Impact of fiscal deficit on corporate bonds yields and private sector borrowing.

Abstract

In this report, we have empirically tested how the corporate bond yields, bank credit to commercial sector and primary issues of private debt vary with fiscal deficit. The analysis brings out that 10-year AAA corporate bond yields in Indian markets have a direct positive relationship with fiscal deficit during the past 10 years (FY 2009-18). The strength of the correlation decreases for 5-year AAA corporate bond yields and there is no relationship between 1-year AAA corporate bond yields and fiscal deficit. Also, the primary issues of private debt as a percentage of GDP have a negative correlation with the fiscal deficit in the past 10 years. However, the total bank credit to the commercial sector as a percentage of GDP has no clear relationship with the fiscal deficit in the same period (FY 2009-18) although it had a very strong negative correlation with the fiscal deficit between FY 1996 and FY 2008.