Inflation-Indexed Bond
A bond whose principal is adjusted for inflation, so both the coupon and the redemption amount rise with prices.
Formula
Adjusted Principal = Original Principal x (Current Index Value / Index Value at Issue); Coupon = Adjusted Principal x Real Coupon Rate
Unit
₹
In depth
These bonds pay a real rate rather than a nominal one, so they protect purchasing power directly rather than through a guess about future inflation embedded in a fixed coupon. The quoted coupon looks low because it is real — a 1.5% coupon on an inflation-adjusted principal can deliver a nominal 7.5% when inflation runs at 6%. India has issued them intermittently and secondary market liquidity has been poor, which limits their practical use. The tax treatment of the principal adjustment, which is income without cash, is the usual complication.
Worked example
A ₹1,000 bond with a 1.5% real coupon after 6% inflation has an adjusted principal of ₹1,060 and pays 1,060 x 1.5% = ₹15.90. The nominal return is the ₹60 of adjustment plus ₹15.90, or 7.59%.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Inflation-Indexed Bond” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.