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Yield Curve Inversion Ahead

Indian money markets have tightened meaningfully over the last one and a half month. Interest rates on the short-term debt instruments like treasury bills, commercial papers, certificate of deposits, etc. shot up by 50-70 basis points (100 basis points = 1%) since the start of February 2023. While longer term bond yields moved up only marginally by 3-6 basis points.

Table – I: Short-term yields moved up more than Longer term yields.

Short-term yields have been rising at a faster pace than longer-term yields for the last 12 months. RBI’s tightening measures – rate hikes and liquidity reduction, had a greater impact on the short end of the rate curve. As a result, the yield curve (a plot of yield for various maturities of bonds) flattened.

Chart – I: Rapid rate hikes and liquidity tightening flattened the yield curve

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