Keynes’s supposition of short-term interest rates as the key driver of long-term government bond yields is investigated for India, after controlling for various key economic factors. It is seen that long-term interest rates of Indian government bonds are positively associated with the short-term interest rates of Treasury Bills.
Higher long-term interest rates on IGBs are influenced by higher short-term interest rates, higher rates of inflation, a faster pace of industrial production and higher fiscal deficit (and vice versa). The bond market was disrupted during 2013 when yields rose sharply in India. Incorporating this structural break improved our findings.