With reference to the Indian economy, what are the advantages of `Inflation-Indexed Bonds (IIBs)` ? 1. Govemment can reduce the coupon rates on its borrowing by way of IIBs. 2. IIBs provide protection to the investors from uncertainty regarding inflation.

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Q: 5 (IAS/2022)
With reference to the Indian economy, what are the advantages of 'Inflation-Indexed Bonds (IIBs)' ?
1. Govemment 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 ?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,343,170,343,81,36,53

keywords: 

{'indexed bonds': [0, 0, 0, 1], 'inflation': [0, 1, 0, 3], 'indian economy': [0, 3, 3, 5], 'coupon rates': [0, 0, 0, 1], 'iibs': [0, 0, 0, 1], 'capital gains': [0, 0, 0, 1], 'advantages': [1, 0, 0, 6], 'interest': [1, 3, 3, 15], 'borrowing': [0, 1, 0, 3]}

Statements 1 and 2 are correct, while statement 3 is incorrect.

Inflation-Indexed Bonds (IIBs) are bonds where the principal amount as well as the coupon payments are adjusted for inflation. The advantages of IIBs are:

  1. Government can reduce the coupon rates on its borrowing by way of IIBs: This statement is correct. Since the principal and coupon payments of IIBs are adjusted for inflation, the real interest rate on these bonds is lower than nominal interest rate bonds. As a result, the government can offer lower coupon rates on IIBs and still attract investors.

  2. IIBs provide protection to the investors from uncertainty regarding inflation: This statement is correct. Since the principal and coupon payments of IIBs are adjusted for inflation, the investors are protected from inflation risk. This makes IIBs an attractive investment option for investors who are concerned about inflation eroding the purchasing power of their investments.

  3. The interest received as well as capital gains on IIBs are not taxable: This statement is incorrect. The interest received on IIBs is taxable as per the Income Tax Act, 1961. However, the capital gains on IIBs are exempt from tax if the bonds are held until maturity.


Preparing for Future Exams: Learning from the Analysis of Past Questions

Topics to be studied:

  • Inflation and its impact on the economy
  • Government borrowing and debt management
  • Inflation-Indexed Bonds (IIBs)
  • Advantages of IIBs
  • Taxation policies related to IIBs

Sources and references:

  • NCERT Macroeconomics textbook for Class 12
  • Indian Economy by Ramesh Singh
  • Economic Survey of India
  • Reserve Bank of India (RBI) website
  • Ministry of Finance website

Chapters to refer in the above books:

  • NCERT Macroeconomics textbook: Chapter 4 - Government Budget and the Economy
  • Indian Economy by Ramesh Singh: Chapter 11 - Fiscal System
  • Economic Survey of India: Chapters on Public Finance and Fiscal Developments
  • RBI website: Reports and publications related to government borrowing and debt management
  • Ministry of Finance website: Information on inflation-indexed bonds and tax policies

Related concepts to study:

  • Fiscal policy
  • Monetary policy
  • Public debt management
  • Taxation policies
  • Capital gains tax
  • Indexation