Yield curve indicating improvement in long-term growth prospects: RBI Bulletin

Mumbai, June 16

The yield curve is indicating an improvement in India’s long-term growth prospects and an upshift in ex-ante (based on forecasts) inflation expectations, according to an article in RBI’s latest monthly bulletin.

At the same time, the fact that the yield curve has become steeper and concave reconfirms expectations of tighter monetary policy in the period ahead.

“We find that in the Indian context, it is the level and curvature of the yield curve rather than its slope that contain useful information on market expectations about economic prospects and inflation expectations,” per the article “What is the Yield Curve Telling Us About the Economy?”, put together by four senior RBI officials, including Deputy Governor MD Patra.

Level is equal to the average yield on all maturities; Slope is the difference between 30 years and 3 months yield;

Curvature is 2 times 10 years yield minus the sum of 30 years and 3 months yields.

The level of the yield curve has increased since 2021 after a steep decline during the pandemic, the authors said.

Furthermore, the yield curve is concave compared to 2019 levels, indicative of strengthening prospects for the recovery, higher inflation expectations and hence market expectations of front-loaded monetary policy normalisation.

The officials assessed that the spread between 3 months and 2 years yields increased, resulting in an increase in curvature (concavity) of the yield curve, indicative of an upbeat economic outlook amidst rising inflation expectations.

The long-term spread (between 3 months and 10 years yields) also declined sharply indicating expectations of monetary policy tightening, going forward.

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