Prelims · Economy & social development · 31 questions

Capital markets, insurance & financial instruments

Every UPSC Prelims question on this topic, 2016–2026, newest first. Tap an option to check yourself; the answer and explanation open below it.

Asked in 10 of 11 years · most in 2024 (5)

UPSC syllabus: “Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.” See the full syllabus →

Prelims 2022 · Q5

Medium

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?

Answer & explanation

Answer: (a) 1 and 2 only

Because the principal and payouts of an IIB rise with inflation, investors do not need an extra premium for inflation risk, so the government can borrow at a lower (real) coupon while investors are shielded from inflation. There is no tax break: normal tax rules apply to both interest and capital gains.

✓ 1. The RBI's technical paper on IIBs lists cost savings for the government, partly by removing the risk premium that lenders charge for uncertain inflation, so the coupon can be set lower in real terms.
✓ 2. The principal is indexed to inflation and the coupon is paid on the indexed principal, so the investor's real return is protected when prices rise.
✗ 3. The RBI's FAQ says existing tax provisions apply to interest and capital gains on IIBs; there is no special tax treatment.

Remember · IIBs: principal indexed to inflation, real coupon; cheaper borrowing for government (no inflation risk premium) and inflation protection for investors; fully taxable as usual.

Sources

Reserve Bank of India — A technical paper on Inflation Indexed Bonds (IIBs) ↗ “Inflation indexed bonds (IIBs) provide insurance to investors from inflation and cost savings for the Government on account of reduction in coupon payments with lowering inflation rate, elimination of uncertainty risk premium, and containing inflationary expectations.”
Reserve Bank of India — FAQs: Inflation Indexed Bonds (IIBs) ↗ “Extant tax provisions will be applicable on interest payment and capital gains on IIBs. There will be no special tax treatment for these bonds.”

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink ·

Prelims 2022 · Q63

Medium

Consider the following statements:

1.In India, credit rating agencies are regulated by Reserve Bank of India.
2.The rating agency popularly known as ICRA is a public limited company.
3.Brickwork Ratings is an Indian credit rating agency.

Which of the statements given above are correct?

Answer & explanation

Answer: (b) 2 and 3 only

SEBI, not the RBI, regulates credit rating agencies in India, so statement 1 is wrong. ICRA Limited and Brickwork Ratings India are both Indian agencies registered with SEBI, so statements 2 and 3 are correct.

✗ 1. Credit rating agencies are regulated by SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999. The RBI only accredits agencies to rate bank loans and similar instruments under its own guidelines.
✓ 2. ICRA Limited is a public limited company, as its name under company law shows (a private company would be 'Pvt. Ltd.'); it is on SEBI's list of registered rating agencies.
✓ 3. Brickwork Ratings India Pvt. Ltd. is an Indian agency on SEBI's list of registered credit rating agencies, with its registered address in Bengaluru.

Remember · SEBI regulates credit rating agencies (CRA Regulations, 1999); the RBI merely accredits them for bank-loan ratings.

Sources

SEBI, Frequently Asked Questions on Credit Rating Agencies (March 2026) ↗ “Credit ratings of securities that are listed, or proposed to be listed, on a recognized stock exchange, and other credit ratings that are required under various SEBI Regulations or circulars thereunder are regulated by SEBI.”
SEBI, Names and registered addresses of Credit Rating Agencies ↗ “5. Brickwork Ratings India Pvt. Ltd. 3rd Floor, Raj Alkaa Park 29/3 & 32/2, Kalena Agrahara Bannerghatta Road, Bangalore … 3. ICRA Limited 1105, Kailash Building, 11th Floor 26, Kasturba Gandhi Marg New Delhi”

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink ·

Prelims 2022 · Q65

Medium

With reference to Convertible Bonds, consider the following statements:

1.As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
2.The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.

Which of the statements given above is/are correct?

Answer & explanation

Answer: (c) Both 1 and 2

UPSC's key treats both statements as correct. A convertible bond can be swapped for the issuer's shares; a plain fixed-interest bond loses purchasing power when prices rise.

✓ 1. UPSC's official key treats this statement as correct; we could not confirm the detail from an official source, so we do not explain it here.
✓ 2. Interest on a plain bond is a fixed amount, and inflation reduces the purchasing power of a fixed rate of interest. UPSC's official key treats this statement as correct; we could not confirm the rest of the detail from an official source, so we do not explain it here.

Remember · Convertible bond = bond plus option to turn into shares. A plain fixed-interest bond loses purchasing power to inflation.

Sources

FINRA (US), Bonds: glossary of terms ↗ · reference work “A convertible bond is a bond with the option to convert into shares of common stock of the same issuer at a pre-established price.”
US SEC, Investor.gov glossary: Convertible Securities ↗ “A "convertible security" is a security—usually a bond or a preferred stock—that can be converted into a different security—typically shares of the company's common stock.”
US SEC, Investor.gov: Bonds ↗ “Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.”

Question and answer: UPSC's official GS Paper I (2022, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 1 Oct 2026 (how we verify). Permalink ·

The same topic in Mains

Economy: planning, growth & employmentGS 3 syllabus
Investment modelsGS 3 syllabus

Capital markets, insurance & financial instruments

Prelims 2022 · Q5

Prelims 2022 · Q63

Prelims 2022 · Q65

The same topic in Mains

More in Economy & social development