Paper identifies monetary uncertainty
The Reserve Bank of India’s (RBI) latest paper on term premium captures the investors’ expectations of future central bank policy, inflation and growth shocks.
The Working Paper, “Term Premium Spillover from the US to Indian Markets”, also highlights risk-neutral rate which reflects expectations of future short-term rates.
The Paper, authored by Archana Dilip, was placed on RBI website on 30 Dec 2019.
The paper estimates and analyses term premium in India and makes an assessment of interconnectedness and transmission of shocks from the US term structure of sovereign bond yields to that of India.
The term premium is estimated by decomposing the yield into two components – and term premium which captures the investors’ expectations of future central bank policy, inflation and growth shocks, explained RBI in a press release.
The paper identifies inflation volatility and monetary policy uncertainty as the two important factors influencing term premium in India.
Further, empirical findings indicate that the spillovers between the US treasury yields and government security yields in India have increased during the sample period from April 2009 to April 2019.
The paper finds stronger spillover with increased financial integration and volatile bond markets.
The paper concludes that for the long-term yields, the term premium channel is a stronger transmission channel as compared with the risk-neutral rates channel. fiinews.com