Objective:

To analyze if there is any statistical relationship between the macroeconomic

indicators and the movements of yield curve in Indian Debt market.
Approach:
To fetch a time series data of both yield curve parameters and macroeconomic
parameters for a particular period and performing a regression analysis among
them to identify any significant statistical relationship among them.
Software used: MS-Excel Analysis Tools and Pivot Charts.
Description:
Based on the earlier factor analysis study conducted to explain the behaviour of
term structure of interest rates the parameters viz., level and slope (which
account for more than 9% of changes) are only chosen to describe the
characteristics of yield curve.
While Index of Industrial Production (IIP), Foreign Exchange Rate (Forex rate),
Wholesale Price Inflation (WPI) & Call Money Rate (CMR) are used to represent
the macro economic factors of Gross Domestic Product (GDP), Inflation &
intervention of Reserve bank of India (RBI).
The time period under the considered for the study is from Q1 FY05 to Q1 FY11
with above parameters obtained at the end of every quarter during that period.
For obtaining Level, Slope:
Only the benchmark risk-free GoI issued securities are considered for the given
period.
The trading transaction details of above bonds are obtained from the RBI website
and a pivot table chart is used to group those bond details into following three
categories:
Type
of
Bond
Short Term
Medium
Term
Long Term

Maturity
years)
<1
1 to 5

(in

>5

Level = Average of (YTM of all the eligible LT, MT, ST securities transacted on first
day of quarter)
Slope = Difference between Average YTM of LT & ST securities
Then the changes in level and slope over consecutive quarters are calculated to
be used in the study.

For obtaining Macroeconomic factors:

These are fetched from CMIE database and then the Q-o-Q changes in those are
calculated to be used in the study.

Formulation of relationship:
Paramet
er
IIP(t)
CMR(t)
Forex(t)
WPI(t)
DSlope(t)
DLevel(t)

Regressed Upon

IIP(t-1), CMR(t-1), Forex(t-1), WPI(t-1), DSlope(t-1),

DLevel(t-1)