Q36 (IAS/2021) Economy › Money, Banking & Inflation › Government securities debt Official Key

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

Web / Current Affairs

Online pages / news items supporting the statement

Web source

Presence: 5/5

"The announcement that quantitative easing would be scaled down pushed up T-bond yields and prompted investors to withdraw funds from countries"

Why this source?

Directly links Fed tapering announcements to higher US T-bond yields and capital withdrawal from emerging markets, a channel that can raise domestic bond yields.
Implies Fed policy tightening (or tapering) has real effects on emerging-market asset prices and investor flows, which affect local bond markets.

Web source

Presence: 5/5

"Quantitative easing in the United States is often identified as one of the drivers of asset price bubbles in several emerging economies. Conversely , a number of emerging market currencies came under stress following the U .S. Federal Reserve Chairman’s Congressional testimony on May 22, 2013 , which raised speculation of an early “tapering” of the asset purchasing program ."

Why this source?

States that US quantitative easing influenced asset price bubbles in emerging economies, indicating Fed policy affects emerging-market assets.
Notes that speculation of Fed 'tapering' caused stress in emerging-market currencies—another transmission channel to bond markets via capital flows and exchange rates.

Web source

Presence: 4/5

"Information on central bank balance sheets is from the RBI and the U.S. Federal Reserve Board, respectively. Finally, the interest rate abroad is measured through the yield on the 10-year U.S. Treasury bond."

Why this source?

Shows empirical analyses of Indian asset prices include US Federal Reserve data and the 10-year US Treasury yield, indicating researchers treat US monetary policy as relevant to Indian yields.
Using the US 10-year yield as 'interest rate abroad' implies a transmission channel from US policy/rates to Indian financial variables.

Indirect textbook clues (5)

How books hint at the answer

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 122

Strength: 4/5

“Which of the statements given above is/are correct? • (a) (i) only• (b) (ii) & (iii) only• (c) (i) & (iii) only• (d) All of the above• 45. Indian Government Bond Yields are influenced by which of the following? [2021] • (i) Actions of the United States Federal Reserve• (ii) Actions of the Reserve Bank of India• (iii) Inflation and short-term interest rates Select the correct answer using the code given below. • (a) (i) & (ii) only• (b) (ii) only• (c) (iii) only• (d) All of the above• 46.”

Why relevant

The exam question explicitly lists 'Actions of the United States Federal Reserve' as a possible influence on Indian government bond yields, indicating that textbooks treat Fed actions as a candidate factor to consider.

How to extend

A student could take this as a prompt to check historical episodes (e.g., Fed tightening) and compare timing with Indian yield moves and capital flows.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Indian Govt. securities will very soon join Global Bond Index > p. 48

Strength: 5/5

“This investment by foreigners will be treated as Govt. of India's external Debt.• More investment by foreigners in the Govt. of India bonds will lead to a lesser interest rate on Govt. bonds and hence lesser yield and this will also increase liquidity (more trade and easy conversion into cash) in Indian Govt. securities. This will also ease pressure on Govt. borrowing from the domestic market and hence domestic interest rate and yield will also come down.• Right now, when foreign investors (NRIs, FPIs) purchase corporate bonds or Govt. bonds in India then they require approval from SEBI. But if an investor wants to invest in Govt. securities through Global Bond Index, then this prior approval from SEBI needs to be removed.• Earlier there was a cap/ceiling as to how much non-residents (foreign) investors can invest in bonds in India.”

Why relevant

Explains that increased foreign investment in Indian government bonds (via global bond indices) lowers yields — showing that international capital flows into Indian bonds affect yields.

How to extend

A student can combine this with the fact that Fed policy affects global yields and investor risk/return, so Fed-induced capital flow changes could alter foreign demand for Indian bonds and thus yields.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 123

Strength: 4/5

“49. With reference to the Indian economy, consider the following statements: [2022] • 1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.• 2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market. 3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars. Which of the statements given above are correct? • (a) 1 and 2 only• (b) 2 and 3 only• (c) 1 and 3 only• (d) 1, 2 and 3• 50. With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"? [2022]• 1.”

Why relevant

States that changes in US/EU interest rates influence RBI foreign-exchange operations (RBI likely to buy dollars if US/EU rates fall), implying RBI reacts to foreign interest-rate moves.

How to extend

One could infer that if RBI adjusts FX/reserve operations in response to Fed moves, those operations (which affect liquidity) may in turn influence domestic bond yields.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.15 RBI's sources of Income and Economic Capital Framework > p. 76

Strength: 3/5

“The following are the various sources of income of RBI: • The Foreign Currency Assets (FCA) are around 90% of the Forex reserves. This FCA RBI has invested in US govt. bonds and it earns interest on that. It has also deposited some FCA with other Central Banks.• When RBI purchase Indian Govt. bonds from the OMO, then it earns interest on the holding of govt bonds/securities• Lending at Repo rate to banks• RBI acts as 'Debt Manager' of Central Govt and State Govt for which it gets commission/income.• Seigniorage Economic capital is a measure of risk in terms of capital.”

Why relevant

Notes RBI's Foreign Currency Assets are largely invested in US government bonds, directly linking RBI balance-sheet exposure to US government debt and yields.

How to extend

A student could reason that Fed actions that change US bond yields affect the value/returns on these assets and potentially RBI policy or reserve management, with knock-on effects for domestic interest rates and yields.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 42

Strength: 4/5

“Notice that in the previous case, Rs 100 in reserves could support deposits of Rs 400. But the banking system would now be able to loan Rs 300 only. It would have to call back some loans to meet the increased reserve requirements. Hence, money supply would fall. Another important tool by which the RBI also influences money supply is Open Market Operations. Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. When RBI buys a Government bond in the open market, it pays for it by giving a cheque.”

Why relevant

Describes RBI open market operations (buying/selling government bonds) as a tool that influences money supply and yields — showing how central bank actions can directly move domestic yields.

How to extend

Combining this with the idea that foreign central-bank (Fed) actions alter global liquidity/interest conditions, a student could investigate whether Fed moves prompt RBI OMOs that then change Indian yields.

Which of the following are the sources of income for the Reserve Bank of India? I. Buying and selling Government bonds II. Buying and selling foreign currency III. Pension fund management IV. Lending to private companies V. Printing and distributing currency notes Select the correct answer using the code given below.

Which of the following action(s) by the Government would lead to contraction of money supply in the economy? 1. Purchase of Treasury Bills by the central bank from public 2. Sale of Treasury Bills by the central bank to public 3. Sale of foreign exchange by the central bank 4. Purchase of foreign exchange by the central bank Select the correct answer using the code given below : (a) 1 and 4 only (b) 1 and 3 only (c) 2 and 3 only (d) 2 only

With reference to the Indian economy, consider the following statements : 1. 'Commercial Paper' is a short-term unsecured promissory note. 2. 'Certificate of Deposit' is a long-term instrument issued by the Reserve Bank of India to a corporation. 3. 'Call Money' is a short-term finance used for interbank transactions. 4. 'Zero-Coupon Bonds' are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations. Which of the statements given above is/are correct ?

Consider the following statements regarding Reserve Bank of India : I. It is a banker to the Central Government. II. It formulates and administers monetary policy. III. It acts as an agent of the Government in respect of India’s membership of IMF. IV. It handles the borrowing programme of Government of India. Which of these statements are correct ?

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

Explanation

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