Earning a steady return can feel reassuring, until inflation quietly reduces its real value. Many Indian investors experience this with traditional fixed-income instruments, where a nominal return of 6.5% may translate into a much lower real gain once inflation is accounted for. This gap between nominal comfort and real purchasing power highlights a growing challenge in today’s investment landscape.
India’s fixed-income market is undergoing a subtle shift. The Reserve Bank of India reduced the repo rate to 5.25% in December 2025, signalling the start of an easing cycle. At the same time, inflation has moderated sharply, falling below 2% in recent months. This combination has placed conventional bonds and inflation-linked instruments at an important crossroads.
In this context, inflation-protected corporate bonds are emerging as a potential solution. By adjusting returns in line with inflation, these instruments aim to preserve real value rather than simply offering fixed nominal returns, making them a noteworthy evolution within the fixed-income space.
Understanding the Real Returns Problem
At first glance, a fixed return can feel reassuring. A 6% interest rate on a fixed deposit appears stable and predictable. However, the real value of that return depends on inflation. If inflation is running at 4%, the actual gain—known as the real return—is closer to 2%. While the investment grows in nominal terms, its purchasing power improves only marginally.
This erosion becomes more pronounced during periods of high inflation, when price increases consume a larger share of nominal returns. In the current environment, inflation in India has moderated significantly, offering some relief to savers. Forecasts suggest that retail inflation may remain relatively subdued in the near term, with price pressures easing across a broad range of goods and services. Even so, inflation does not disappear entirely, and its persistent presence continues to reduce the effectiveness of traditional fixed-income instruments.
This is where inflation-linked investments become relevant. When inflation is relatively stable and predictable, instruments designed to adjust with inflation can serve as effective tools for preserving purchasing power. Rather than attempting to anticipate extreme inflation scenarios, these instruments offer a structured way to account for whatever inflation materializes whether modest or moderate.
The mechanics are straightforward. If an investor allocates ₹1 lakh to an inflation-indexed bond when the Consumer Price Index stands at 100, and inflation rises by 4% over the year, the principal adjusts to ₹1,04,000. Interest payments are then calculated on this revised principal. In this way, inflation is not an external force eroding returns but an embedded component of the investment structure, helping maintain real value over time.
The Government’s Answer: Inflation-Indexed Bonds
For more than a decade, the Indian government has offered inflation-indexed bonds as a way for investors to safeguard their savings against rising prices. Introduced in their current structure in 2013, these bonds were designed to address a long-standing concern among savers: the gradual erosion of purchasing power caused by inflation. Despite this clear objective, awareness and adoption among retail investors have remained limited.
The structure of these bonds is relatively simple. They are generally issued with a tenure of around ten years and carry a fixed real coupon rate that is determined at auction. Unlike conventional bonds, however, both the interest payments and the principal are linked to movements in the Consumer Price Index. If inflation rises, the bond’s principal is adjusted upward, and interest is calculated on this revised amount. At maturity or in the event of an early exit—the investor receives the inflation-adjusted principal, ensuring that real value is preserved.
Retail participation is encouraged through accessible entry points. Investments can typically begin from ₹5,000, with an annual cap of ₹10 lakh per investor, and the bonds can be purchased through banks and brokerage channels. While the real coupon offered often around 1–2% above inflation may appear modest, the objective is stability rather than high nominal returns.
From a broader policy standpoint, inflation-indexed bonds also benefit the issuer. By offering inflation protection, the government can borrow at lower nominal rates, creating a balanced arrangement that aligns the interests of both investors and the sovereign.
Extending the Model: Corporate Inflation-Protected Bonds
Government-issued inflation-indexed bonds address only part of the inflation challenge. The more compelling development lies in the gradual emergence of inflation-linked bonds issued by corporates. Although this segment is still at an early stage in India, it holds meaningful potential as both issuers and investors rethink how inflation risk is managed.
From a corporate perspective, issuing inflation-protected debt can be a logical choice. Many businesses operate in sectors where revenues tend to move in line with inflation. Companies involved in infrastructure, utilities, or essential consumer goods often experience higher cash flows when prices rise. Structuring bond payments that adjust with inflation allows these firms to better align their debt obligations with their operating income, reducing mismatches between earnings and interest costs.
Investor preferences also play an important role. A growing group of investors now evaluates fixed-income investments through the lens of real returns rather than headline yields. For such investors, a nominal return of 8% may offer limited comfort if inflation erodes much of that gain. In contrast, a lower but inflation-adjusted return can be more appealing, particularly for long-term, risk-conscious investors such as pension funds and insurers, as well as increasingly informed retail participants.
There is also a broader market benefit. By offering inflation protection, corporates can attract investors who might otherwise avoid corporate debt altogether. This widens the investor base, improves participation, and supports the development of a more resilient and diversified corporate bond market.
The Current Market Context: Opportunity in 2026
The broader market environment suggests that the timing for inflation-linked instruments may be particularly favourable. In December 2025, a comprehensive policy report on strengthening India’s corporate bond market underscored the need for greater innovation in debt instruments. While the market has expanded meaningfully growing from about ₹17.5 trillion in FY2015 to roughly ₹53.6 trillion by FY2025 it continues to represent only around 15–16% of India’s GDP. This remains modest when compared with developed economies, where bond markets often account for 80–100% of economic output.
A notable feature of the policy roadmap is its focus on diversifying product offerings. Beyond encouraging deeper secondary markets and a wider issuer base, the report highlights the importance of instruments such as credit-enhanced structures and sustainability-linked bonds. Inflation-linked bonds fit naturally within this framework. They are designed to be conservative rather than speculative, offering structural protection instead of return enhancement through risk-taking.
Monetary policy conditions further reinforce this setting. The central bank reduced the policy rate by 25 basis points in December, bringing the repo rate to 5.25%, and indicated scope for additional easing if economic growth warrants support. At the same time, inflation expectations have softened, with projections for FY26 revised down to around 2.0%. This combination of lower rates and muted inflation encourages long-term investors who value stability and predictability to commit capital.
Yield trends add another dimension. The benchmark 10-year government security trades near 6.54%, with expectations of a gradual decline toward the 6.38–6.48% range by early 2026. Corporate bond yields, currently around 7.15%, may also compress modestly. In such an environment, inflation-linked instruments offer clarity by focusing on real returns rather than rate direction.
Altifi: Bringing Inflation-Protected Bonds to Retail
The idea of widening access to India’s bond market would remain largely academic without platforms that reduce the barriers faced by retail investors. Altifi addresses this gap as a SEBI-registered online bond investment platform supported by Northern Arc Capital, a diversified non-banking financial company with a long track record in debt markets.
The value Altifi brings does not stem from technological novelty alone, but from simplifying a historically cumbersome process. Traditionally, retail investors encountered several hurdles when attempting to invest in corporate bonds high minimum ticket sizes, multiple intermediaries, paperwork-heavy processes, and limited transparency. For individuals investing ₹2–5 lakh, the effort often outweighed the perceived benefits.
Altifi streamlined this experience. Bond purchases on the platform are offered without commissions, reducing cost friction in a market where spreads are common. The platform’s mobile-first design reflects how investors increasingly manage finances, enabling users to track holdings, view cashflow schedules, and evaluate investments digitally without intermediary dependence.
Equally important is the range of instruments available. Inflation-sensitive options such as corporate bonds, non-convertible debentures, government securities, treasury bills, and state development loans are accessible within a single interface. This consolidated access supports investors seeking diversified exposure with an inflation-aware approach.
Northern Arc Capital’s backing adds depth, with over ₹2.3 trillion in financing facilitated across India, reinforcing credit assessment and product selection capabilities behind the platform.
Constructing Your Inflation-Protected Portfolio
From a practical standpoint, building exposure to inflation-protected instruments benefits from a structured framework rather than an ad-hoc approach. The foundation often begins with government-issued inflation-indexed bonds. These instruments offer explicit protection against inflation and are considered risk-free in nominal terms. Their expected real returns may be modest—typically in the range of 1–2% annually—but their primary role is preservation, not return enhancement. They help ensure that inflation does not erode the core value of invested capital.
Beyond this base, investors may consider adding corporate bonds that incorporate inflation-adjustment features. These may take the form of floating-rate instruments linked to inflation indices or bonds issued with coupons that rise in line with inflation. Compared to government bonds, such instruments generally offer higher nominal yields—often in the 7–9% range, depending on the issuer’s credit profile—while still providing a degree of inflation alignment.
Maturity selection is another important consideration. If the current interest-rate easing cycle extends into 2026, longer-duration bonds could benefit from price appreciation. On the other hand, uncertainty around future inflation or rate movements may warrant a staggered or laddered approach across different tenures, such as one, three, five, and ten years. This helps manage interest-rate risk while maintaining periodic cash flows.
Ultimately, allocation depends on risk comfort. More conservative investors may prefer a larger share in government instruments, while those willing to accept higher credit exposure may increase their allocation to corporate bonds, keeping in mind that inflation protection does not eliminate credit risk.
The Inflation Surprise Scenario
A useful way to evaluate inflation-protected bonds is to consider how they perform when inflation rises unexpectedly. Suppose inflation accelerates to 6–7% due to factors such as commodity price shocks or global disruptions. In such situations, traditional fixed-income instruments tend to be affected quickly. A bond offering a 7% coupon would deliver only around a 1% real return, and if sold before maturity, its market price could decline sharply.
Inflation-linked bonds are designed to respond differently. When inflation increases, both the principal and the interest payments adjust upward in line with inflation measures. This adjustment helps protect real value, reducing the impact of rising prices on returns.
The benefit of this structure becomes most evident during periods of uncertainty. While market volatility may rise and investor sentiment may weaken, inflation-linked instruments continue to preserve purchasing power and provide relatively stable real returns.
There is, however, an inherent trade-off. If inflation remains low, these bonds may not outperform traditional instruments in nominal terms. Instead, investors earn a real coupon along with inflation adjustment. This balance reflects the essence of hedging—accepting lower upside during stable periods in exchange for protection when inflation conditions deteriorate.
Looking Ahead: Why 2026 Matters
A combination of factors positions 2026 as an important year for inflation-protected corporate bonds. Monetary policy appears supportive, with the RBI’s easing cycle likely to continue if economic growth moderates further. Corporate fundamentals remain stable, enabling sustained bond issuance, while digital investment platforms are steadily reducing access barriers. At the same time, investor behaviour is evolving, particularly among younger participants who increasingly focus on real returns rather than headline yields.
Policy direction adds further support. A key government report released in December 2025 highlighted the need to deepen bond markets through innovation and broader investor participation. Inflation-linked corporate bonds align well with this objective, offering a conservative yet structurally advanced option for both institutional and retail investors.
With inflation expected to average around 2.5% during FY26, investors are not paying high premiums for protection. Instead, they gain a measured hedge against inflation without assuming extreme risk, creating a balanced and timely opportunity.
Conclusion: Beyond Traditional Thinking
Inflation-protected corporate bonds remain a relatively underdeveloped segment in India, even though they are widely used in global markets. This is less a reflection of risk and more a result of limited awareness and historical access constraints. As policy frameworks mature and digital channels improve availability, the distance between concept and participation continues to narrow.
For investors concerned about inflation steadily reducing real returns—especially in a low-yield environment—these instruments offer a pragmatic alternative. They do not rely on predicting interest rate movements or inflation spikes. Instead, they focus on preserving purchasing power, providing a measured balance between stability and opportunity within fixed-income investing.