Civil Services Prep

Prelims 2021 · Economy · Question 6

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

  1. 1 and 2 only
  2. 2 only
  3. 3 only
  4. 1, 2 and 3

Answer

1, 2 and 3

1. Actions of the United States Federal Reserve — US Fed rate changes affect global capital flows, dollar yields, and risk sentiment; this can influence demand for Indian government securities and their yields. Verdict: Correct.

2. Actions of the Reserve Bank of India — RBI policy rates, liquidity operations, OMOs, and bond purchases/sales directly affect government bond prices and yields in India. Verdict: Correct.

3. Inflation and short-term interest rates — Bond yields reflect inflation expectations and the prevailing interest rate environment; higher inflation/short-term rates generally push yields up. Verdict: Correct.

Hence, all three influence Indian Government Bond Yields.

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