A Keynesian explanation of Indian government bond yields

Abstract

John Maynard Keynes held that the central bank’s actions mainly determine long-term interest rates through short-term interest rates and various monetary policy measures. His conjectures about the determinants of long-term interest rates were made in the context of advanced capitalist economies and were based on his views on liquidity preference, ontological uncertainty, and the formation of investors’ expectations. Is Keynes’s conjecture that the central bank’s action is the main driver of long-term interest rates valid in emerging markets, such as India? This paper empirically investigates the determinants of changes in Indian government bonds’ nominal yields. Changes in short-term interest rates, after controlling for other crucial variables, such as changes in the rate of inflation and the rate of economic activity, take a lead role in driving the changes of the nominal yields of Indian government bonds. This suggests that Keynes’s views on long-term interest rates can also be applicable to emerging markets. The empirical findings reveal that higher fiscal deficits do not appear to exert upward pressures on government bond yields in India.

Key words:

• Central bank
• emerging markets
• government bond yields
• India
• interest rates
• Reserve Bank of India

JEL Classifications:

• E43
• E50
• E60
• O16

Notes

¹See “Country and Lending Groups,” http://data.worldbank.org/about/country-and-lending-groups (accessed Aug 10, 2015).

²The relevant quotes from Keynes are available in the working paper version, Akram and Das (2015).

³Additional econometric results, using a more extensive data set from across the yield curve of IGBs, are available in the working paper version, Akram and Das (2015).

Additional information

Notes on contributors

Tanweer Akram

Tanweer Akram is director of global public policy and economics at Thrivent Financial, Minneapolis, Minnesota.

Anupam Das

Anupam Das is an associate professor in the Department of Economics, Justice, and Policy Studies at Mount Royal University, Alberta, Canada.