2021 GS Paper I, all questions

UPSC Prelims 2021 · GS Paper I

Question 6: Economy and Social Development

Indian Government Bond Yields are influenced by which of the following?

  1. 1.Actions of the United States Federal Reserve
  2. 2.Actions of the Reserve Bank of India
  3. 3.Inflation and short-term interest rates

Select the correct answer using the code given below.

a1 and 2 only
b2 only
c3 only
d1, 2 and 3

AnswerUPSC’s answer is (d).

Government bond yields move inversely with bond prices, and several forces move those prices. Inflation and short-term interest rates set investors' required return. RBI actions such as repo-rate changes, open market operations and liquidity management shift yields directly. US Federal Reserve actions matter because changes in US rates move foreign investors' money into and out of Indian debt and affect the rupee. Remember: yields respond to domestic policy, inflation and global rates together.

  • 1. Fed moves change global capital flows into Indian debt.
  • 2. RBI rate action, bond operations and liquidity management move yields directly.
  • 3. Higher inflation and short rates raise the return investors demand.

How you could have got this

  1. If you were sure statement 1 is correct, (b) and (c) go: each of them leaves 1 out.

    What you needed to know: Fed moves change global capital flows into Indian debt.

  2. Then, if you were sure statement 3 is correct, (a) goes: it leaves 3 out.

    What you needed to know: Higher inflation and short rates raise the return investors demand.

Only (d) is left. You didn’t need statement 2.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Wrong: it leaves out inflation and short-term rates, which also move yields.
  • (b) Wrong: the RBI matters, but so do the Fed and inflation.
  • (c) Wrong: inflation and rates matter, but so do the RBI and the Fed.
  • (d) Right: all three influence Indian bond yields.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.