Question 49 from UPSC CSE 2021 - Economics

Question

Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.

Accepted Answer

Correct Option: D. 1, 2, and 3

Strategy: Select the option that encompasses all three primary drivers of Indian government bond yields: actions by the US Federal Reserve, domestic policy by the Reserve Bank of India, and the influence of inflation and short-term interest rates.

Key Info: Government bond yields indicate the return investors receive on Indian government securities. They are inversely related to bond prices.

**Major factors influencing yields include:**

- **Actions of the United States Federal Reserve:** US Fed interest rate policy impacts global capital flows. Higher US rates often attract funds away from emerging markets like India, increasing domestic yields as demand for rupee-denominated bonds falls. Movements in the US dollar and global risk appetite affect the yield curve.

- **Actions of the Reserve Bank of India (RBI):** RBI controls the monetary policy stance in India, influencing liquidity and the benchmark policy rates (repo/reverse repo). Rate hikes usually increase yields, while rate cuts reduce them. RBI's open market operations, statutory liquidity ratio changes, and interventions in the bond market also directly affect costs and returns for government securities.

- **Inflation and short-term interest rates:** Higher inflation reduces the real return from bonds, prompting investors to demand higher yields. Short-term interest rates influence the overall cost of borrowing and the yield curve shape (the spread between short- and long-term yields).

**Other contextual factors:**

Other influences include the government's fiscal deficit and borrowing requirements, external account pressures, and global economic developments. The Indian government's bond market is a key tool for public debt management, and its yields are a benchmark for loans and corporate bonds across the economy.

Answer

Option A: 1 and 2 only

Answer

Option B: 2 only

Answer

Option C: 3 only

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.

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.