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. 

(a) 1 and 2 only 

(b) 2 only 

(c) 3 only 

(d) 1, 2 and 3 

Answer: d

Explanation:

Actions of the United States Federal Reserve:

If the federal government cuts interest rates, then borrowing costs will be lowered, and spending and investment will be encouraged in the US; such action has impact worldwide.

Actions of the Reserve Bank of India:

RBI controls short-term interest rates and uses monetary policy to manage inflation and liquidity. When RBI raises interest rates, Bond Yields automatically rises. 

Inflation and short-term interest rates: 

Inflation- It can reduce the real returns on bonds, causing investors to demand higher yields.

Short-term interest rates- Interest rates are a key part of a nation’s monetary policy.  With short-term bonds, this risk is not as significant because interest rates are less likely to change substantially in the short term. Short-term bonds are also easier to hold until maturity, thereby alleviating an investor’s concern about the effect of interest rate-driven changes in the price of bonds.

Hence, option d is correct.

Read: Solved Economy PYQs With Explanation 2021 UPSC Prelims