Advantages of Inflation-Indexed Bonds
Question
With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"? Which of the statements given above are correct?
- 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.
Options
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Explanation
Statements 1 and 2 are correct. Because IIBs absorb the inflation risk (protecting the investor's real yield), the government is able to issue them at lower base coupon rates. Statement 3 is incorrect; the interest income and capital gains generated from IIBs are strictly taxable in India under existing income tax laws, lacking any special exemption.
Answer: (a).
Question details
Year
2022
Paper
GS Paper 1
Question
Q5
Subject
Economy
Sub-topic
Financial Markets & Instruments
Type
Statement-based
Difficulty
Medium
Nature
Static
Source hint
RBI Inflation Indexed Bonds G-Sec Guidelines
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