Official Answer Key & Detailed Solution
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Correct Answer: Option (D) — 1, 2 and 3
Concept & Option Breakdown
Standard Reference VerifiedAll three factors significantly influence domestic sovereign bond yields:
- US Federal Reserve Actions: Interest rate changes in the US lead to cross-border capital reallocation (FPI flows), directly impacting the demand and yield of Indian sovereign bonds.
- RBI Actions: Monetary policy tools (repo rate changes, open market operations, CRR adjustments) directly determine domestic liquidity and sovereign yield curves.
- Inflation and Short-Term Rates: Expected inflation erodes the real return on fixed coupon payments, forcing investors to demand higher nominal yields.
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