Contents
Definition
The yield curve (or term structure of interest rates) is a graphical representation of yields on bonds of identical credit quality across a range of maturities, from the very short end (overnight or 91-day T-bills) to the long end (10, 20, 30, or 40 years). In India, the benchmark yield curve is constructed from RBI-issued Government Securities (G-Secs) and is published daily by FBIL (Financial Benchmarks India Pvt. Ltd.) as the FBIL G-Sec par yield curve. A second widely-used curve is the Overnight Index Swap (OIS) curve, which captures the market's expectations of RBI's repo rate over future periods. Yield curves answer the fundamental question: "How much extra yield does the market demand for locking up capital for longer?"
How it is computed
FBIL constructs the G-Sec par yield curve daily using traded prices from NDS-OM (the RBI's electronic G-Sec trading platform), fitting a Nelson-Siegel-Svensson (NSS) parametric model to bootstrapped zero-coupon yields extracted from traded G-Secs across maturities (3-month, 6-month, 1-, 2-, 5-, 10-, 14-, 20-, 30-, 40-year). The NSS model ensures a smooth, arbitrage-free curve even when on-the-run G-Secs have gaps in tenor coverage. Key output: (1) Par yield curve — yields on hypothetical par bonds at each maturity; (2) Zero-coupon (spot) curve — yield for a single cash flow at each maturity; (3) Forward curve — implied future yields between two forward dates (e.g., the 2-year rate 3 years from now). Market practitioners typically refer to the slope as the 10y–2y spread (10-year G-Sec yield minus 2-year G-Sec yield).
Why it matters for investors
The yield curve is the backbone of fixed-income analysis: (1) Monetary policy signal: An upward-sloping (normal) curve indicates the market expects rates to rise or sees adequate term premium — typical in growth periods. An inverted curve (short-end yields > long-end) signals a growth slowdown and potential future rate cuts; the US yield curve inverted in 2022–23, historically a reliable recession predictor. India's G-Sec curve rarely inverts but flattened significantly during 2018–19 and 2021 COVID stimulus. (2) Debt fund duration positioning: Fund managers in Long Duration Funds (SEBI-defined MD > 7 years) take duration risk specifically to profit if the long end of the yield curve rallies (yields fall). (3) Accrual vs. duration strategies: A steep curve rewards "riding the yield curve" — buying a 5-year G-Sec and selling after 1 year as it becomes a 4-year bond at a lower (higher-priced) yield, earning a capital gain on top of coupon income. (4) Corporate bond pricing: Every corporate bond is priced as G-Sec yield (at matching tenor) + credit spread.
Worked example
On a representative trading day, India's G-Sec yield curve (FBIL) shows:
| Tenor | G-Sec Yield | Note |
|---|---|---|
| 91-day T-bill | 6.75% | Conventional "risk-free rate" proxy (academic) |
| 1-year | 6.92% | |
| 3-year | 7.05% | |
| 5-year | 7.15% | |
| 10-year | 7.26% | Benchmark; most-quoted |
| 30-year | 7.55% |
The 10y–2y spread = 7.26% − 6.98% = 28 bps. This is a mildly normal, relatively flat curve — consistent with a late-easing cycle where the market prices in few near-term rate cuts but limited long-term risk premium. A debt fund manager would conclude that adding duration risk (buying 10y vs. 5y) earns 11 bps of additional yield for 5 additional years of maturity — a poor risk-reward in a flat curve environment, favouring shorter-duration accrual strategies.
Caveats
Liquidity distortions: Some tenors (e.g., 7-year G-Sec) may have few traded bonds, causing the fitted curve to interpolate — yields at these tenors are model estimates, not market prices. Parallel shift assumption: Modified Duration assumes the entire curve shifts in parallel; in reality, curves twist and steepen, causing different-maturity bonds to behave differently. Currency effect for NRIs: NRIs investing in Indian G-Secs via RBI's Fully Accessible Route (FAR) must factor USD/INR hedging cost (typically 5–6% annualised), which significantly alters the effective yield curve compared to a domestic rupee investor.
See also
- Yield to Maturity (YTM)
- Modified Duration
- Zero-Coupon Bond
- Credit Spread
- Debt Funds in India — Complete Guide
Primary source
- FBIL G-Sec par yield curve: fbil.org.in
- RBI — Government Securities Market in India: rbi.org.in
- RBI NDS-OM (primary G-Sec trading platform): rbi.org.in/scripts/nds.aspx
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