Question
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?
Explanation
Statement 1 is correct: Because IIBs remove the inflation-risk premium investors would otherwise demand, the government can borrow at a lower coupon rate.
Statement 2 is correct: Since the principal and coupon are indexed to inflation (WPI/CPI), investors are protected from inflation uncertainty.
Statement 3 is incorrect: IIBs get no special tax exemption — both the interest and capital gains are taxed under normal rules.