Indian Government Bond Yields are influenced by which of the following

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

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1 and 2 only

2 only

3 only

1, 2 and 3

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This question was previously asked in

UPSC IAS – 2021

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Indian Government Bond Yields are influenced by a multitude of factors, both domestic and international. The actions of the Reserve Bank of India (RBI), as the central bank, directly impact domestic interest rates through its monetary policy tools like the repo rate, reverse repo rate, and open market operations. These actions significantly shape the domestic yield curve. Inflation expectations play a crucial role, as bond investors demand higher yields to compensate for the loss of purchasing power due to rising prices. Short-term interest rates set by the RBI influence the short end of the yield curve, and expectations about future RBI actions affect longer-term yields. Furthermore, in an interconnected global economy, the actions of major central banks like the United States Federal Reserve have spillover effects. Changes in US interest rates and monetary policy influence global capital flows, investor sentiment towards emerging markets like India, and the relative attractiveness of Indian bonds compared to US Treasury bonds, thereby influencing Indian bond yields.

Bond yields are determined by the interplay of supply and demand for bonds, which is affected by monetary policy (domestic and international), inflation expectations, and overall economic conditions and risk perception.

Other factors influencing bond yields include government borrowing requirements (fiscal policy), credit rating of the sovereign, liquidity in the market, global economic outlook, and geopolitical events.

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