Government securities and bond yields: why prices and yields move opposite
Why in news: India's benchmark 10-year government bond yield rose to 7.40% on 12 October 2026 after the RBI's liquidity-withdrawal measures announced on 9 October.
Government bonds, or G-Secs, are how the Centre and the States borrow from investors; the yield is the return a buyer earns, and it climbs when the bond's market price drops. India's benchmark 10-year yield rose 10 basis points to 7.40% on 12 October 2026, after the RBI took steps to withdraw surplus liquidity from banks.
Syllabus: GS3 · Indian Economy & Growth; GS3 · Government Budgeting
Why this matters for UPSC
Bond yields sit in GS3 (Indian economy, mobilisation of resources, monetary policy). Prelims asks how G-Secs, treasury bills, open market operations and the cash reserve ratio work; Mains asks why rising yields raise borrowing costs and what China's falling yields signal.
In short
A government security (G-Sec) is a tradeable instrument acknowledging the Centre's or a State's debt; its yield, the return a buyer locks in, moves inversely to its price.
Bond yields are the economy's price of money; India must let them signal inflation risk while fiscal restraint and steady liquidity management keep borrowing affordable.
Why it matters
A family repaying a home loan, a small firm seeking working capital and a State government building roads all borrow at rates that sit above the G-Sec yield. When that yield climbs, banks and bond markets reprice loans upward, so instalments rise and fewer projects make sense. The government's own interest bill grows too, leaving less money for schools and hospitals. Savers in debt mutual funds may see their holdings lose value as bond prices fall, although new buyers lock in better returns. China shows the opposite danger: yields that fall because people are too cautious to spend point to a weak economy, not a healthy one.
Prelims pointers
- Treasury bills: issued by the Centre in 91-day, 182-day and 364-day tenors; zero-coupon, sold at a discount and redeemed at face value.
- Section 21A of the RBI Act, 1934: the RBI may manage a State's public debt by agreement with that State.
- Article 293(3): a State needs the Centre's consent to borrow while any loan from the Centre to it is outstanding.
- Statutory Liquidity Ratio: kept under Section 24 of the Banking Regulation Act, 1949, in cash, gold or unencumbered approved securities such as G-Secs.
- Open market operations: outright RBI purchase or sale of G-Secs; a sale absorbs durable liquidity, a purchase injects it.
- Monetary Policy Committee: six members under Section 45ZB of the RBI Act, 1934; it fixes the policy repo rate to meet the inflation target.
- Liquidity Adjustment Facility corridor: the Standing Deposit Facility rate is the floor; the Marginal Standing Facility rate sits 25 basis points above the repo rate.
- Cash reserve ratio: the average daily balance a bank keeps with the RBI as a share of its net demand and time liabilities.
Practise a UPSC-style question
With reference to government securities in India, consider the following statements:
1. Treasury bills are issued by the Central Government but not by the State Governments.
2. Treasury bills pay interest to the holder through a half-yearly coupon.
3. State Development Loans qualify as investments for the Statutory Liquidity Ratio.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Show the answer
Answer: (c) 1 and 3 only
Answer: (c) 1 and 3 only. Treasury bills are the Centre's zero-coupon paper; SDLs count for SLR.
Statement 1: correct. The Central Government issues treasury bills and dated securities; State Governments issue only dated securities, called State Development Loans.
Statement 2: incorrect. Treasury bills are zero-coupon: they are issued at a discount and redeemed at face value, the difference being the investor's return.
Statement 3: correct. Like the Centre's dated securities, SDLs qualify for the Statutory Liquidity Ratio and serve as collateral under the Liquidity Adjustment Facility, per the RBI.
Eliminate: statement 2 is the surest, since treasury bills carry no coupon. Out: (a), (b), (d).
Trap: Sounds right. Dated securities pay half-yearly coupons, so a coupon on treasury bills sounds natural but does not exist.
Remember: T-bills: Centre only, discount, no coupon. SDLs: States' dated paper, SLR-eligible.
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