Impact of fiscal deficit on long-term bond yields

Abstract

We would like to express utmost gratitude to Professor Chetan Subramanian for giving us this opportunity to work on ‘Understanding the Impact of Fiscal Deficit on Long-term Bond Yields’. We are sincerely grateful for the invaluable guidance Professor Subramanian provided in guiding the paper to the right track. His constant support and enthusiasm throughout the term was critical for our learnings and helped us to complete the paper in good shape. The aim of this study is to understand the impact of fiscal deficit on the long-term government bond yields. Existing studies done on this topic have focused on the developed economies and our aim for this paper is to complement these studies by looking at the impact from an Indian context. We will also understand the impact of other fiscal variables like GDP growth rate on the yields and explore their possible explanations.