WorkingPaperNo.1085

FiscalDeficitandTermStructureofInterestRateLinksonCorporateInvestment:

AnalyzingthePost-PandemicMonetaryPolicyTransmissionUsingIndianHigh

FrequencyData

by

LekhaChakraborty

NationalInstituteofPublicFinanceandPolicyandLevyEconomicsInstitute

and

C.Prasanth

NationalInstituteofPublicFinanceandPolicy

July2025

ChakrabortyisprofessoratNIPFPandResearchAssociateattheLevyEconomicsInstitute;PrasanthisformerresearcheratNIPFP.ThanksareduetoKavitaIssarforthetechnicalhelp.

TheLevyEconomicsInstituteWorkingPaperCollectionpresentsresearchinprogressbyLevyInstitutescholarsandconferenceparticipants.Thepurposeoftheseriesistodisseminateideastoandelicit

commentsfromacademicsandprofessionals.

LevyEconomicsInstituteofBardCollege,foundedin1986,isanonprofit,nonpartisan,

independentlyfundedresearchorganizationdevotedtopublicservice.Throughscholarshipandeconomicresearch,itgeneratesviable,effectivepublicpolicyresponsestoimportanteconomicproblemsthatprofoundlyaffectthequalityoflifeintheUnitedStatesandabroad.

LevyEconomicsInstitute

P.O.Box5000

Annandale-on-Hudson,NY12504-5000

Copyright?LevyEconomicsInstitute2025AllrightsreservedISSN1547-366X

ABSTRACT

1

Usinghigh-frequencymacrodatafromafinanciallyderegulatedregime,thispaperexamineswhetherthereisanyevidenceoffinancialcrowdingoutinIndia.Themacroeconomic

channelthroughwhichfinancialcrowdingoutoccursisthelinkbetweenthefiscaldeficitandtheinterestratedetermination.Theresultsrevealedthatthefiscaldeficitdoesnot

significantlydetermineinterestratesinthepost-pandemicmonetarypolicystanceinIndia.

Thelong-terminterestrateswerestronglyinfluencedbytheshort-terminterestrates,afactwhichreinforcesthatthetermstructureisoperatinginIndia.Theresultsfurtherrevealedthatlong-terminterestrateswerealsopositivelyinfluencedbycapitalflowsandinflation

expectations,whileinverselyimpactedbythemoneysupply.TheseinferenceshavepolicyimplicationsonthefiscalandmonetarypolicycoordinationinIndia,whereitiscrucialto

analyzetheeffectofahigh-interest-rateregimeonpubliccorporateinvestment.Ourresultsshowedthatpublicinfrastructureinvestmentandrateofinterestaresignificantdeterminantsofprivatecorporateinvestment.Ourresultscounterthepopularbeliefthatdeficitsdetermineinterestratesinthecontextofemergingeconomiesand“crowdout”privatecorporate

investment.

KEYWORDS:fiscaldeficit,interestratedetermination,asymmetricvectorautoregressivemodel,financialcrowdingout

JELCODES:E62,C32,H6

2

INTRODUCTION

InthecontextofemergingeconomiessuchasIndia,persistentfiscalimbalancesareoften

seenasconstrainingtheeffectivenessofmonetarypolicyinsteeringinterestrates,owingtotheriskoffinancialcrowdingout.However,thehighinterestratessetbycentralbankscanaffectpublicdebtmanagement,makingdebtservicingcostlier.Therefore,thesettingofbothmonetaryandfiscalpoliciesneedstobereassessedwithinacomprehensiveframeworkof

soundandstablefiscalbalancesoverthemediumtermfortheeconomicgrowthrecovery

process(AuerbachandKotlikoff1987;Auerbach2003;Blanchard2019).ThisisespeciallysignificantbecausefiscalpolicyhasremainedaccommodativeinIndiawithafocusonhighcapitalexpenditure(CaPex)investmentforeconomicgrowthrecovery.

Thereturnoffiscaldominanceiscrucial,especiallywhentheimpactofmonetarypolicyongrowthisconstrained,asitprimarilyfocusesonpricestabilityasthesinglemandateof

centralbanks—asperthenewmonetarypolicyframeworkinIndia.HighdeficitsanddebtinIndiahavecreateddebatesregardingfiscalrisksfrommaintaininganaccommodative

fiscalstance.However,Indiahasfollowedafiscalglidepathcautiously,linkinghigh

deficitstocapexformationintheeconomy.Creditratingagenciesareworriedabouthigh

deficitsduetopotentialmacroeconomicconsequences,primarilytheimpactoninterestratemanagement.However,creditratingagenciesarebecomingincreasinglyconfidentinthe

insignificantlinkbetweendeficitsandinterestrates,especiallywhentheReserveBankofIndia(RBI)determinesinterestratesbasedonarules-based,inflation-targetingframework.ThetimelyfiscaldeficitinIndiaisarticulatedinapositivemanner,bylinkingittocapex

formationforthegrowthrecoveryprocess.ThispapercontributestotheempiricalevidencefromIndia,furthersubstantiatingthatthetimelyfiscaldeficitisnottheculpritbehindrisinginterestrates,anditiscrucialtokeepfiscalpolicyaccommodativetothecapexandgrowthrecoveryprocess.

Usinghigh-frequencydatamodels,thepaperanalyzesthesecondlevelofcrowdingout—

financialcrowdingout—inthepost-pandemicperiod.AgainstthebackdropofaderegulatedfinancialregimeinIndia,weanalyzethemacroeconomicchannelsinwhichthefinancial

3

crowdingoutisoperated.Untilthemid-1990s,therateofinterestwasadministeredinIndia,andremainednon-varyingforalongperiod.Thepost-pandemicmonetarypolicystanceofinterestratedetermination,theperiodofaccommodativestance,andthesubsequent

withdrawalofaccommodativestance—willbeanalyzedinthenextpaper,usinghigh-frequencydatamodels.

1.THEANALYTICALFRAMEWORK

FollowingChakraborty(2016),theanalyticalframeworkforthestudyisderivedfromanextendedversionofSargent’s(1969)model,whichisflexibleenoughtoincorporatethe

macroeconomiclinkthatmayoperateinthedeterminationofinterestrates(Chakraborty

2016).Sargent(1969)expressedthenominalrateofinterestasacombinationofthree

components:theequilibratingrateofinterest,thespreadbetweenmarketrateofinterestandtheequilibratingrealrateofinterestandthespreadbetweennominalrateofinterestand

marketrateofinterest.Itcanbeexpressedasfollows:

rn(t)=re(t)+[rm(t)?re(t)]+[rn(t)?rm(t)](1)

Inequation(1),rn(t)isthenominalrateofinterest,re(t)istherealrateofinterestwhichequilibratesdesiredsavingsanddesiredinvestment;rm(t)isthenominalrateofinterestadjustedfortheexpectedrateofinflation.Eachofthethreespecificcomponentsis

determinedinturnbyspecificmacroeconomicvariables.

Thelogicalnextstepistoidentifythedeterminantsofeachofthethreetermsinequation

(1).But,astheobjectiveofourstudywasnottotestthevalidityofalternativeparadigmsofconnectionbetweendeficitandrateofinterestacrosscountriesbuttodistinguish

betweentheshort-andlong-termimpactsofdeficitsontherateofinterest,wehavenotdrawnheavilyonthederivationsofthedeterminantsofthemodel.Rather,weimprovisethespecificationaccordingtoourpurposetoundertakethefinancialcrowdingoutinthe

4

contextofIndia,irrespectiveoftheparadigm-specificdetailsandthedichotomyoftransitoryandpermanenteffectsofdeficitsonrateofinterest.

Oneofthesignificantdeterminantsofthefirstterm,re(t),whichistherealrateofinterestthatequilibratesdesiredsavingsanddesiredinvestment,isthedeficitofthegovernment.The

otherdeterminantsofequation(1)intheGupta-Moazzamimodelconstitutedthe

governmentconsumptionexpenditure,thenationalincome,privateconsumption

expenditure,privatesavings,etc.—allofwhichweomitinourspecificationdueto

multicollinearityproblems.Moreover,theseexplanatoryvariablesarenotrequiredforouranalysisaswehavenottestedthevalidityofeachofthealternativeparadigmsoffiscal

deficitandrateofinterestinthecontextofIndia;ourprimeconcernwas,instead,toassesstheroleofthefiscaldeficitontherateofinteresttounderstandthetransmissionchannelofthecrowding-outphenomenon(Chakraborty2016).

FollowingChakraborty(2016),thedeterminantofthesecondterm,[rm(t)-re(t)],istakenasthegrowthrateofhigh-poweredmoney.Intheopeneconomymodel,capitalflowsalso

determinethespreadbetweenthemarketrateandtheequilibriumrealrateofinterest,whichisbeyondthescopeofthepresentpaper.Therealexchangeratecanalsobeinsertedinto

equation(3)tocapturetheeffectontheinterestrate,inanopeneconomymacromodel—ascopeforfutureresearch.Inthepresentmodel,weconfineouranalysistohigh-powered

money(HPM),whosecomponentsareinclusiveofnet-RBIcredittogovernmentandnetFOREXreserves.

re(t)=α+β1(deft)+μt(2)

Assuminglinearity,wethushave:

rm(t)?re(t)=λ+β2(ΔM3)t+β3(Kr)t+δt(3)

Where,(ΔM3)t=changesinhighpoweredmoney.

5

Thelasttermofequation(1)isassumedtodependlinearlyandpositivelyontheinflationaryexpectations.

rn(t)?rm(t)=θ+β4(πte)+Dt(4)

Whereπte=ExpectedRateofInflation.

Nowbysubstitutingequations(2),(3),and(4)intoequation(1),wegetequation(5)

rn(t)=φ+β1(deft)+β2(ΔM3)t+β3(Kr)t+β4(πte)+①t(5)

Accordingtoequation(5),therateofinterestisafunctionoffiscaldeficits,changesinhigh-poweredmoney,capitalflows,andexpectedinflation.

2.INTERPRETINGDATA

ThenewmonetarypolicyframeworkwasintroducedinIndiainFebruary2016,withan

inflation-targetingframework.SinceMay2020,theRBIhaskeptthepolicystance

“accommodative,”foreconomicfirefightingduringthepandemicperiod.BetweenMay

2020andMay2022,RBIhadkeptthereporateconstantat4percent.SinceMay2022,

theRBIhasincreasedthereporateandhasincreasedtherateby250basispoints(bps)to6.5percentbyFebruary2023.SinceFebruary2023,theMonetaryPolicyCommittee

(MPC)keptthereporateunchangedat6.5percentinallthepolicyreviewmeetings.TheRBI’sdecisiontotransitiontoa“neutralstance”isaboldone,givingequalimportancetogrowthandinflation.

Thecentralbankhasemphasizedthesuccessofthe“newmonetaryframework”

envisionedforIndiainFebruary2016,basedonUrjitPatelCommitteerecommendations.Thenewmonetarypolicyframeworkenvisages“pricestability”asthesinglemandateoftheRBI,throughtheflexibleinflationtargetingframework.Aspertheflexibleinflation

6

target(FIT)frameworkinIndia,anominalanchorof4percentCPIinflationwasdecided,withinabandofplusorminus2percent.

TheMPCismindfulofnegativeinterestrates,iftheinflationaryexpectationsarehigherthanthenominalinterestrate.Theirdecisionthusreflectstherealitythatasudden

reductioninthepolicyratesatthismomentisnotfeasiblegiventhegeo-political

uncertainties.TheRBIGovernorhasemphasised“centralbankindependence”—intermsof“operationalindependence”—recallingthedecisionin2016toconstitutetheMPC

withinternalandexternalmembers,insteadoftheRBIGovernorsingularlymaking

decisionsonthepolicyrates.The“operationalindependence”allowstheMPCmemberstotakeanindependentstanceregardingthepolicyratesbasedontheirvotingpowers.InthelatestMPCmeeting,aunanimousdecisionfora“neutral”policystancewastaken.Amajorityoffiveofsixmembersvotedtokeepthepolicyreporateunchangedat6.50

percent.

Themonetarypolicycorridorremains“symmetrical,”withlowerandupperboundsofthecorridorequidistantfromthereporate.ThelowerboundofthecorridoristheStandard

DepositFacility(SDF)rate,therate(keptat6.25percent)atwhichtheRBIabsorbsliquidityfrombanks(byacceptinguncollateralizeddeposits)onan“overnight”basis.

TheupperboundofthecorridoristheMarginalStandingFacility(MSF),whichiskeptat6.75percent.TheMarginalStandingFacility(MSF)rateistherateatwhichbankscan

borrow“overnight”fromtheRBI.ThesearetheLiquidityAdjustmentFacility(LAF)mechanismtoolsoftheRBI,throughwhichbanksborroworlendmoney.

Giventhevolatilityintheglobalfinancialmarketsandthedownwardrisksfromthegeo-politicaluncertainties,therealGDPgrowthforQ1:2025–26isprojectedat7.3percent.

TheMPChasprojectedtherealGDPgrowthfor2024–25tobeat7.2percent,withQ2at7.0percent;Q3at7.4percent;andQ4at7.4percent.TheCPIinflationfor2024–25is

projectedat4.5percent,withQ2at4.1percent;Q3at4.8percent;andQ4at4.2percent.CPIinflationforQ1:2025–26isprojectedat4.3percent.TheRBI'sgrowthandinflation

7

outlookhighlightsglobalresilience,despitegeopoliticalrisks

.1

Table1explainsthe

structureofvariousinterestratesinIndiaandthemacro-monetaryratiosincludingCRRandSLR.

Thevariablesincludedinthestudyconsistoftime-seriesdatawithamonthlyfrequencyfromJanuary2020toJuly2023.Allthedatausedinthestudyaresourcedfromthe

ReserveBankofIndiadatabase.Aspertherequisiteofthetheoreticalmodel,the

dependentvariablesselectedforthestudyincludetheyieldof10-yearand5-yearGSecs,whichconstitutethelong-terminterestrates,andtheyieldof3-yearGSecsand91-day

TreasuryBills,whichconstitutetheshort-terminterestrates.Theindependentvariablesincludeinflationandexpectedinflation,derivedfromtheConsumerPriceIndex(CPI),theoutputgapderivedfromtheIndexofIndustrialProduction(IIP),thecapitalflows,fiscaldeficit,andthemoneysupplycapturedthroughbroadmoney.Thefallininterestratesofboththelong-andshort-termgovernmentsecurities(Gsecs)wasevidentduringthisperiod(Figures1and2).

Figure1:Long-terminterestrates(Jan2020-July2023)

NominalRates(%)

8

7

6

5

4

3

2

1

0

2

1.5

1

0.5

0

-0.5-1

-1.5

RealRates(%)

2020M01

2020M03

2020M05

2020M07

2020M09

2020M11

2021M01

2021M03

2021M05

2021M07

2021M09

2021M11

2022M01

2022M03

2022M05

2022M07

2022M09

2022M11

2023M01

2023M03

2023M05

2023M07

10y_nominal5y_Nominal10y_real5y_Real

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

1

ReserveBankofIndia-PressReleases(.in)

8

Figure2:Short-terminterestrates(Jan2020-July2023)

2

1

0

-1

-2

-3

-4

8

7

NominalRates(%)

RealRates(%)

6

5

4

3

2

1

2020M01

2020M03

2020M05

2020M07

2020M09

2020M11

2021M01

2021M03

2021M05

2021M07

2021M09

2021M11

2022M01

2022M03

2022M05

2022M07

2022M09

2022M11

2023M01

2023M03

2023M05

2023M07

0

3y_nominal91tbill_Nominal3y_real91tb_Real

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

TheMonetaryPolicyCommittee(MPC)unanimouslydecidedtokeepthepolicyrepo

ratesunchangedwhileitwasdeemednecessarytoreviveandsustaintheeconomic

growthatthattime.Allpolicyrateswerekeptatmoderatelevelstofacilitatetherecoveryoftheeconomy(Figure3).Unliketheadvancedeconomieswhichreducedthepolicy

ratesclosertothezero-bound,theRBIdidnotlowerthepolicyreporatesbelowthe

targetedinflationrateof4percent.Theseratecutswerecomplementedbyliquidity

infusionmeasuresaddingtothearrayofbothconventionalandunconventionalmeasuresaimedatboostinginvestorconfidenceand,ultimately,revivingtheeconomy.Variable

RateReverseRepo(VRRR)wasfollowedtomigratethesurplusliquidityfromshort-

termperiodstolong-termperiods.Furthermodulationoflong-termGSecyieldswas

carriedoutthroughOperationTwist,involvingthesimultaneoussaleofshort-andlong-termGsecs,loweringtheinterestratesofinstrumentsbenchmarkedtoGSecs(Das2023).

9

Figure3:MonetaryPolicyRates(January2020-July2023)

6.5

4.5

2.5

2020M01ii

2020M03ii

2020M05i

2020M07ii

2020M09

2020M11

2021M01i

2021M03i

2021M05i

2021M07i

2021M09

2021M11

2022M01i

2022M03i

2022M05

2022M07

2022M09

2022M11

2023M01i

2023M03

2023M05

2023M07

callmoneyreporev_repo

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

ThedataoninflationaretakenastheConsumerPriceIndex(CPI),whichistransformedintotheex-anterealrateofinterest,followingFischer’sequation(seeCorreiaetal.1995;Chakraborty2012;Chakraborty2024),wheretheexpectedinflationiscomputedusing

theHodrick-Prescottfilter.Inflationinthepre-pandemicperiodhoveredaround7percentinJanuary2020drivenbyrisingfoodprices,beforefallingbelow6percentinMarch

2020.Thelockdownsandsupplychaindisruptionsresultedinaspikeininflationtomorethan7.5percent.TheinflationlevelsfromJanuary2020toJuly2023reflectaperiodofeconomicturbulenceandrecoveryasdepictedinFigure4.

Figure4:ActualInflationandExpectedInflationDerivedusingHPFilter

7.5

5.5

3.5

2020M01

2020M03

2020M05

2020M07

2020M09

2020M11

2021M01

2021M03

2021M05

2021M07

2021M09

2021M11

2022M01

2022M03

2022M05

2022M07

2022M09

2022M11

2023M01

2023M03

2023M05

2023M07

ExpectedInflationActualInflation

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

10

Fiscaldeficit—inregardstothebroaderpolicydebateaboutitsimpactoninterestrates—isconsideredanimportantvariabledetermininginterestrates.Figure5capturesthe

monthlyprogressionoffiscaldeficitduringthepandemicperiodandthroughthe

recoveryphase.Thepandemicperiodwitnessedasurgeinthefiscaldeficitduetothedisruptiveeffectsofthenationwidelockdownandleadingtoaseverecontractionineconomicactivityand,atthesametime,theallocationofresourcestowardmountinghealthexpenditures.Thepandemic-inducedchallengeswereaddressedthroughwell-calibratedfiscalexpansionduringtherecoveryperiod.

Figure5:MonthlyGrossFiscalDeficit

InRupeesCrore

450000

250000

50000

-150000

2020M01ii

2020M03i

2020M05i

2020M07i

2020M09

2020M11i

2021M01i

2021M03i

2021M05

2021M07

2021M09ii

2021M11

ii

2022M01i

2022M03ii

2022M05i

2022M07i

2022M09i

2022M11i

2023M01

2023M03

2023M05

2023M07

Source:theauthors’calculationfromBasicdata—ReserveBankofIndiaHandbookofStatistics(2024)Thepaceofeconomicactivityisgaugedbytheoutputgap,derivedfromtheseasonallyadjustedIndexofIndustrialProduction(IIP).Here,theoutputgapwhichdepictsthe

transitorydeviationsfrompotentialoutputisderivedas:

[((AcutalIIp—potentialoutput)/potentialoutput)*100)]

ThepotentialoutputisderivedusingtheHodrick-Prescottfilter.ThemajoradvantageoftheHodrick-Prescottfilteristhatitallowstheoutputgaptobestationaryacrossarangeofsmoothingvalueswhileaccommodatingthechangesintrendovertime(deBrouwer1998).TheplotofmonthlyIIPandtheoutputgapisdepictedinFigure6.

Figure6:IIPandOutputGapDerivedUsingHPFilter

11

30

20

10

0

-10

-20

-30

-40

-50

-60

160

140

120

100

80

60

40

20

0

IIPIIPOutputGap

Source:BytheauthorsfromBasicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Thecapitalflowsintotheeconomyarecapturedbythenetforeignportfolioinvestments.Indiaexperiencedasubstantialoutflowofnetportfolioinvestmentsinthewakeofthe

pandemic(Figure7)aswellasin2022,drivenbyaglobaltighteningoffinancial

conditions(GoelandNovikova2023).Amidstthevolatilecapitalflowsduringthe

pandemic,theRBIpursuedanaccommodativepolicyoflowerinterestratesinordertobolstereconomicrecovery.

Figure7:MonthlyNetPortfolioInvestments

14000

9000

InMillionUSD

4000

2020M01

2020M03

2020M05

2020M07

2020M09

2020M11

2021M01

2021M03

2021M05

2021M07

2021M09

2021M11

2022M01

2022M03

2022M05

2022M07

2022M09

2022M11

2023M01

2023M03

2023M05

2023M07

-1000

-6000

-11000

-16000

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

12

ThetrendsofmoneysupplyinIndiaarecapturedbythebroadmoney(M3)andthehigh-poweredmoney(M0)inFigure7.Empiricalliteratureshowsthatbroadmoneyis

negativelyassociatedwithlong-terminterestrates,whileitexhibitsapositive

relationshipwithshort-terminterestrates(seeVinod,Chakraborty,andKarun2016).

Figures8and9presentthetrajectoriesofM3andM0duringthereferenceperiodofthestudy.ThepresentanalysisconsidersM3asoneofthedeterminantsofinterestrates.

PriortoestimatingtheARDLmodels,Figures10-21encapsulatethebivariate

scatterplots,whichvisuallyrepresentthestylizedfactsoftheplausibledirectionofrelationshipbetweenthevariables.

Figure8:TrendsinBroadMoney(M3)

24000000

23000000

inRupeescrore

22000000

21000000

20000000

19000000

18000000

17000000

16000000

15000000

M3

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

13

Figure9:TrendsinHigh-PoweredMoney(M0)

5000000

4500000

inRupeescrore

4000000

3500000

3000000

2500000

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Figure10:ScatterPlotof10YGSECandExpectedInflation

10YGSEC

8

7.5

7

6.5

6

5.5

R2=0.

0406

4.004.505.005.506.006.507.007.508.00

Inflation

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

14

Figure11:ScatterPlotof5YGSECandExpectedInflation

5YGSEC

8

7

6

5

4

R2=0.

0391

●

4.004.505.005.506.006.507.007.508.00

Inflation

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Figure12:ScatterPlotof3YGSECandExpectedInflation

3YGSEC

8

7.5

7

6.5

6

5.5

5

4.5

4

R2=0

0346

.

4.004.505.005.506.006.507.007.508.00

Inflation

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

15

Figure13:ScatterPlotof91TreasuryBillRateandExpectedInflation

91TB

8

7

6

5

4

3

2

R2=0.

0089

4.004.505.005.506.006.507.007.508.00

Inflation

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Figure14:ScatterPlotof10YGSECandFiscalDeficit

10YGSEC

8

7.5

R2=0.0182

7

6.5

6

5.5

5

-150000-5000050000150000250000350000450000

FiscalDeficit

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

16

Figure15:ScatterPlotof5YGSECandFiscalDeficit

5Y

8

7.5

7

R2=0.0193

6.5

6

5.5

5

4.5

-200000-1000000100000200000300000400000500000

FiscalDeficit

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Figure16:ScatterPlotof3YGSECandFiscalDeficit

3Y

4

8

7.5

7

●

6.5

R2=0.0155

6

5.5

5

4.5

-200000-1000000100000200000300000400000500000

FiscalDeficit

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

17

Figure17:ScatterPlotof91TreasuryBillRateandFiscalDeficit

91TB

0

8

7

6

5

R2=0.0097

4

3

2

1

-200000-1000000100000200000300000400000500000

FiscalDeficit

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Figure18:ScatterPlotof10YGSECandOutputGap

10YGSEC

5

8

7.5

7

●

●

R2=2E

-05

6.5

6

●

5.5

-60-50-40-30-20-100102030

OutputGap

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

18

Figure19:ScatterPlotof5YGSECandOutputGap

5YGSEC

4.5

8

7.5

7o

6.5

●

R2=0.0004

6

5.5

●

5

-60-50-40-30-20-100102030

OutputGap

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

Figure20:ScatterPlotof3YGSECandOutputGap

3YGSEC

4

8

7.5

7

6.5

●

6

R2=0.0024

5.5

5

4.5

-60-50-40-30-20-100102030

OutputGap

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

19

Figure21:ScatterPlotof91TreasuryBillRateandOutputGap

91TB

2.5

7.5

7

6.5

●

5.5

6

5

R2=0.0006

4.5

3.5

4

●

●

3

-60-50-40-30-20-100102030

OutputGap

Source:Basicdata—ReserveBankofIndiaHandbookofStatistics(2024)

3.THEEMPIRICALAPPROACH

WeemployanARDLmodelforstudyingthetermstructureofinterestratesinIndia.Inthelong-runrateofinterestmodels,theresultsoftheboundstestrevealedforall

estimatedequationsthatthenullhypothesisofnocointegrationisrejectedatthe1

percentlevelofsignificancesincethevalueoftheFstatisticliesabovetheboundI(1)implyingtheexi