Is it another flimflam?

The Reserve Bank of India has announced that it is going to sell inflation linked bonds for the public, starting this year. TOI, 22 May. On the surface it sounds an awfully good idea. At present we keep money in fixed deposits in banks which pay up to 9% interest depending on the duration of the contract. But our money is losing value because the Consumer Price Index was 9.39% in April, down from 10.2% in March. To hedge against inflation people buy gold, even though the price of gold has dropped from $1900 a troy ounce to $1385 today,  thus increasing our trade deficit. The Trade Deficit was $17.8 billion in April compared to $10.3 billion in March and $14 billion last year which is bad because it adds to our Current Account Deficit and could lead to a downgrade in our credit rating. So, sovereign bonds which guarantee our money will retain its value give us a totally safe opportunity for investment. The trouble is that the RBI is going to pay interest on the Wholesale Price Index which was just 4.89% in April although it could be revised as the WPI in February was revised from 6.84% to 7.28%. The bonds will mature in 10 years and the calculation of interest is hellishly difficult. The coupon or interest rate will remain fixed during the lifetime of the bonds and will be decided by auction. The expert view is that it will be 2%. The principal will be calculated according to the WPI and interest paid on that. So if the WPI is declared at 7% then the principal will be raised by 7% and interest at 2% will be calculated on it. So if Rs 1000 is invested in the bonds its value will become 1070 and interest will be Rs 214. The question is what happens to the principal once interest is paid out. Presumably it will remain at Rs 1000 until the next time interest is paid again. Which would mean that the RBI would paying simple interest whereas inflation compounds every year. For example, if something costs Rs 1000 and the inflation rate is 10% its cost will go up to Rs 1100. Next year the rise in price will be 10% of Rs 1100 and not Rs 1000. Assuming an inflation rate of 10% every year the price will rise to Rs 1331 after 3 years and not Rs 1300. Traders are betting that inflation will continue to fall in the longer term. Bond yields on 8.15% 2022 bonds have dropped to 7.40% from 7.74% a fortnight ago. Traders maybe betting on low commodity prices because of slow growth in the world as well as in India. So not only is the RBI paying a ludicrously low rate of interest but it will pay simple interest instead of compounding it and foresees paying even less in the future. Sounds like a flimflam. Is it possible that the RBI is fooling the people?