Our honourable Prime Minister Mr. Narendra Modi has shocked the entire nation with latest demonetisation policies. This is one of the most crucial steps towards ending corruption. Everyone in nation is joyful with the strong decision. This hot topic has high chances to appear in upcoming banking exams, either under the category of current affairs or Money and banking.

Let’s understand what Demonetisation is. Demonetisation means banning or taking back currency unit of its status under legal terms. So, speaking in current scenario, notes of Rupees 500 and 1000 has been legally demonetised for circulation effective from 9^th November 2016.

According to NITI Aayog Vice Chairman Arvind Panagarjya, demonetisation will help in lowering the inflation rate. It is being said that yields on sovereign Bonds softened after the government announced that the present Rs. 500 and Rs. 1,000 currency notes will not be a legal tender from November 9.”

Now, let us understand these important and highlighting terms: Bond Price, Yield and Demand Relationship.

Bond Price, Yield and Demand relationship and meaning:

1. Bond prices and yields have an inverse relationship. This means, rise in one would result in a fall in the other. To rephrase it, when bond prices go up, bond yields will go down and when bond prices are decreasing, bond yields are increasing.
2. Bond yields may be seen as the profit one makes from the bond investment. Lesser one pays for a bond by way of bond price, the greater the profit will be at selling the bond at its fixed price at the time of maturity and higher would be the yield. Conversely, the more one pays for a bond, the smaller will be the profit and thus the lower yield.
3. Bond yields are considered to be a very good indicator of demand in the stock market, and demand for money, as Bond and stocks, and currency compete with each other for the same amount of money. Simply saying, a person having some money as investible surplus will invest it in the bonds if he is more concerned about safety and invest in stocks if s/he thinks that better returns can be had from the stock market.  Same logic goes for the relation between Bonds and Currency as well.
4. Coming to the instant situation, Mr Panagariya has said that, “All these makes me believe that there could be some moderation in inflation in the short term,” Mr. Panagariya said at the Economic Editors’ Conference on Friday. (Because) “Yields on sovereign bonds softened:
5. Explanation: According to him, Yields on bonds have softened or decreased. This would mean price of Bonds would increase and thereby demand of bonds would decrease, and people will sell bonds. By selling bonds they would get money, and thereby money supply will increase. The increased money supply may reduce inflation, if the same money is not going into bonds.

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News Source: The Hindu