The Term Structure of Interest Rates in India: Analysing the Post-Pandemic Monetary Policy Stance

Prasanth C. (), Lekha Chakraborty () and Nehla K. Shihab ()
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Prasanth C.: National Institute of Public Finance and Policy
Lekha Chakraborty: National Institute of Public Finance and Policy
Nehla K. Shihab: National Institute of Public Finance and Policy

Working Papers from National Institute of Public Finance and Policy

Abstract: Against the backdrop of the new Monetary Policy Committee (MPC) decisions to maintain the status quo policy rates, we analyse the post-pandemic monetary policy stance in India. Using high-frequency data, the term structure of interest rate is analyzed incorporating monetary aggregates, fiscal deficit, inflation expectations and capital flows. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, which reinforces that term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows, and inflation expectations, while it was inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyse the efficacy of high interest rate regime on public debt management. Our results also refute the popular belief that deficits determine interest rates in the context of emerging economies.

Pages: 30
Date: 2024-10
New Economics Papers: this item is included in nep-ban and nep-cba
Note: Working Paper 419, 2024
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