What is the relation between bond yield and inflation in india?

Question

What is the relation between bond yield and inflation in india?

Answer 1

Inflation has the same effect as interest rates. When the inflation rate rises, the price of a bond tends to drop, because the bond may not be paying enough interest to stay ahead of inflation. Remember that a bond's coupon rate is generally unchanged for the life of the bond.

The longer a bond's maturity, the more chance that inflation will rise rapidly at some point and lower the bond's price. That's one reason bonds with a long maturity offer somewhat higher interest rates: they need to do so to attract buyers who otherwise would fear a rising inflation rate. (Another reason is that buyers want a higher interest rate if they are going to tie up their money longer.)