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?

Statements 1 and 2 are correct because IIBs allow the government to pay lower coupon rates by eliminating the inflation risk premium, while simultaneously protecting investors' purchasing power by adjusting both principal and interest to an inflation index (like CPI or WPI). Statement 3 is incorrect because interest income and capital gains on IIBs are generally taxable under the Income Tax Act, making options (b), (c), and (d) wrong. The core concept tested is the mechanism of Inflation-Indexed Bonds as a hedging tool that aligns sovereign borrowing costs with real interest rates rather than nominal rates.