Scaling behaviour of Treasury rates in India

ABSTRACT

This study finds that the scaling properties of India’s nominal and real Treasury rates are time varying, as is their multiscaling behaviour. We observe an association between the scaling behaviour of interest rates and the stages of development of the bill market. Interest rate behaviour is influenced by structural reforms, microstructure changes, and improvement in the operational efficiency of the Treasury market. Our findings suggest that monetary policy shocks have a persistent effect, but rates eventually revert to the mean. We show that the adaptive market hypothesis helps to delineate the dynamics of an emerging market undergoing a series of institutional and structural changes.

KEYWORDS:

• Scaling properties
• long-range dependence
• interest rates
• Hurst exponents
• market efficiency
• adaptive markets
• Treasury bill (T-bill)
• Government securities

JEL CLASSIFICATION:

• G02
• G12
• G14
• G10
• C58

Acknowledgements

We thank the two anonymous referees and the Editor Ashima Goyal for their constructive and insightful comments. We acknowledge suggestions of T Di Matteo and Yue (Lucy) Liu and research assistance of Subhamitra Patra. Authors thank Indian Institute of Technology Kharagpur for travel grants to present the earlier version of the paper at 34th International Business Research Conference, London. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. For instance, the RBI introduced the primary dealers in G-sec market to bid for T-bills. Later, it allowed foreign institutional investment and domestic retail investment. In April 2017, the Securities and Exchange Board of India (SEBI) raised the cap on foreign investment in G-sec market.

2. A comparative analysis of pre- and post-liberalization dynamics is not possible because of data constraints. Moreover, testing of the EMH is irrelevant in the presence of explicit controls and administered rates.

3. We could not further microstructure analysis because of data constraints.

4. Inflation was the primary concern of the RBI’s monetary policy stances. In 2015, however, it adopted flexible inflation targeting. Hence, the direct formal testing of the influence of a policy regime switch and predictability of interest rates is constrained.

5. We estimated windows at different lengths but do not find significant differences in the current results and inferences. Results are available on request.

6. Results related to real Treasury rates are not reported to save the space. The figures and tables are available on request.

Additional information

Notes on contributors

Gourishankar S. Hiremath

Gourishankar S. Hiremath is currently Assistant Professor of Economics at Indian Institute of Technology Kharagpur and his areas of interest include financial economics and open economy macroeconomics.

Kritarth Jha

Kritarth Jha is currently pursuing higher studies at Faculty of Economics, University of Cambridge.

Ankur Agarwal

Ankur Agarwal has obtained Masters in Exploration in Geophysics from Indian Institute of Technology Kharagpur.