"Rising US Bond Yields Test India's Macroeconomic Resilience"
Yield spread
the gap between two bonds' yields, often used to compare risk between countries
Basis point
one-hundredth of a percentage point, used to measure small interest rate changes
A government bond is a loan that an investor makes to a government. The government pays interest, called a coupon, and repays the loan at maturity. A bond's yield is its real annual return at the current market price. Yield and price move in opposite directions. For decades, US Treasuries carried the world's lowest yields. Investors saw them as the safest asset on earth. Emerging economies like India had to offer higher yields to attract the same money. Investors saw them as riskier.
India's own government bonds are called G-Secs. Domestic banks, insurance firms and pension funds buy them mainly. Foreign investors can also buy G-Secs. But they can only buy within limits set by the Reserve Bank of India (RBI). Indian yields are not decided alone, though. Indian G-Sec yields respond to Fed rate decisions, RBI operations, and domestic inflation and interest rates acting together. This is why a sharp rate move in Washington can quickly change what the Indian government pays to borrow at home. In 2013, the US Federal Reserve signalled an end to easy money. India faced a similar squeeze at the time. The RBI opened the FCNR(B) deposit window to pull in foreign currency and defend its reserves.
When inflation is high, the RBI typically sells (not buys) government securities. This reduces money supply and cools demand. When the rupee depreciates rapidly, the RBI sells dollars to support the currency. When US or EU interest rates fall, foreign investors seek higher returns elsewhere. The RBI then buys dollars to prevent excessive rupee appreciation from capital inflows.
The India-US yield spread is the gap between the 10-year Indian G-Sec yield and the 10-year US Treasury yield. A narrower India-US yield spread limits how much foreign capital flows into Indian bonds. Investors earn less extra return for taking on India's risk. They compare this with safer US debt. US yields have now risen fast. They are at their highest level since 2007. This gap shrinks unless Indian yields rise just as fast. A shrinking spread can also pressure the rupee. Some foreign money may prefer the now higher, safer US return.
Higher global yields also raise India's own fiscal risk. When the government borrows for long periods, this is called long-tenor issuances. …
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.
With reference to the Indian economy, consider the following statements:
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?
Consider the following statements: 1. A sharp rise in Brent crude oil prices tends to weaken the Indian rupee. 2. A weaker rupee tends to lower India's imported inflation. Which of the statements given above is/are correct?
Which of the following best describes the relationship between a bond's market price and its yield?
The FCNR(B) scheme is best associated with which of the following?
Match List I with List II and select the correct answer using the code given below.
List I (Term): 1. SDL 2. G-Sec 3. FCNR(B) 4. Yield spread
List II (Description): a. Bonds issued by state governments b. Bonds issued by the central government c. Scheme for NRI foreign currency deposits d. Difference between two bonds' yields
Consider the following statements regarding India's recent macroeconomic position: 1. Domestic institutional investors now own more of India's capital markets than foreign institutional investors. 2. India's fiscal deficit is on a declared glide path toward 3% of GDP. Which of the statements given above is/are correct?
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