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:

The correct option is 1, 2 and 3.

Government bond yields represent the interest rate the government pays to borrow money by issuing bonds. The yield is influenced by a variety of domestic and international macro-economic factors:

1. Actions of the United States Federal Reserve: Monetary policy actions, such as interest rate changes by the US Federal Reserve, significantly impact global capital flows. When the US Fed raises its policy rates, foreign portfolio investors (FPIs) often move capital out of emerging markets like India and invest in US Treasuries. This outflow of capital leads to a decrease in demand for Indian government bonds, causing bond prices to fall and bond yields to rise.

2. Actions of the Reserve Bank of India (RBI): The RBI directly influences domestic liquidity and interest rates through monetary policy tools such as Repo Rate, Cash Reserve Ratio (CRR), and Open Market Operations (OMOs). When the RBI increases policy rates to control inflation, bond yields tend to rise. Conversely, rate cuts or bond-buying OMOs increase demand for bonds, driving bond prices up and yields down.

3. Inflation and Short-Term Interest Rates: High inflation erodes the real purchasing power of future fixed income payments (coupons). Investors demand higher yields to compensate for the higher inflation risk. Additionally, short-term interest rates set the base cost of borrowing in the economy; as short-term rates shift, long-term bond yields adjust accordingly to maintain parity in money markets.

Therefore, all three factors—the US Federal Reserve actions, Reserve Bank of India actions, and inflation alongside short-term interest rates—play a crucial role in influencing Indian Government Bond Yields.