Q. With reference to the India 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. IIGs 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?

  • 1 and 2 only
  • 2 and 3 only
  • 1 and 3 only
  • 1, 2 and 3

Answer: (a) 1 and 2 only

Inflation-Indexed Bonds
  • Inflation-indexed bonds or IIBs is a type of bond designed to protect investors from the rising inflation, which is the rise in the overall price level of goods and services in an economy over time. As inflation erodes the purchasing power of money, it can adversely affect individuals and create economic instability. However, these bonds serve as a shield against inflation by offering a fixed rate of return that accounts for changes in the inflation rate. Both the principal amount and interest payments on these bonds are adjusted to maintain their real value, ensuring that investors’ investments are safeguarded from the impacts of inflation.
  • IIBs are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation. Government can reduce coupon rates on its borrowing by way of IIBs.
    • An inflation-indexed bond protects both investors and issuers from the uncertainty of inflation over the life of the bond.
    • Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds.
  • Features of Inflation Indexed Bonds:
    • Coupon payments: Twice a year, you will receive a fixed interest payment on the adjusted principal amount of your investment.
    • Investment term: These bonds are issued for a period of 10 years.
    • SLR status: As government securities (G-secs), these bonds are eligible for Statutory Liquidity Ratio (SLR) status, which means that banks and other financial institutions are required to hold a certain percentage of their assets in G-secs.
    • Objective: These bonds are designed to protect the savings of the middle class and the poor from inflation.
    • Investment limits: Individual investors can invest up to Rs. 10 lakh per year, while institutional investors can invest up to Rs.25 lakh per year. The minimum investment amount is Rs. 5000.
  • Benefits of Inflation-Indexed Bonds:
    • Protection against inflation: IIBs provide protection against inflation by adjusting the principal amount and interest payments for inflation, which ensures that the real value of the investment is maintained.
    • Issued by the government: IIBs are issued by the central government, which makes them a safe investment option.
    • Fixed rate of return: IIBs offer a fixed rate of return that is adjusted for inflation, which provides investors with a predictable income stream.
    • Tradable: IIBs are tradable on stock exchanges, which provides investors with liquidity and the ability to exit their investment before maturity.
Features of IIBs