UPSC Prelims 2022 · Question 5 of 98
UPSC Prelims 2022 question on Inflation Indexed Bonds
- ExamUPSC CSE
- Year2022
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicMoney Market
- DifficultyMedium
- TypeStatement
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?
Show answer
Answer: A. 1 and 2 only
Verdict
Correct statements: 1 and 2 → Option (a).
Statement by statement
Statement 1 – CORRECT: Inflation-indexed bonds were issued by the RBI in 2013 and benchmarked to WPI. If WPI falls, the effective coupon rate falls too, so the government can reduce coupon rates on its borrowing through IIBs.
Statement 2 – CORRECT: IIBs attempt to protect the bonds' purchasing power by tying interest and principal payments to an index of price changes, thereby protecting investors from inflation uncertainty.
Statement 3 – INCORRECT: Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There is no special tax treatment for these bonds.