How does a change in the Repo Rate impact government bonds?

A change in the Repo Rate can have an impact on government bonds, particularly in terms of their yields. The Repo Rate serves as a benchmark interest rate in the economy, and it influences the overall interest rate environment.

When the central bank raises the Repo Rate, it signals a tightening of monetary policy and a desire to curb inflation or manage economic growth. As a result, interest rates in the economy tend to rise, including the yields on government bonds. This happens because investors demand higher yields on bonds to compensate for the increased cost of borrowing and the perceived risk associated with higher interest rates.

Conversely, when the central bank lowers the Repo Rate, it indicates an expansionary monetary policy and an attempt to stimulate economic activity. In this scenario, interest rates in the economy generally decline, leading to a decrease in government bond yields. Lower yields on government bonds can make them relatively more attractive to investors seeking fixed income investments, potentially driving up demand for government bonds.

It's important to note that the impact of a change in the Repo Rate on government bond yields can also be influenced by other factors such as market sentiment, inflation expectations, overall economic conditions, and global interest rate trends. Investors analyze these factors along with the Repo Rate to make investment decisions in government bonds.