The IUP Journal of Applied Finance
Impact of Global and Domestic Economic Variables on 10-Year Indian Government Bond Yield: An Empirical Study

Article Details
Pub. Date : Aprill, 2022
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF010422
Author Name : Ashok Panigrahi, Mohit Sisodia and Kushal Vachhani
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 19



Many research studies related to the impact of monetary policy and macroeconomic variables have already been conducted, but studies on combining this with global factors and its shocks are very few. To fill this research gap, the paper tries to find out the combined effect of global factors, macroeconomic variables, and monetary policy on 10-year Indian government bond yield using Structural Vector Autoregression (SVAR) and Autoregressive Distributive Lag (ARDL) model. This paper is designed to analyze the impact of various variables on 10-year Indian government bond yield, in the context of its continuous exposure to global factors like oil price shocks and changes in macroeconomic variables. The empirical findings, based on monthly data relating to the period January 2001 to April 2021, suggest that monetary policy has had a considerable impact on bond yields over a long-term horizon, which appears to be consistent with the prevailing Keynes theory. However, the output has the least impact on bond yield. This may be because the monthly data that is used in the study restricts to use GDP. Hence the Index of Industrial Production (IIP) data is used. Further, inflation shocks increase bond yields and global factors like oil price shocks have detrimental effects on bond yields for a long-time horizon of 24-36 months, whereas an increase in the 10-year US government bond yield results in an increase in 10-year Indian government bond yield.


Recently, the Reserve Bank of India (RBI) launched the 'Retail Direct Scheme' through which retailers can directly invest in government securities. This becomes crucial for retailers to understand the impact of variables that are affecting the yield curve of Indian government securities and make their investments accordingly in both short and long-term horizons. The fiscal deficit (the gap between revenue and expenditure) of the Indian government is increasing year on year. To cover this gap, three options are generally followed, namely, small savings, disinvestment, and borrowings. The major portion of the deficit is normally covered by borrowings. Due to the Covid-19 pandemic, government borrowings have increased enormously and the major borrowings are done through the bond market. Bond market participants are limited in number, hence to deepen and make the market more efficient, it is important to introduce new players. In India, there is a huge base of retail investors and through the Retail Direct Scheme, it is possible to tap this base of investors. However, the success of this scheme is yet to be seen. Initially, retail investors generally try to invest in benchmarks such as 5-year, 10-year and 14-year maturity securities to make safer bets as high