An NIPFP study reveals that since late 2022, India's long-term bond yields have become far less sensitive to inflation and money supply growth, while short-term rates have become more responsive.
New Delhi: The yields on long-term government bonds have become less responsive to inflation expectations since September 2022, whereas the short-term rates have become more responsive, according to a working paper from the National Institute of Public Finance and Policy (NIPFP), which has been reviewed by Mint.
The study, titled Artificial Intelligence and the Indian Sovereign Yield Curve: Empirical Evidence in Times of Macroeconomic Turmoil, analysed monthly data from 2000 to 2025 to examine whether AI adoption has changed the factors influencing government bond yields.
The study notes that this change could be due to the increasing use of artificial intelligence (AI) tools, which can assist regulators and policymakers in detecting risks earlier and making more accurate liquidity forecasts in the banking system. It further states that better information would mean markets experience less uncertainty, thereby reducing the impact of inflation expectations and liquidity conditions on long-term bond yields.
The researchers do not, however, say that AI is the only cause. The period after late 2022 also saw policy normalisation following the pandemic, a surge in global inflation, and geopolitical tensions, all of which could have affected bond market behaviour.
Still, the widening gap between short- and long-term rates is attracting increasing attention. "The divergence between short- and long-term yields deserves a more careful examination since it might indicate changes in inflation expectations, in the way monetary policy is transmitted or in the term premium," Madhavi Arora, chief economist at Emkay Global Financial Services, told Mint. “For the Centre, the practical implication is equally important, as a weaker inflation coefficient at the long end does not guarantee lower borrowing costs. Fiscal supply, investor demand and the term premium will remain crucial determinants,” she added.
The term premium refers to the extra return that investors require when they lock their money into long-term bonds, reflecting the increased risks involved in lending for a longer period.
NIPFP, chaired by former Reserve Bank of India ( RBI) governor Urjit Patel, is an autonomous research institute under the finance ministry.
Queries sent to the NIPFP chairman and the finance ministry spokesperson remained unanswered till press time.
Changing yield curve
The findings matter for the RBI, which uses monetary policy and liquidity management to influence financial conditions. The results could have implications for the Union government’s borrowing programme. Government bond yields influence the cost of market borrowings, but the study does not establish that AI has lowered borrowing costs. Yields also depend on factors such as RBI’s policy stance, government borrowing requirements and investor demand for securities.
The researchers used an autoregressive distributed lag model to examine yields on 10-year, five-year and three-year government securities, as well as 91-day Treasury bills. They identified September 2022 as a structural break to test whether the relationship between yields, expected inflation, and the broad money supply (M3) changed during the AI period.
However, the findings do not establish that AI alone caused the changes. The period also coincided with post-pandemic monetary policy normalisation, the global inflation shock and geopolitical uncertainty, all of which could have influenced bond yields.
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Dhirendra Kumar
Dhirendra Kumar is a seasoned policy reporter with about 20 years of experience in deep, on-ground reporting across key economic and governance sectors. His work spans finance, public expenditure, disinvestment, public sector enterprises, textiles, trade, consumer affairs, and agriculture, with a strong focus on uncovering structural policy shifts and their real-world impact.<br><br>Kumar has been awarded the Chaudhary Charan Singh Award for Excellence in Journalism in Agricultural Research and Development, recognising his contribution to reporting on critical issues in the farm sector. He has also been a recipient of a fellowship in international trade from the National Press Foundation, which has further strengthened his coverage of global trade dynamics and their implications for India.<br><br>Kumar is known for breaking complex policy developments into clear, accessible stories. His reporting focuses on uncovering under-reported trends, explaining policy shifts, and helping readers stay informed about developments that shape India’s economic landscape.