Civil Services Prep

Prelims 2022 · Economy · Question 5

With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"?

  1. Government can reduce the coupon rates on its borrowing by way of IIBs.
  2. IIBs provide protection to the investors from uncertainty regarding inflation.
  3. The interest received as well as capital gains on IIBs are not taxable.

Which of the statements given above are correct?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer

1 and 2 only

1. Correct. Inflation-Indexed Bonds usually allow the government to offer a lower real coupon because investors get inflation protection separately through indexation of principal/interest.

2. Correct. IIBs protect investors against inflation risk, since returns are linked to an inflation index and preserve real value.

3. Incorrect. Interest on IIBs is taxable; they do not enjoy a general exemption from tax on interest and capital gains.

Therefore, statements 1 and 2 only are correct.

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