usually have lower fixed coupon rates than regular instruments.
Tax treatment: Inflation adjustments are subject to interest taxes in India, which may reduce net gains.
Liquidity issues: When there isn't much trading in the secondary markets, it's hard to sell investments.
Complexity: Investors may have a hard time guessing how much inflation will happen in the future, which affects returns.
Limited availability: India still has fewer options than other countries.
Not for short-term goals: These bonds are meant to keep you safe from inflation over the long term.
Buying inflation indexed bonds is a strong and unique way to protect the real value of your money from inflation. They provide a unique type of security compared to other fixed-income instruments.
Before you invest, you should know how they work and whether or not they fit with your long-term financial goals and your overall investment portfolio.
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These bonds protect your returns against inflation. As a result, your yield in percentage terms remains flat over your investment horizon.
The government increases the principal of these bonds every year based on inflation. On the principal thus adjusted, the interest is calculated by applying the coupon rate. By doing this, the government protects the interest and principal of investors against inflation.
These bonds protect the real return on investments by providing a shield against inflation. Besides, they are issued by the government; hence, their creditworthiness tends to be very high.
Regular bonds don’t offer protection against inflation; however, inflation indexed bonds are designed to provide such protection.
Those investors who want guaranteed protection against inflation should consider investing in these bonds.
Their prices change based on the level of interest rates. So, you take market risk by investing in these bonds. Besides, the CPI may not be the best benchmark for inflation. Hence, such bonds may not offer you adequate protection against inflation.
Interest on an Inflation-Indexed Bond is calculated by adjusting the bond’s principal based on the inflation rate. The interest or coupon is then paid on this inflation-adjusted principal. As inflation rises, the principal increases, resulting in higher interest payments. This helps preserve the bond’s real value over time.
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