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.
- (a) 1 and 2 only
- (b) 2 only
- (c) 3 only
- (d) 1, 2 and 3 ✓ UPSC's answer
Why the answer is (d)
• Government bond yields reflect the return investors demand for holding government debt and respond to several forces.
• The RBI's policy rate, open-market operations and liquidity stance directly set the short end and shape the whole curve (item 2).
• Inflation and short-term interest rates drive yields because investors demand compensation for expected inflation and compare bonds with money-market returns (item 3).
• US Federal Reserve actions matter too: higher US rates draw foreign capital out of Indian bonds and push Indian yields up (item 1).
• Hence 1, 2 and 3, option (d).
Why the other options are wrong
- (a) 1 and 2 only
- Inflation and short-term rates also influence yields.
- (b) 2 only
- The Fed and inflation also matter, not the RBI alone.
- (c) 3 only
- RBI and Fed actions also affect yields.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.