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UPSC Prelims 2022 Paper-1 📅 05 Jun, 2022

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
(a) 1 and 2 only
B
(b) 2 and 3 only
C
(c) 1 and 3 only
D
(d) 1, 2 and 3
Result Summary
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UPSC Prelims
2022 • 05 Jun, 2022 • Paper-1
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?
Correct Answer
(a) 1 and 2 only
Statement 1 Analysis: Correct. Because IIBs offer a built-in safeguard against inflation risk, investors demand a lower risk premium. This allows the government......
Ref/Book : UPSC Prelims 2022
Ref. Subject Economy
Chapter -
Ref. Topic Financial Markets
Pg. No -
💡 Analysis & Explanation
Statement 1 Analysis ▼
Correct. Because IIBs offer a built-in safeguard against inflation risk, investors demand a lower risk premium. This allows the government to issue these bonds at a lower baseline coupon rate.
Statement 2 Analysis ▼
Correct. The principal and/or interest payments are directly linked to an inflation index, ensuring the investor's real purchasing power remains protected despite price volatility.
Statement 3 Analysis ▼
Incorrect. In India, both the interest earned and the capital gains realized on Inflation-Indexed Bonds are fully subject to taxation according to the investor's applicable income tax slab.
Conclusion ▼
Only statements 1 and 2 describe valid advantages.
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