Indian Yield Curve - Inverted and Worrisome
Here’s a chart of the G-sec yield curve for India, from the Reserve Bank of India’s August Bulletin:
Note that the short end of the June yield curve (green) moved up rapidly causing it to invert. Since then, the RBI has hiked rates twice.
Of course, the US yield curve gets much more attention from investors worldwide, while the Indian bond markets barely register on the radar; nevertheless, it is useful to understand the Impact Of An Inverted Yield Curve:
Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.
When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks. Likewise, hedge funds are often forced to take on increased risk in order to achieve their desired level of returns.
While there is no shortage of signs of an economic slowdown in India, this is yet another piece of data worth watching.
Related Posts: