Inflation spurs spike in bond yield; rupee hits 1-month low
- June 16, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Inflation spurs spike in bond yield; rupee hits 1-month low
Subject : Economics
Context : India’s benchmark 10-year bond yield closed at its highest level in more than six weeks while the rupee ended at a one-month low on the back of a larger-than-expected surge in retail inflation.
Concept:
- The benchmark 10-year bond yield ended at 6.04%, after touching 6.05%, its highest since April 30 and up 4 basis points on the day.
- Retail inflation rate rose 6.3% year-on-year in May, from 4.29% in April and sharply above analysts’ estimate of 5.3%. The wholesale price inflation rate rose 12.9%, its highest in at least two decades.
Bond Yields
- Bond yield is the return an investor realizes on a bond. The mathematical formula for calculating yield is the annual coupon rate divided by the current market price of the bond
- Bond: Is an instrument to borrow money. A bond could be issued by a country’s government or by a company to raise funds.
- Coupon Rate: It is the rate of interest paid by bond issuers on the bond’s face value.
- Yield curve: It is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.
- The slope of the yield curve gives an idea of future interest rate changes and economic activity.
Factors affecting the yield:
- Monetary policy of the RBI (interest Rates), fiscal position of the government and its borrowing programme, global markets, economy, and inflation.
- A fall in interest rates makes bond prices rise, and bond yields fall.
- Rising interest rates cause bond prices to fall, and bond yields to rise.
- To control high inflation: the interest rate is increased.