US QE and the Indian Bond Market

Area of Science:

• Economics
• International Finance
• Monetary Policy

Background:

• Unconventional monetary policies like quantitative easing (QE) by major economies can have significant international spillovers.
• The Indian government bond (IGB) market is sensitive to global financial conditions and policy changes.

Purpose of the Study:

• To analyze the long- and short-run effects of US quantitative easing (QE) on the benchmark 10-year Indian government bond (IGB) yield.
• To assess the impact of QE on yield volatility and the subsequent policy responses by the Reserve Bank of India (RBI).

Main Methods:

• Autoregressive Distributed Lag (ARDL) bounds testing co-integration approach.
• Analysis of monthly data from September 2008 to June 2019.
• Counterfactual analysis to estimate yield volatility without QE.

Main Results:

• A 10 percentage-point increase in US QE was associated with a 4 basis points rise in IGB yields.
• Counterfactual analysis indicated lower yield volatility in the absence of US QE.
• The Reserve Bank of India (RBI) adjusted policy rates and conducted open-market operations (OMOs) in response to QE-induced volatility.

Conclusions:

• US QE spillovers lead to IGB yield mispricing and a partial erosion of the RBI's monetary policy autonomy.
• Effective management of liquidity and interest rate volatility is crucial for emerging economies during periods of global unconventional monetary policy.