Q56. 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.
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1, 2 and 3
Answer: (d)
- Statement 1 is correct: Bond yield is the return an investor gets on that bond or on a particular government security. It depends on the price of the bond which is impacted by its demand. The major factors affecting the yield are the monetary policy of the Reserve Bank of India, especially the course of interest rates, the fiscal position of the government and its borrowing program, global markets, the economy, and inflation. Actions of the United States Federal Reserve can impact the investments flowing in India. The investments by foreign players in government securities can be affected by this. This will lead to a change in demand of government securities thereby impacting its yield.
- Statement 2 is correct: The actions of the Reserve Bank determine the liquidity and also the cost of funds available in the economy through its various inflation management tools. The cost of funds will directly impact the demand of government securities in the market and thereby influencing its yield.
- Statement 3 is correct: Inflation and short-term rates determine the purchasing capacity of the people in the economy. Therefore, this also has an impact on the demand and price of government -securities thereby influencing the yield
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