What is the Yield Curve telling us about the Indian economy?

RBI’s Bulletin (Jun-2022) has several interesting research articles.

Michael Debabrata Patra, Joice John, Krishna Mohan Kushwaha and Indranil Bhattacharyya discuss whether yield curve tells us anything about Indian economy. Typically when yield curve is inverted meaning short term interest rates are higher than long term interest rates, one expects a recession.

So what does the yield curve say about Indian economy:

The government securities yield curve is widely regarded as a valuable predictor of future macroeconomic developments. Following the dynamic latent factor approach suitably modified to fit Indian conditions, this article uses a state space yield-macro model to show that in contrast to advanced economies, it is the level and curvature of the yield curve rather than its slope that contain useful information on market expectations about economic prospects and inflation expectations.


    • The government securities yield curve contains important clues on the likely behaviour of the economy.
    • The slope of the yield curve steepened with the onset of pandemic-related policy easing which has reversed in the recent policy tightening phase.
    • The curvature increased sharply during the pandemic-related easing and after the Union Budget announcement of a large market borrowing programme for 2021-22 till the announcement of G-SAP in April 2021.
    • The yield curve is indicating an improvement in long-term growth prospects and an upshift in ex ante inflation expectations. At the same time, the fact that the yield curve has become steeper and concave reconfirms expectations of tighter monetary policy in the period ahead.

Curvature is defined as 2*10 year yield – (3 months yield + 30 years yield).

RBI should also release data/code of the analysis.


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