Price Risk of Central Government Securities in India

The study examines the determinants of price risk of the central government securities in India using their daily trading data comprising of 81,384 observations during the period 2011 to 2020. The study finds that the high coupon bonds witness a moderate rise in prices compared to lower coupon bonds when the interest rate changes. The bond characteristics like residual maturity had a positive impact on bond price changes while the on-the-roll (recently issued) securities had a negative influence on bond price changes. The major contributions of the study are the quantification

The authors are grateful to K Kanagasabapathy, Golak C Nath, Sunder Ram Korivi, J Dennis Rajakumar and the anonymous reviewer from the Reserve Bank of India for their comments on an earlier draft of the paper. The authors also acknowledge Vimal Kishore for his help in data organisation. However, errors that remain are the sole responsibility of the authors. The views expressed in the paper should be attributed to the authors and not to the institutions they belong to.

The study examines the determinants of price risk of the central government securities in India using their daily trading data comprising of 81,384 observations during the period 2011 to 2020. The study finds that the high coupon bonds witness a moderate rise in prices compared to lower coupon bonds when the interest rate changes. The bond characteristics like residual maturity had a positive impact on bond price changes while the on-the-roll (recently issued) securities had a negative influence on bond price changes. The major contributions of the study are the quantification
of price change differentials due to different bond characteristics.

The government securities market in India plays an important role in the transmission of monetary policy. The yields on government securities set risk-free interest rates and the risk–premium in the economy. The price discovery in these markets helps to understand the market participants’ expectations on macroeconomic outlook and monetary policy. The yield on government securities also sets the cost of capital for the government. Studies in the Indian context have dealt with the role of financial sector reforms and institutional developments in Indian debt markets (Reddy 2002a, 2002b; Mohan 2004, 2005; Gandhi 2016), application of term structure models (Darbha et al 2002; Kanjilal 2013), yield spread and economic activity (Kanagasabapathy and Goyal 2002), and liquidity (Fleming et al 2016; Nath et al 2017). But the factors driving the price risk of central government securities in India are still an area that are less researched. The identification of the proximate determinants of sovereign bond price changes is important for both market participants and policymakers as it provides guidance on sources of volatility in bond prices and how one can immunise such risks.