UPSC Prelims 2021 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.

Explanation: 

• Bond yield is the return an investor gets on that bond or on a particular government security. There is an inverse relationship between bond price & bond yield. Thus, when bond prices go up, bond yield falls & vice-versa. Following three major factors which affect bond prices are – inflation, interest rates (monetary policy) & credit ratings.
  
  
• The monetary policy of the United States Federal Reserve has an impact on Indian Financial Markets. Traditionally, when bond yields rise in the US, FPIs move out of Indian equities. Also, it has been seen that when the bond yield in India goes up, it results in capital outflows from equities and into debt. So, point 1 is correct.
  
  
• When bond yields rise, the RBI has to offer a higher cut-off price/yield to investors during auctions. This means borrowing costs will increase at a time. So, point 2 is correct.
  
  
• Inflation and interest rates in the economy are key factors that determine yields. Both factors determine how much money people can spend in the market and impact the demand and G-sec and influence the bond yield. So, statement 3 is correct.
  
  

Therefore, option (4) is the correct answer.

Subject: Economics | Financial Sectors and Capital Market