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.

Answer: D. ALL THREE factors influence Indian Government Bond Yields. GOVERNMENT BOND YIELDS reflect the market's required return on sovereign debt and are influenced by multiple domestic and global factors. (1) US FEDERAL RESERVE ACTIONS: CORRECT. When the US Fed raises interest rates, global investors shift capital toward US treasuries (higher yields). FII outflows from Indian bonds push their prices DOWN and yields UP. Conversely, dovish Fed policy supports Indian bond inflows and lowers yields. Indian bond yields are clearly correlated with the US 10-year yield. (2) RBI ACTIONS: CORRECT. The RBI directly influences yields through: - Repo rate changes — higher repo raises short-term yields and the entire yield curve. - Open Market Operations (OMOs) — RBI buying bonds reduces yields; selling raises them. - G-SAP (Government Securities Acquisition Programme) introduced in 2021 explicitly to manage yields. - Forward guidance and stance signals. (3) INFLATION AND SHORT-TERM INTEREST RATES: CORRECT. Inflation expectations are the primary driver of long-term yields (bond investors demand a real return + inflation compensation). When inflation rises, investors demand higher nominal yields. Short-term rates form the floor on which the yield curve is built. Other influences (not in options but relevant): government fiscal deficit, public debt levels, currency movement, FPI flows, geopolitical risk. Source: RBI Monetary Policy Reports / NCERT Class 12 Macroeconomics.