UPSC CSE Prelims
Question 63
With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)" ?
- Government can reduce the coupon rates on its borrowing by way of IIBs.
- IIBs provide protection to the investors from uncertainty regarding inflation.
- The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct ?
View correct answer and explanation
Correct answer: A
Correct Option: A (1 and 2 only)
Explanation: Inflation-indexed bonds protect investors’ real purchasing power through inflation-linked payments, allowing issuers potentially to offer lower nominal coupon rates.
Statement / Pair / Item-wise Analysis:
1. True / qualifies - Indexation compensates inflation, so coupon rates can be lower than comparable nominal bonds.
2. True / qualifies - Linking principal or payouts to an inflation index reduces erosion of real investment value.
3. False / does not qualify - IIB interest/capital gains are not universally exempt from Indian taxation.
Option-wise Analysis:
A. Correct-selects exactly the correct statements/items identified above.
B. Incorrect-includes 3 even though IIB interest/capital gains are not universally exempt from Indian taxation.; omits 1 even though Indexation compensates inflation, so coupon rates can be lower than comparable nominal bonds.
C. Incorrect-includes 3 even though IIB interest/capital gains are not universally exempt from Indian taxation.; omits 2 even though Linking principal or payouts to an inflation index reduces erosion of real investment value.
D. Incorrect-includes 3 even though IIB interest/capital gains are not universally exempt from Indian taxation.