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Bond Yield and Inflation Expectations: A Study of Indian Bond Market

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  • Nikhil Rastogi

Abstract

Bond yield is theoretically an aggregate of real rate of interest and expected inflation. This study verifies this relationship empirically for the bond markets of USA and India using bond yield data for long-term securities against the expected inflation for the period 1996-2002. A linear regression technique is used to determine the extent of relationship between the variables of bond yield and expected inflation. The results show that Indian markets have also started to reflect the expected inflation dependency which has been the hallmark of developed markets of USA, Canada, etc. Earlier period data (1991-96) for Indian bond market does not show any significant relationship between nominal yields and expected Inflation. The results could lend credence to the reforms initiated by RBI in that it has led to expanding the market thereby making it more independent in determination of yields as per expected economic realities.

Suggested Citation

  • Nikhil Rastogi, 2004. "Bond Yield and Inflation Expectations: A Study of Indian Bond Market," The IUP Journal of Bank Management, IUP Publications, vol. 0(3), pages 7-10, August.
    • Handle: RePEc:icf:icfjbm:v:03:y:2004:i:3:p:7-10
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