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Changes in interest rates have impact short-term bonds: RBI-backed Study

The impact on shorter maturities builds over time and the peak impact occurs with a lag of around six months

Brokers trade at their computer terminals at a stock brokerage firm in Mumbai. Photo: Reuters
Brokers trade at their computer terminals at a stock brokerage firm in Mumbai. Photo: Reuters

Changes to monetary policy have a stronger impact on yields of short-term bonds than on longer-dated securities. That long-held view received an emphatic backing from researchers in the Reserve Bank of India. An empirical study covering moves from April 2004 to March 2018 showed the impact of policy rate on yields weakens as the tenure of the bonds increases. The impact on shorter maturities builds over time and the peak impact occurs with a lag of around six months. For five- and 10-year maturities, there is an over-shooting of yields in the initial month as markets seem to ...