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Price discovery in Indian government securities market, monetary management and the cost of government borrowing

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

Over 2017-18 there was a sharp rise in Indian government securities (G-Secs) interest rates unrelated to fundamentals. Examining each of the standard explanatory variables shows them to be inadequate to account for the rise in bond yields in this period. Turning to aspects of Indian structure the reason is found to be the narrow focus of monetary operating procedures, with excessive reliance on making up liquidity shortfalls with short-term liquidity, which was inadequate given large exogenous durable liquidity shocks including foreign inflows. The composition of liquidity, share of reserve money and its sources all matter. Open market operations (OMOs) have a significant impact on yields. Large foreign debt inflows induce OMOs sales as G-Secs are swapped for foreign securities to sterilize the effect of inflows on the money supply. G-Secs yields are then found to rise.

Suggested Citation

  • Ashima Goyal, 2019. "Price discovery in Indian government securities market, monetary management and the cost of government borrowing," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-007, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2019-007
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2019-007.pdf
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    References listed on IDEAS

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    1. Viral V. Acharya, 2018. "Understanding and managing interest rate risk at banks," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 11(2), pages 218-231, May.
    2. Canlin Li & Min Wei, 2013. "Term Structure Modeling with Supply Factors and the Federal Reserve's Large-Scale Asset Purchase Progarms," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 3-39, March.
    3. Ashima Goyal, 2018. "Evaluating India’s exchange rate regime under global shocks," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 11(3), pages 304-321, September.
    4. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
    5. Goyal, Ashima & Kumar, Abhishek, 2018. "Active monetary policy and the slowdown: Evidence from DSGE based Indian aggregate demand and supply," The Journal of Economic Asymmetries, Elsevier, vol. 17(C), pages 21-40.
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    Cited by:

    1. Moumita Paul & Kalluru Siva Reddy, 2022. "US QE and the Indian Bond Market," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(1), pages 137-157, March.

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    More about this item

    Keywords

    Government securities market; yields; open market operations; debt inflows; price discovery;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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