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EFFECTS OF MACROECONOMIC FACTORS AND POLICY ACTIONS ON BOND YIELDS

By Harsh M Sankhala

OBJECTIVE
To study the behavior Bond Yields with changes in macro-economic factors and policy actions Factors considered are:
Inflation IIP GDP LAF Monetary

Policy Fiscal Policy

Limitations:
Effect

of individuals factors are studied by not considering the effect of other factors

DETERMINANTS OF INTEREST RATES

INFLATION AND BOND YIELDS

Irving Fisher: the nominal interest rate equals an expected real interest rate plus expected inflation. Nominal Interest= Real Interest + Expected Inflation Inflation () Bond Yield ()

INFLATION AND BOND YIELD


1 2 1 1 1 0 8 9 8 7 6 5 5 4 3 2 2 1 0 -1 1 4 7 1 0 9

5 8 5 /2 /0

2 /0 /2 6

1 /1 /0 0 0 6

6 7 7 /1 /0

2 2 8 /2 /0

1 /2 /0 0 9 8

7 /0 /6 9

3 3 0 /1 /1

1 /1 /1 1 8 0

7 6 1 /2 /1

4 /1 /1 2

T e(m n /Y a ) im o th e rs

1 Y a G I Y ld % 0 e r o ie

Y YIn tion% o fla

INFLATION AND BOND YIELD

Anomalies in Region A: Borrowing sharply shot up above Rs.3,00,000 Cr The year 2008-09 witnessed five announcements of the issuance calendar Average auction size crossed Rs.10,000 Cr The average borrowing per day crossed Rs.1,000 Cr touching as high as around Rs.1,650Cr Multi-security auctions, three and sometimes even four securities were auctioned The coefficient of correlation between 10 year GoI Yield and inflation is 0.53

REGRESSION EQUATION
Variable Yield Inflation Yield( t-1) Type Dependent Independent Independent Details Monthly yield of 10 year GoI securities/Bond YoY % change in inflation Monthly Yield of 10 year GoI bond for the period( t1) Inflation for the period (t1)

Inflation (t-1)

Independent 0.72289777

Adjusted R Square

Equation of Yield: Yield = 0.09132572*Inflation YoY % + 0.79168237*Yield -0.0746825*Inflationt-1 % + 1.50853416

t-1

FORECASTED YIELD

IIP AND BOND YIELD

INFERENCES FROM GRAPH

Region 1

Region 2:

The period from June 2008 to October 2009 is covered in this region Government borrowed huge sum of about 6 lac crores from the debt market during this period The region is characterized by slow down in the beginning At the end of the period RBI has cut the repo rate , CRR rate which improved liquidity situation and hence yields

The period from June 2010 to December 2011 is covered in this region The Liquidity in the system was soaked by RBI to contain inflation There were almost 8 rate hikes the repo rate peaked at around 8% Government borrowing also high during this period of about 4,70,000 cr. Hence despite lower IIP numbers the yield increased

REGRESSION EQUATION
Variable Yield IIP Yield( t-1) IIP (t-1) Type Dependent Independent Independent Independent Adjusted R Square 0.67370096 Details Monthly yield of 10 year GoI securities/Bond YoY % change in Index Yield of 10 year GoI bond for the period( t-1) IIP for the period (t-1)

quation of Yield: ield = 0.0100743*IIP

YoY %

+ 0.80970662*Yield

t-1

-0.0029625*IIPt-1 % + 1.44510072

FORECASTED YIELD

GDP AND BOND YIELD

REGRESSION EQUATION
Variable Yield GDP (T-4) Yield (T-1) Type Dependent Independent Independent Details 10 year GoI Bond Yield % change in GDP (YoY) for the period (T-4) 10 year GoI Bond Yield for the previous month 0.687

Adjusted R Square Equation of Yield:

Yield = 0.0217 *GDP t-4 + 0.8225 *yield t-1 + 1.2064

PREDICTIVE POWER OF YIELDS

LIQUIDITY AND YIELD

LIQUIDITY- OMO

CENTRAL GOVERNMENT BORROWINGS

MONETARY POLICY RATES AND T-BILL YIELD

MONETARY POLICY RATES AND 10 YEAR GOI BOND

REGRESSION EQUATION
Variable Yield Inflation Yield( t-1) Type Dependent Independent Independent Details Monthly yield of 10 year GoI securities/Bond YoY % change in inflation Monthly Yield of 10 year GoI bond for the period( t1)
% change in GDP (YoY) for period ( t-4 YoY % change in Index

GDP (T-4) IIP

Independent Independent

CRR Repo Rate

Independent Independent

RBI Cash Reserve Ratio rate RBI Repo Rate

C0RRELATION
Yield T-Bill yield Yield T-1 GDP T-4 Inflation IIP CRR Repo Yield Spread Yield 1.000 .682 .825 .241 .535 .300 .454 .584 .144 1.000 .694 .304 .504 .064 .547 .905 .446 T-Bill yield

REGRESSION OUTPUT
Adjusted R 0.772

Equation of Yield:
Yield = 0.3432 *T-Bill yield + 0.6312* Yield T-1 -0.1005 *GDP T-4 -0.00037764 *Inflation + 0.0185* IIP + 0.0740*CRR -0.3215* Repo -0.1602 *Yield Spread +3.013728

CONCLUSION

REFERENCES

Data Source: http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home https://www.ccilindia.com/Research/Pages/Introduction.a