🧷 Authentic Classroom Explanation by IAS Monk

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📌 The 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?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

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✅ Correct Answer: (a) 1 and 2 only

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🧠 Classroom Explanation

• Statement 1 is correct
  • Inflation-Indexed Bonds link returns to inflation (earlier WPI-linked in India).
  • If future inflation turns out lower than what markets expect, the government ends up paying lower effective interest, thus reducing borrowing costs.
  • Hence, IIBs help the government manage borrowing efficiently.
• Statement 2 is correct
  • IIBs protect investors against erosion of purchasing power.
  • Both principal and interest are adjusted for inflation, ensuring real returns.
• Statement 3 is NOT correct
  • There is no special tax exemption for IIBs.
  • Interest income and capital gains are taxable as per prevailing income-tax rules.

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🔍 Curiosity Raiser

Why did India quietly discontinue large-scale issuance of Inflation-Indexed Bonds despite their textbook advantages?

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🧘 IAS Monk Whisper

Inflation steals silently;
IIBs whisper back in real terms.