X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Is India's yield curve inverted? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 22, 2011

    Is India's yield curve inverted?



    In our previous article we discussed the basics of yield curves. In this article, we aim to understand the nature of yield curves in India currently. We will also try and understand a little bit about inverted yield curves.

    If you recently opened a newspaper, or even visited the grocery store you would have noticed one thing. The price of everything seems to be going in one direction, up! Inflation has hit the economy hard. To battle this monster, the central bank has been aggressively using its monetary tools. Just last week, the RBI raised its key policy rates once again, making this the tenth rate hike since March 2010. The repo rate (rate at which RBI lends to banks) now stands at 7.5%, an increase of 2.75%. Through these moves, the RBI hopes that it can curb demand, reduce credit growth and thus control inflation.

    But, what impact are the RBI's moves having on government bond yields? Has India's yield curve inverted?

    Inverted yield curves

    According to Investopedia: "An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields." It is also called as a negative yield curve. In this case there is a negative relationship between yields and time to maturity.

    Why is this indicator so ominous? Just as dark clouds hovering in the sky indicate that rain is on the horizon, an inverted yield curves is a strong indicator of a recession. An inversion of the yield curve preceded six out of America's last seven recessions over the past four decades. When short term rates are higher than long term rates, the outlook for the future is typically bleak. So, with its latest rate hike, has the RBI forced the country into a recession?

    India's G-Sec yield curve

    Well, we cannot say that the current yield curve in India is completely inverted. Rather, it exhibits some form of partial inversion. This, according to Investopedia "is when only some of the short-term treasury papers(5 or 10 years) have higher yields than the 30-year treasury papers do."

    Source: Bloomberg, Reuters


    Between the 6 month and 1 year rates we can see some inversion. This means that if the govt. had to borrow for 6 months, it could have to pay a higher yield than what it would pay if it had to borrow for 1 year. The short end of the yield curve is higher as a consequence of RBI's hawkish stance and ongoing rate hikes We can also see that the Indian yield curve is flattish, since there is not much difference between the 1 year and ten year rates, as can be seen in the chart above. As per the current data the difference is around 0.12%. Even if the government had to borrow for 30 years, yields would be around the 8.6%, while for 3 months it is at 8.1%.

    Our emerging market peers are also in similar situations. Brazil has hiked its key interest rate four times this year to 12.25%, since it is also facing the heat of inflation. China's yield curve is also relatively flat, with a less than 1% difference between 1 year and ten year yields.

    The flattening of India's yield curve, beyond the one year mark shows that interest rates may moderate in the future, and the battle against inflation may be won. But, economic growth may also see some moderation as a consequence.

    One can also see a slight kink, at the 10 year mark where the yields are lower than at other maturities. Does this also show inversion? Well, since, ten year government bonds are highly liquid, they command a higher price, and thus lower yields. This is due to inverse relationship between bond prices and yields.

    So will inflation win the battle or will growth moderate due to the rate hikes? In our final article in this series we will focus on the impact these yield curves, and how they affect companies, banks, and benchmark indices.

     

     

    Equitymaster requests your view! Post a comment on "Is India's yield curve inverted?". Click here!

    1 Responses to "Is India's yield curve inverted?"

    pradeep

    Jun 23, 2011

    I no economist, however for a growth economy is this not natural. As the country grows, we should expect the interest rates and inflation to fall (if we can manage debt), in which case we should expect long term yields to be lower than short term ones as they are bumped up by imported inflation

    Like (1)
      
    Equitymaster requests your view! Post a comment on "Is India's yield curve inverted?". Click here!
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 21, 2017 (Close)

    MARKET STATS