Asymmetric Impact of Monetary Policy on 10-Year G-Sec Yield in India

Abstract

This paper examines the asymmetric impact of monetary policy on central government’s 10-year g-sec yield using a non-linear autoregressive distributed lag model for the period Q1:2001–02 to Q4:2019–20. We find that monetary policy transmission to 10-year g-sec yield is partial and asymmetric in the long-run. A percentage point increase in the weighted average overnight call money rate (WACR) is, on an average, associated with 36–37 basis points rise in g-sec yield, whereas a percentage point fall in WACR leads to decrease in g-sec yield by 29–30 basis points. In the short-run, the asymmetric impact of WACR on the g-sec yield, though less conclusive, ranges between 18 and 20 basis points when WACR increases and 14–18 basis points when WACR decreases. The model includes market borrowings, GDP growth, crude oil price / inflation and yield on 10-year US government bonds as control variables. Our findings bear implications for monetary policy transmission to the real economy as well as for the market borrowing decisions of the fiscal authorities.