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Interest Rate Modeling and Forecasting in India

Author

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  • Pami Dua

    (Department of Economics, Delhi School of Economics, Delhi, India and Economic Cycle Research Institute, New York)

  • Nishita Raje

    (Department of Economic Analysis and Policy, Reserve Bank of India)

  • Satyananda Sahoo

    (Department of Economic Analysis and Policy, Reserve Bank of India)

Abstract

The study develops univariate (ARIMA and ARCH/GARCH) and multivariate models (VAR, VECM and Bayesian VAR) to forecast short- and long-term rates, viz., call money rate, 15-91 days Treasury Bill rates and interest rates on Government securities with (residual) maturities of one year, five years and ten years. Multivariate models consider factors such as liquidity, Bank Rate, repo rate, yield spread, inflation, credit, foreign interest rates and forward premium. The study finds that multivariate models generally outperform univariate ones over longer forecast horizons. Overall, the study concludes that the forecasting performance of Bayesian VAR models is satisfactory for most interest rates and their superiority in performance is marked at longer forecast horizons.

Suggested Citation

  • Pami Dua & Nishita Raje & Satyananda Sahoo, 2004. "Interest Rate Modeling and Forecasting in India," Occasional papers 3, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:occpap:3
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    2. Biswajit Maitra, 2018. "Determinants of Nominal Interest Rates in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 265-288, March.
    3. Haroon Mumtaz & Nitin Kumar, 2012. "An application of data-rich environment for policy analysis of the Indian economy," Joint Research Papers 2, Centre for Central Banking Studies, Bank of England.
    4. Narayana, N.S.S. & Ghosh, Probal P., 2005. "Macroeconomic Simulation Results for India based on VEC/VAR Models," Indian Journal of Agricultural Economics, Indian Society of Agricultural Economics, vol. 60(4), pages 1-40.
    5. Pami Dua & Nishita Raje & Satyananda Sahoo, 2008. "Forecasting Interest Rates in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 2(1), pages 1-41, March.
    6. Dilip Nachane & Jose Clavel, 2008. "Forecasting interest rates: a comparative assessment of some second-generation nonlinear models," Journal of Applied Statistics, Taylor & Francis Journals, vol. 35(5), pages 493-514.
    7. Sanjay Sehgal & Kumar Bijoy & Florent Deisting, 2011. "Modeling and Forecasting Debt Market Yields : Evidence From India," Post-Print hal-01881922, HAL.
    8. Pami Dua, 2023. "Macroeconomic Modelling and Bayesian Methods," Springer Books, in: Pami Dua (ed.), Macroeconometric Methods, chapter 0, pages 19-37, Springer.
    9. Bhattacharya, B.B. & Bhanumurthy, N.R. & Mallick, Hrushikesh, 2008. "Modeling interest rate cycles in India," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 899-915.
    10. Jayaraman, T. K. & Choong, Chee-Keong, 2011. "Impact of global growth fluctuations on India: an empirical study," MPRA Paper 33685, University Library of Munich, Germany.

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