Q. Indian Government bond yields are influenced by which of the following?
1. Action of the United States Federal Reserve
2. Action 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

Answer: D

Why this question) Recently, the Reserve Bank of Indias (RBI) decision to step up purchase of Government Securities (G-Sec) under the Government Securities Acquisition Programme (G-SAP) led to the yield on the benchmark 10-year bond falling below 6%.  

Ans) d 

Exp) Option d is correct. 

Statement 1 is correct.  

Hike in interest rate in the US by United States Federal Reserve leads not only to an outflow of funds from equities into US treasury bonds, but also to an outflow of funds from emerging economies to the US. Thus, it impacts Indian Government Bond Yields in negative manner. 

Statement 2 is correct.  

The multifaceted roles played by the RBI in the payment system, monetary policy, financial stability policy, and policy coordination with the Treasury gives it the operational ability to influence government bonds nominal yields by setting and changing the short-term interest rate and using other tools of monetary policy as it deems appropriate. 

Statement 3 is correct.  

Short-term interest rate and pace of inflation are the key drivers of interest rates on government bonds. 

Source)  adev_a_00127.pdf (silverchair.com) 

Explained: Federal Reserve signals, and Indian markets | Explained News,The Indian Express 

Subject) Economics