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 ?
- (a) 1 and 2 only ✓ UPSC's answer
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Why the answer is (a)
• Inflation-Indexed Bonds link their principal (and hence interest) to a price index such as the CPI, so real returns are preserved.
• Statement 1 is correct: because investors bear no inflation risk, they accept a lower real coupon, reducing the government's borrowing cost.
• Statement 2 is correct: IIBs protect investors from the uncertainty of future inflation eroding returns.
• Statement 3 is wrong: interest on IIBs is taxable as income and gains are subject to capital-gains tax; there is no blanket exemption.
• India issued IIBs in 2013; Sovereign Gold Bonds later served a similar hedging role.
• Hence 1 and 2 only, option (a).
Why the other options are wrong
- (b) 2 and 3 only
- Statement 3 is wrong: IIB income is taxable; statement 1 is correct.
- (c) 1 and 3 only
- Statement 3 is wrong; statement 2 is correct.
- (d) 1, 2 and 3
- Statement 3 is wrong, so all three cannot be correct.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2022, held on 5 June 2022. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.