Q5.
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?
Answer
A
Explanation
Inflation-indexed bonds in India were issued by RBI in 2013 and benchmarked to WPI. Statement 1 is correct: economists argue IIBs could reduce government borrowing costs because when inflation falls, the effective coupon rate also falls (e.g., if coupon is WPI+1.5% and WPI drops from 4% to 2%, rate drops from 5.5% to 3.5%). Statement 2 is correct: IIBs protect investors by adjusting the principal with an inflation index, ensuring real returns. Statement 3 is incorrect: Extant tax provisions are applicable on interest payment and capital gains on IIBs — no special tax treatment is provided.