Consider the following statements about Inflation-Indexed Bonds (IIBs):
1. They are a type of dated government securities designed primarily to protect investors from the impact of inflation.
2. They protect the real value of the principal against inflation and not the interest.
3. They are currently linked to the Wholesale Price Index (WPI).
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 1 only
(c) 2 only
(d) 1, 2 and 3
Explanation Statement 1 is correct: Inflation-Indexed Bonds (IIBs) are dated government securities introduced by the Government of India to shield investors from inflation risks. These bonds are part of the government’s debt management strategy, offering a fixed real return over and above inflation.
Statement 2 is not correct: Inflation-Indexed Bonds (IIBs) bonds adjust both the principal and the interest to reflect inflation. For example, if inflation rises, the principal amount gets indexed, and interest is calculated on this revised principal. This mechanism ensures the real return (inflation-adjusted return) remains constant, unlike conventional bonds.
Statement 3 is not correct: Initially, when IIBs were introduced in June 2013, they were linked to the Wholesale Price Index (WPI). However, this was later revised. In 2014, the government decided to issue IIBs linked to the Consumer Price Index (CPI) to better reflect retail inflation, which affects households more directly.
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