The Term Structure of Interest Rates in India
We examine the term structure of interest rates in India to see if the yield curve can be rationalized based on the ‘expectations hypothesis’. Although we find evidence of predictability for holding period returns, we reject the null hypothesis that the expectations hypothesis holds for the period under consideration. Contrary to the finding in the US, the volatility of Indian bond returns is consistent with the expectations hypothesis. Returns on long-term bonds are less volatile than those of short-term bonds. The volatility puzzle documented by Shiller on US data is not observed in Indian bond returns.
Prepared for the volume “Monetary Policy in India: A Modern Macroeconomic Perspective” edited by Chetan Ghate and Kenneth Kletzer. We thank Ravi Bansal, John Donaldson an anonymous referee and the editors for their insightful comments and Neeru Mehra for editorial assistance. The usual caveat applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.