UPSC Essentials | Mains answer practice — GS 3 : Questions on influence of bond yields on the monetary policy and CCUS technology (Week 141)

QUESTION 2

Discuss the role of carbon capture, utilisation, and storage (CCUS) technology in India’s decarbonisation efforts. Highlight the barriers to large-scale deployment of carbon capture technology in India.

QUESTION 1: Discuss how changes in government bond yields influence the transmission of monetary policy in India.

Relevance: Recent large government borrowing programmes and volatile G-sec yields after the Union Budget have raised concerns about impaired monetary policy transmission despite unchanged repo rates. Government bond yields highlight issues of RBI autonomy, fiscal–monetary coordination, and Centre–State financial relations, all core GS-II governance themes.

Introduction:

— The bond market reacted sharply as the benchmark 10-year government bond yield climbed to its highest level in more than a year, a day after Finance Minister Nirmala Sitharaman presented the Union Budget and announced a record gross borrowing plan for 2026–27.

— Rising yields signal falling bond prices, reflecting selling pressure from investors.

Body:

— Higher yields indicate rising funding costs across the financial system. As yields climb, the government must offer higher returns to attract investors, increasing its borrowing costs. This, in turn, puts upward pressure on interest rates across the banking system, affecting loans, deposits, and overall liquidity conditions.

— Analysts say the rise in yields reflects expectations of sticky inflation and the possibility that interest rates may remain elevated or even rise further. Persistently higher yields can intensify upward pressure on interest rates and may also prompt a shift in savings from bank fixed deposits to sovereign bonds, as the yield gap widens in favour of government securities.

— Rising yields typically mean investors expect higher interest rates ahead and therefore sell bonds they already hold. Since bond prices move inversely to yields, higher rates reduce the market value of existing bonds, leading to potential capital losses for investors who exit before maturity.

— As bond prices fall, the net asset values (NAVs) of debt mutual funds, especially those with significant exposure to government securities, tend to decline. Corporate bonds, which are priced at a spread over government securities, also come under pressure as benchmark yields rise.

— Bond yields represent the annual return an investor expects to earn by holding a security until maturity, taking into account both interest payments and the principal repayment relative to the purchase price. Because bond prices and yields move in opposite directions, a rise in yields automatically translates into lower bond prices in the secondary market.

Conclusion:

— Higher bond yields can also have spillover effects on equity markets, as rising interest rates increase financing costs for companies and make fixed-income investments relatively more attractive, potentially dampening equity valuations.

(Source: Benchmark 10-year bond yields rise on record borrowing plan announced in Budget)

Points to Ponder

Relationship between bond yield and bond price

Read about RBI Monetary Policy

Related Previous Year Question

What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation. (2024)

QUESTION 2: Discuss the role of carbon capture, utilisation, and storage (CCUS) technology in India’s decarbonisation efforts. Highlight the barriers to large-scale deployment of carbon capture technology in India.

Relevance: CCUS links to India’s international climate commitments (Paris Agreement, NDCs, Net-Zero 2070) and climate diplomacy. The Union Budget’s push towards carbon capture solutions reflects India’s attempt to balance climate action with industrial growth and export competitiveness amid global measures like CBAM.

Introduction:

— As defined by the Department of Science and Technology, Government of India, “Carbon Capture, Utilization, and Storage programme aims to reduce carbon emission by either storing or reusing it so that captured carbon dioxide does not enter the atmosphere.”

— CCUS is not a single technology. It refers to a variety of different technologies and approaches that ensure that the emitted carbon dioxide — the main cause of global warming and consequent climate change — does not get into the atmosphere.

Body:

— For India, which expects its emissions to grow in the near and medium term due to construction and industrial expansion, CCUS is critical. In the past few years, particularly after it announced its intention to attain net-zero status by 2070 at the Glasgow climate conference in 2021, India has been pushing for development and deployment of indigenous CCUS technologies that are suited to its specific needs and circumstances.

— The CCUS technologies are particularly relevant for industrial sectors that find it extremely hard to eliminate carbon dioxide. In these industries, like steel or cement, a majority of CO2 release comes from the production process rather than from burning of fuel. CCUS solutions are the only way out for reducing the carbon footprint of these industries.

How CCUS works

— CCUS is a crucial facilitator of large-scale industrial decarbonisation. This support is crucial for the cement sector since it enables the adoption and scaling up of CCUS technology while also meeting the country’s long-term infrastructure needs.

— CCUS plays a “critical role in India’s efforts to reduce CO2 emissions by half by 2050 and achieve net-zero status by 2070.””Net zero” refers to the reduction of greenhouse gas emissions to the point that they can be neutralised by absorption (either naturally or through artificial removal procedures), resulting in zero total emissions.

Barriers to the deployment of carbon capture technology

— Such technologies have been around for decades, but their deployment has been extremely limited, mainly because of cost and safety considerations, and difficulties in scaling them up. Still, barely 50 million tonnes of CO2 are currently captured every year globally, to be stored or utilised. That is less than half a per cent of the nearly 40 billion tonnes of CO2 that is emitted every year.

Status of CCUS projects

— The NITI Aayog report noted that “Because of the high mobilization and laying expenses, the economics of CCUS cluster projects in the initial years is quite challenging due to lower CO2 volumes and the outsized infrastructure created.”

— A 2023 report from the London School of Economics (LSE) also explained, “The amount of CO2 that needs to be captured through CCUS to deliver large-scale emission reductions is much larger than the current market for CO2 usage.”

Conclusion:

— But with countries struggling to make any significant reduction in their actual emissions, CCUS technologies hold the key to achieving net-zero status. There is no future pathway in which the world is able to keep global warming in check and achieve a global net-zero status by 2050 without a significant intervention from CCUS technologies.

(Source: Why India needs carbon capture solutions, challenges it faces, Union Budget | Rs 20,000 cr for Carbon Capture Utilisation and Storage tech: How it works, and the push for it)

Points to Ponder

Read more about CCUS technologies

What are the different types of CCUS technologies

Related Previous Year Questions

What is Carbon Capture, Utilization and Storage (CCUS)? What is the potential role of CCUS in tackling climate change? (2025)

The adoption of electric vehicles is rapidly growing worldwide. How do electric vehicles contribute to reducing carbon emissions and what are the key benefits they offer compared to traditional combustion engine vehicles? (2023)

Previous Mains Answer Practice

UPSC Essentials: Mains answer practice — GS 3 (Week 140)

UPSC Essentials: Mains answer practice — GS 3 (Week 139)

UPSC Essentials: Mains answer practice — GS 2 (Week 140)

UPSC Essentials: Mains answer practice — GS 2 (Week 139)

UPSC Essentials: Mains answer practice — GS 1 (Week 138)

UPSC Essentials: Mains answer practice — GS 1 (Week 139)

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