`Yield Curve’ as a Predictor of the Behavior of the Economy: An Empirical Evidence from the Indian Economy

Economists often tend to use complex and complicated models to predict the path of the economy and the likelihood of recession. The present paper explores the scope of using the yield curve as a tool to predict the future behavior of the economy by analyzing interest rate movements during the last 30 years and studying the relationship between the interest rates, maturity premium and expected inflation. The effects of real GNP and long term real interest rates on investment expenditure behavior during 1971- 2001 have also been discussed. The whole approach to the analysis of relationship between various macroeconomic fundamentals and the inferences that could be drawn from the yield curve are basically aimed at facilitating a practicing banker to cultivate the habit of looking at these macroeconomic fundamentals with ease and accordingly manage their assets and liabilities in such a fashion that net interest margin always remains healthy.