Discussion on Feasibility of GDP-Indexed Bonds in Emerging Economies –Viewpoint India

Abstract

In their endeavor to sustain high level of economic growth rate, emerging economies are prone to financial distress and bourgeoning indebtedness. Exceeding reliance on foreign investments exposes to the risk of growth rate fluctuations. GDP-Indexed Bonds have been proposed as an instrument to hedge against debt trap, growth rate fluctuations and external economic turbulences. Return on these bonds is in direct relationship with GDP growth rate. The economic growth rate impacts interest rates as well, thereby affecting the returns on vanilla bonds.  Anticipating a correlation between returns on GDP-Indexed bonds and plain vanilla bonds, monthly data has been collected on GDP growth rate and 10-Year bond yield to determine the strength of association between the two types of bonds. Furthermore, this study explores the hedging possibilities for investors and comments upon the utility of GDP-indexed bonds in Indian context. The results may find use with large corporations, pension funds and overseas investors.

Keywords: interest rate, economic growth rate, GDP-indexed bond, vanilla bond