Yield Curve Dynamics of the Indian G-Sec Market: A Macro-Finance Approach

We examine the interactions between monetary policy and the term structure of the g-sec market in India through a SVAR model comprising macroeconomic variables and latent factors of the yield curve. Among macroeconomic factors, while monetary policy has the dominant impact on level and curvature, the exchange rate largely determines slope of the yield curve. Moreover, the level is found to be an important input for monetary policy decisions. Despite the persistence of large fiscal deficits, the g-sec market is found to be strongly influenced by policy measures implying that the central bank has a distinct role in market development.