Correct Option
- Actions of the United States Federal Reserve: Changes in the US Federal Reserve's monetary policy, such as interest rate adjustments, influence global capital flows. An increase in US interest rates can make US government bonds more attractive to international investors, potentially leading to capital outflows from emerging markets like India. This reduced demand for Indian government securities (G-Secs) can lead to a rise in Indian bond yields to attract investors.
- Actions of the Reserve Bank of India: The Reserve Bank of India (RBI) directly influences Indian government bond yields through its monetary policy tools. These include Open Market Operations (OMO), where the RBI buys or sells government securities to manage liquidity, and policy rate adjustments (e.g., repo rate, reverse repo rate). For instance, an increase in the repo rate or OMO sales of government securities by the RBI typically leads to higher bond yields.
- Inflation and short-term interest rates: Inflation expectations significantly impact bond yields. Investors demand a higher yield to compensate for the erosion of purchasing power due to anticipated inflation. Therefore, higher inflation expectations generally lead to higher bond yields. Short-term interest rates, determined by the central bank's policy, serve as a benchmark for longer-term rates and reflect the prevailing monetary policy stance, thereby influencing bond yields.
Incorrect Options
Options (a), (b), and (c) are incorrect because they exclude one or more factors that significantly influence Indian Government Bond yields. All three factors listed in the question (actions of the US Federal Reserve, actions of the Reserve Bank of India, and inflation and short-term interest rates) are crucial determinants of bond yields.