India's g-sec yield curve is indicating improvement in longer term economic growth prospects, said an RBI article published in its monthly bulletin. Deputy governor Michael Patra is one of the authors of the article.
The article noted that the yield curve is indicating an upshift in ex ante inflation.
"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," the article stated.
The article, which does not represent institutional view, said the slope of the yield curve steepened with the onset of pandemic-related policy easing, which has reversed in the recent policy tightening phase, where the RBI has hiked rates by 0.90 per cent in two actions since May 4.
It explained that 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 yield curve is concave compared to 2019 levels, indicative of strengthening prospects for the recovery, higher inflation expectations and hence market expectations of front-loaded monetary policy normalisation," it said.
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, it said.
As regards the level, it said the level of the yield curve has increased since 2021 after a steep decline during the pandemic, it said.
The 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, it said.
(With inputs from PTI)
The article noted that the yield curve is indicating an upshift in ex ante inflation.
"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," the article stated.
The article, which does not represent institutional view, said the slope of the yield curve steepened with the onset of pandemic-related policy easing, which has reversed in the recent policy tightening phase, where the RBI has hiked rates by 0.90 per cent in two actions since May 4.
It explained that 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 yield curve is concave compared to 2019 levels, indicative of strengthening prospects for the recovery, higher inflation expectations and hence market expectations of front-loaded monetary policy normalisation," it said.
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, it said.
As regards the level, it said the level of the yield curve has increased since 2021 after a steep decline during the pandemic, it said.
The 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, it said.
(With inputs from PTI)
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