India’s long-term bond yields less sensitive to inflation in AI era: NIPFP | Today’s news

New Delhi: Long-term government bond yields are less responsive to inflation expectations from September 2022, while short-term rates are more responsive, according to a National Institute of Public Finance and Policy (NIPFP) working paper reviewed by Mint.

The study, titled Artificial Intelligence and India’s Treasury Yield Curve: Empirical Evidence in a Time of Macroeconomic Turmoil, analyzed monthly data from 2000 to 2025 to examine whether the adoption of AI has changed the factors affecting government bond yields.

The study says this change could be driven by the growing use of artificial intelligence (AI) tools that can help regulators and policymakers detect risks earlier and make more accurate forecasts of liquidity in the banking system. It further states that better information would mean less uncertainty in the markets, thereby reducing the impact of inflation expectations and liquidity conditions on long-term bond yields.

But the researchers aren’t saying AI is the only cause. The period after the end of 2022 also saw post-pandemic policy normalization, a surge in global inflation and geopolitical tensions, all of which could have affected bond market behavior.

However, the widening gap between short-term and long-term rates is attracting more and more attention. “The difference between short-term and long-term yields deserves closer scrutiny as it could indicate changes in inflation expectations, the transmission of monetary policy or the term premium,” Madhavi Arora, Chief Economist at Emkay Global Financial Services, told Mint. “For the center, the practical impact is just as important, as a weaker inflation coefficient does not guarantee lower borrowing costs in the long run. Fiscal supply, investor demand and the term premium will remain the deciding factors,” she added.

The term premium refers to the extra return that investors demand when they lock their money into long-term bonds, reflecting the increased risks associated with borrowing for longer periods.

NIPFP, chaired by former Reserve Bank of India (RBI) Governor Urjit Patel, is an autonomous research institute under the Ministry of Finance.

Queries sent to the NIPFP chairman and a spokesman for the finance ministry remained unanswered as of press time.

Shifting yield curve

The findings are important for the RBI, which uses monetary policy and liquidity management to influence financial conditions. The results could impact the borrowing program of the Union government. Treasury yields affect the cost of market borrowing, but the study does not show that AI reduces borrowing costs. Returns also depend on factors such as RBI’s stance, government borrowing requirements and investor demand for securities.

The researchers used an autoregressive distributed lag model to examine yields on 10-year, 5-year, and 3-year Treasuries, as well as 91-day Treasury bills. They identified September 2022 as a structural turning point to test whether the relationship between yields, expected inflation and the broad money supply (M3) had changed during the AI ​​period.

However, the findings do not prove that AI alone caused the changes. The period also coincided with a post-pandemic normalization of monetary policy, a global inflation shock and geopolitical uncertainty, all of which could have affected bond yields.