This study analyzed the behavior of the ten-year nominal sovereign bond yield in India with respect to a host of factors, especially for a decade when economic growth alters considerably with time. The vector autoregression methodology (VAR) was applied to the monthly data of economic and financial variables from January 2012 to March 2020. The findings suggested that long-run sovereign bond yield behavior was primarily driven by domestic fundamentals, including money market fundamentals. A rise in the 91-day treasury bill lagged the value of the bond yield, and inflation exert significant upward pressure on the ten year domestic sovereign bond yields. International factors such as exchange rate and crude oil price exert significant but mild influence. Another finding was affirmed that short-term domestic bond yield movements significantly determined long-run domestic bond yields. From an overall policy perspective, it becomes important to maintain domestic economic stability to manage fiscal and debt sustainability.
Which Combination of Fiscal and External Imbalances to Determine the Long-Run Dynamics of Sovereign Bond Yields?