Are inflation-indexed bonds better hedge than gold?

Below is the verbatim transcript of Mathpal's interview with CNBC-TV18.

Q: Are inflation-indexed bonds better hedge against inflation than gold and can you comment on inflation-indexed bonds at this juncture or would you wait to see the fine print?

A: Inflation-indexed bonds by definition are good because these bonds offer inflation adjusted return for example, if one buys a normal bond and it offers 10 percent fix coupon, it will remain throughout the term of that bond. However, inflation may change. Therefore, inflation adjusted real rate will be lower for example if returns are 10 percent and inflation is 7 percent then it comes to 2.80, if inflation goes to 8 percent then it come to 1.85. So, with increase in inflation the real rate comes down.

4.8%-deficit tough; OMOs, rate-cut to buoy bonds: StanChart

In these bonds because returns are inflation adjusted so throughout the term of this the real rate will remain same. So, it is good for the investors but (1) whether this return will be taxable or tax free (2) these bonds will be linked to wholesale price index, which is not the reflection of retail index and if returns are taxable in that case tax free bonds will be a better choice. So, we will have to wait for sometime and then we will see whether these bonds will be helpful for the investor to get good real rate.