Yield curve shows India's better long-term growth prospects: RBI paper

The bond yield curve indicates an improvement in India’s long-term growth prospects and increase in inflation expectations, as also a tighter monetary policy in the coming days, a Reserve Bank of India research paper authored by Deputy Governor M D Patra and other researchers observed.

“The yield curve is indicating an improvement in long-term growth prospects and an upshift in ex-ante inflation expectations,” the study said. “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.”

The report found that in the Indian context it was the level and curvature of the yield curve rather than its slope that contained useful information on market expectations about economic prospects and inflation expectations.

The level of the yield curve has increased since 2021 after a steep decline during the pandemic. “Furthermore, the yield curve is concave compared to 2019, indicative of strengthening prospects for the recovery, higher inflation expectations, and hence market expectations of front-loaded monetary policy normalisation,” the report added.