In bond markets, interest rates are the most important factor, and the RBI controls interest rates.
RBI uses various rates like repo, reverse repo and CRR to give direction to interest rates in the country. Lets us understand each one of these in detail.
Repo comes from the words 'repurchase obligation'. In case of tight liquidity conditions (as you saw in 2008), when banks need funding for the short term, they approach the RBI and ask for a temporary loan. RBI gives them a loan only after taking some collateral. This collateral is Government Securities (G-Secs). (What are G-Secs? Next article will focus on that!)
So banks give G-Secs to RBI and take money to meet their temporary requirements. The interest rate which RBI charges to banks for such short-term loan is known as the repo rate. After the short-term period is over, banks have the obligation to repay the money back to RBI, along with the interest and 'buys back' its G-Secs, hence the word repurchase obligation.
It must be understood that when RBI does not want more money to go into the economy, it will raise this rate. When repo rate increases, the cost of money for banks also increases. Banks in turn increase the interest rates for their borrowers (that is, people like you and me). This prevents borrowers from taking loans from banks and thus RBI's objective of controlling money supply is achieved.
The only fallout of this is that while inflation gets controlled growth slows down as people don't borrow.
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