Definition
Bond Yield and Government Borrowing
The yield on government bonds reflects the cost at which the government borrows and is influenced by the size of its borrowing programme, inflation and RBI policy.
When the government borrows more through dated securities, the increased supply can push bond yields higher, raising its own and the wider economy's cost of funds. Yields also respond to inflation expectations, the RBI's policy stance and global rates.
A higher G-sec yield feeds into loan pricing across the economy, so the government and RBI work to keep the market borrowing programme orderly. The benchmark ten-year yield is watched as a barometer of fiscal credibility and macro conditions.
Related terms
- Market Borrowing (Dated Securities)Market borrowing is the money the government raises by issuing dated securities — long-term bonds — to investors to finance its fiscal deficit.
- Government Securities (G-Sec)Government securities are tradable debt instruments issued by the central or state governments, considered virtually free of credit risk in rupee terms.
- Crowding Out EffectCrowding out occurs when heavy government borrowing raises interest rates or absorbs available savings, reducing the funds available for private investment.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.