The downward trend in liquidity and the inversion of the yield curve may continue for some time, experts say. (Representative photo: Reuters)
An inversion of the bond yield curve is generally seen as an indicator of an imminent recession; is it the same for India? check the details
For the first time since May 2015, India’s bond yield curve witnessed an inversion, with the yield on the 364-day Treasury bill briefly rising above the yield on the benchmark 10-year bond. This came after the yield on 364-day notes rose to 7.48 percent, the highest since October 2018.
The RBI sold 364-day notes at a yield of 7.48 percent on Wednesday, while the benchmark 10-year 2032 bond yielded 7.26 percent at 7.4728 percent and ended at 7.4547 percent.
In May 2015, the 1-year note last traded higher than the 10-year note.
What are bonds and their yield?
A bond is a fixed income instrument that represents a loan from an investor to a borrower (usually a corporate or government). Bonds are used by companies, municipalities, states and sovereign governments to finance projects and operations. According to Investopedia, bondholders are debtors or creditors of the issuer. In India, 10-year government securities (G-Sec) is the benchmark bond.
Yield is the yield of bonds. For example, if a person buys a bond worth Rs 5,000 with a coupon rate of 5 per cent per annum (or a fixed interest rate), he will get an income of Rs 250 per year. If the bond price falls to Rs 4,000 for any reason, the returns will be higher in percentage terms given the same coupon rate and time period. Thus, bond prices and yields move in opposite directions. When bond prices fall, yields rise and vice versa.
What is an inverted bond yield curve?
An inversion of the bond yield curve is when short-term bond yields (say 365 days) are higher than long-term (monthly 10-year) yields. India’s 1-year government bond yield was higher than the country’s benchmark 10-year bond on Wednesday.
Why has India’s bond yield curve shifted?
The inversion was driven by higher-than-expected cuts in Treasury bill sales in India, which in turn stemmed from liquidity shortages in the banking system.
Geojit Financial Services Chief Investment Strategist V.K. “Liquidity crunch and yield curve inversion may continue for some time,” Vijayakumar said.
What does this mean for India?
According to Vijayakumar, an inversion of the bond yield curve is generally seen as an indicator of an impending recession. But this correlation between yield curve inversion and recession is found only in developed countries and not in developing countries like India.
“This will not affect India’s FY24 GDP growth,” he said.
Is this happening only in India?
No. Developed countries, first of all the USA, are facing this. The yield on two-year U.S. Treasury notes hit 5.08% on Wednesday, its highest level since 2007. Critically, long-term yields have remained in check, with the 10-year yield below 4% and 30-year bond yields low.
According to forex traders, the rise in interest rates in the US is likely to strengthen the dollar against the rupee and as a result Indian imports may become more expensive.
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