Mumabi, Aug 7: Only gilts have provided a positive real return to investors between August 1994 to July 1997 while gold has clearly lost its glitter as an inflation hedge asset, says I-Sec report on the return on bonds.

``In fact, this builds up a strong case for the Reserve Bank of India to encourage retail investment in government securities particularly risk averse individuals,'' says the report.

A comparison across asset classes between the August 1994 to July 1997 period reveals that investment in government bonds has yielded the highest returns.

These three years have seen bond and equity markets move broadly in tandem and the fact that the BSE sensex has risen by over 800 points (from 3539) in 1996-97, and the bond index returns have been comparable with equity returns over this period gives an indication of the extent of price rise in government securities, said the report.

Over this three-year period interest rates have completed a full cycle with yields on government securities currently being only marginally lower than what they were in August 1994.

However, the yield volatility within this three-year period has been high with the ten-year government bond depreciating from 11.75 per cent in October 1994 to 14 per cent in June 1995 to January 1996 period and back to 11.6 in August 1997.

The financial year 1996-97 was the consolidation phase for interest rate markets, several structural and policy changes initiated during this period.

Establishment of the primary dealers network was the major event of the year, while on the policy front, Reserve Bank consciously tried to ease its tight monetary stand through a series of CRR reductions, says the report. The full impact of these actions has been felt over the past four to five months with a sharp drop in interest rates and an increase in the secondary market volumes to over Rs 500 crore per day.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.