Gurmeetsingh S Sikh
Sardar Patel University
On a day-to-day basis, market participants look at many other variables as well e.g. crude prices, commodity prices, GDP growth rates, etc. However, the end implication of these factors has been captured in the statistical study done in this paper. For Example, higher crude or commodity price would result in higher inflation, which has been studied here. A higher GDP growth rate would give a larger scope of RBI to hike rates (in case inflation is high); we have studied the co-relation with Repo and Reverse Repo Rates. Higher investment by FIIs in Indian equities may result in higher rupee liquidity; we have studied the impact of system liquidity on yield levels.
At a given point of time, one factor may be overbearing over others e.g. if inflation is too high or if system liquidity too much in surplus it may overshadow other parameters. We have covered 14 quarters to smoothen out any such impact. As we can see in the multiple regression analysis, the variables we have taken explain 80% of the movement in 10-year benchmark Gilt yield levels. The balance may be attributed to sentiments and other factors.
Factors Influencing Movement of G-Sec. Yields: An Empirical Approach Introduction
The biggest challenge for any analyst in any market is to predicting future movements: This paper is an attempt to:
(A) Delineate the factors relevant for taking a view on movement of yields of government securities in the secondary market, and (B) Establish the degree of correlation between the variables, as a measure of relevance for using that parameter. For our analysis, we have represented yields by the 10-year benchmark government security. We have broadly divided factors into two categories;
(A) Fundamental i.e. factors that are relevant as per economic theory; and (B) Technical, including the demand – supply equation for G-Secs. Fundamental Factors
The yield expected by investors in Government Securities includes a premium for current inflation as well as expected inflation during the time horizon of the security.
Year and Quarter| WPI Inflation| Average 10-Year G-sec Yield| 07-08 Q1| 5.53%| 8.13%|
07-08 Q2| 4.08%| 7.91%|
07-08 Q3| 3.74%| 7.89%|
07-08 Q4| 5.96%| 7.67%|
08-09 Q1| 9.02%| 8.15%|
08-09 Q2| 11.08%| 8.89%|
08-09 Q3| 8.58%| 7.07%|
08-09 Q4| 3.61%| 6.17%|
09-10 Q1| 0.46%| 6.59%|
09-10 Q2| 0.26%| 7.14%|
09-10 Q3| 4.30%| 7.40%|
09-10 Q4| 9.48%| 7.78%|
10-11 Q1| 10.63%| 7.70%|
10-11 Q2| 9.26%| 7.83%|
Mean| 6.14%| 7.59%|
Standard Deviation| 3.58%| 0.69%|
Corelation| 0.6004| |
| Data Source: RBI Website & Bloomberg|
Exibit-1 shows the historical co-relation between the yield on the 10-year Benchmark Security (average yield for the quarter) and inflation as measured by the wholesale price index (average for the quarter). This exhibit contains data for the previous 14 quarters up to the second quarter for fiscal year 2010-11.
The scatter plot for the above data is shown in Chart-1.
As we see, the degree of co-relation between the 2 sets of variables is 60%. Considering there are multiple factors influencing yield movements, 60% is a fairly high degree of co-relation. Rate Signal from RBI
RBI Repo and Reverse-Repo Rates
RBI rate action has a direct impact on yields (most of the times) as that is the steering wheel used by the central bank of the economy to guide market participants.
Exhibit 2 shows historical data on G-sec 10-year yields and RBI Repo and Reverse Repo Rates, for the previous 14 quarters up to the second quarter of fiscal year 2010-11. The relation between yield and the RBI is graphically shown in the Chart 2.
Year and Quarter| Repo Rate at end of Quarter| Reverse Repo...