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Fixed Income

Nifty, 10 Year Bond Yields and Inflation

A great question for Prashanth: How does this chart from Ritholtz look like for India?

So I decided to plot the Nifty, the 10 year bond yield (month end values from RBI) and WPI inflation in a single chart.

Nifty, 10 year bond yields and Inflation

(Click for a bigger chart)

As you can see, India’s bond yields are not entirely related to the equity curve (other than from 2011, perhaps). As yields fall, equity markets should rise as money becomes less expensive to borrow – but in India, the bond market is not as well developed, so the transition was absent in the late 90s.

The early 2000s saw bond yields going up from about 5% to 8%, but the markets went up even higher! inflation was benign through this period and mostly, we had positive rates (interest rates higher than inflation).

From 2008, we have had a flat market, and yields have both fallen and risen with the stock markets. Only since 2011 have we seen bond market yields go down while equities have recovered.

The upper 6300 barrier has been a fairly stiff resistance now with three hits in five years. I wonder if this current upmove will take us there again.

  • DD says:

    Try plotting the yield curve with domestic investor net equity sales/ buys?
    The inverse correlation should also get stronger from the brief period after the FIIs were allowed to buy GoI debt.

    • Gold Bug says:

      I also think the truth lies somewhere there. Bonds are mostly held on HTM basis. Only small part are for trading. Since 2011, FIIs have been trading in bonds. This has effect on Bond markets. However if recession deepens Banks will again buy bonds like they did in Oct-Dec. 2008 to deploy their unused cash.

  • Leo says:

    it is not like 2008 any more things have doubled from 2009 …and the problems have gone exponential times
    Yields are going higher if somehow they stop its a miracle….12% gsec may be going to hit waiting for a breakout

  • Brijesh says:

    Sorry Deepak, I am not convinced. there is some serious relationship between bond yields and equities (often with a lag).
    However for the sake of argument here, could invert the bond yields here in this chart.
    Thanks.