Yield curve: As a lead indicator of Indian economy

Abstract

Empirical Evidence obtained from many research studies conducted in the recent past highlighted the potential of Yield Curve in predicting the future economic activity. This has renewed the interest in Yield-Curve studies across many countries to evaluate its predictability and accuracies of forecasting future economic upswings/downswings for any country. In this paper, we have majorly studied the relevance of Yield Curve when applied for Inidan Economy. As part of our study We have listed the factors which are needed for application of Yield Curve Studies to a particular economy. Historical data is also used to understand the variations in predicatability of Yield Curve for United States and other important European economies. Using evidence from regression and probit models for US and India, it has been found that Yield Spread between 10-year treasury bonds and 3 month treasury bills can be used as a leading indicator to predict the future economic activity for Indian economy. Linear regression and Probit models are used to obtain the evidence about the predictability of the yield curve for the Indian Economy.