Q. Indian Government Bond Yields are influenced by which of the following? - Actions of the United States Federal Reserve
- Actions of the Reserve Bank of India
- Inflation and short-term interest rates
Select the correct answer using the code given below. (UPSC Prelims 2021)
Answer:
1,2 and 3
Notes: The correct answer is
[D] 1, 2 and 3. Government bond yields represent the return an investor receives on their investment in government debt, and they are highly sensitive to both domestic and global factors.
- Actions of the US Federal Reserve (Statement 1 – Correct): The US Fed is the world's most influential central bank. When it raises interest rates, capital often flows out of emerging markets like India toward the US in search of safer, higher returns. This "capital flight" leads to a sell-off in Indian bonds, causing bond prices to fall and yields to rise.
- Actions of the RBI (Statement 2 – Correct): The RBI influences yields through monetary policy tools like the Repo Rate and Open Market Operations (OMO). If the RBI increases the Repo Rate, the cost of borrowing rises, typically leading to an increase in bond yields. Conversely, when the RBI buys bonds through OMOs, it increases liquidity and pushes yields down.
- Inflation and short-term interest rates (Statement 3 – Correct): Inflation erodes the purchasing power of future coupon payments. Therefore, if inflation is high, investors demand higher yields to compensate for the loss in value. Short-term market interest rates also serve as a benchmark; if they rise, bond yields must follow to remain competitive.