A working paper from the National Institute of Public Finance and Policy found that, from September 2022 onward, long-term government bond yields grew less sensitive to inflation expectations while overnight and near-term rates moved in the opposite direction, tracking those expectations more closely.
Covering monthly records from 2000 through 2025, the research — published under the title Artificial Intelligence and the Indian Sovereign Yield Curve: Empirical Evidence in Times of Macroeconomic Turmoil — set out to determine whether the spread of AI adoption had reshaped the variables driving government bond yields. To track how government borrowing costs move over time, the team applied an autoregressive distributed lag framework across four debt instruments — 10-year, five-year, and three-year bonds, along with 91-day Treasury bills. September 2022 was pinpointed as a structural break point, allowing researchers to examine whether the interplay among bond yields, anticipated inflation, and the broad money aggregate known as M3 had shifted once the AI era took hold.
Researchers behind the study attributed the shift partly to the growing adoption of AI-driven tools, which offer regulators and policymakers a way to flag potential vulnerabilities earlier and produce more reliable projections of liquidity conditions across the banking sector. When bond markets receive more transparent and timely data, the uncertainty baked into long-term pricing tends to shrink — reducing how much weight traders place on inflation expectations and available liquidity when setting yields.
The result, however, does not attribute the outcome to AI as the only factor involved. Yield-curve dynamics in the period after late 2022 were shaped by overlapping pressures — the unwinding of pandemic-era policy stances, a broad uptick in global inflation, and geopolitical friction — each of which carried the potential to influence fixed-income market behaviour across that interval. Across that same window, central banks were pulling back pandemic-era monetary support, consumer prices were climbing at a pace felt globally, and geopolitical strains were intensifying — each of these developments stands as a plausible contributor to movements in bond yields, though no direct link has been established.
Madhavi Arora, chief economist at Emkay Global Financial Services, noted in a television interview that the divergence between yields at the short and long ends of the curve deserves careful examination, as it may reflect underlying movements in inflation expectations, the transmission pathway of monetary policy, or the term premium embedded in longer-dated instruments. She went on to observe that the practical fiscal implications for the central government remain equally pressing, given that a diminished inflation coefficient at the longer end of the yield curve does not automatically feed through into lower borrowing costs for the sovereign.
Three factors she identified — the volume of government debt issuance, appetite among investors, and the term premium — are expected to drive bond market outcomes going forward. When investors commit funds to bonds with distant maturity dates, they typically demand a yield premium above what shorter-duration instruments offer — compensation for the greater uncertainty that comes with tying up capital over an extended horizon.
While government bond yields shape what it costs to borrow on open markets, no link between AI adoption and reduced borrowing expenses was established by the research. Bond returns are shaped by a range of variables, among them the monetary policy position held by the Reserve Bank of India, the volume of securities the government places in the market, and the appetite investors bring to fixed-income instruments.
Those results hold practical weight for the Reserve Bank of India, whose toolkit of interest rate decisions and liquidity operations shapes the broader conditions under which credit and capital flow through the economy. How those findings land may shape the trajectory of the Union government's debt-raising plans.
Established as an autonomous body operating within the finance ministry's ambit, NIPFP counts Urjit Patel — who previously served as governor of the Reserve Bank of India — among its leadership as chair. No response had been received from either the NIPFP chairman or the finance ministry spokesperson by the time this report went to publication.
