The Long-Run Determinants of Indian Government Bond Yields
Asian Development Review 36:1 March 2019
38 Pages Posted: 27 Mar 2019
Date Written: March 4, 2019
This paper investigates the long-term determinants of the nominal yields of Indian government bonds (IGBs). It examines whether John Maynard Keynes’ supposition that the short-term interest rate is the key driver of the long-term government bond yield holds over the long run, after controlling for key economic factors. It also appraises if the government fiscal variable has an adverse effect on government bond yields over the long run. The models estimated in this paper show that in India the short-term interest rate is the key driver of the long-term government bond yield over the long run. However, the government debt ratio does not have any discernible adverse effect on IGB yields over the long run. These findings will help policy makers to (i) use information on the current trend of the short-term interest rate and other key macro variables to form their long-term outlook about IGB yields, and (ii) understand the policy implications of the government’s fiscal stance.
Keywords: government bond yields, India, interest rates, monetary policy
JEL Classification: E43, E50, E60, G10, O16
Suggested Citation: Suggested Citation