Dear Sir,
There is something related to the monetory phenomenon that I have read in the Business Line. The article talks about the effects of monetory tightening on short term yeilds. I am not very sure on my understanding of the same.
The article says - "“The short term yields having spiked in the month of August following a slew of policy measures including the hike in CRR to 7 per cent, the removal of cap in reverse repo volumes, the hike in limit of MSS issuances to Rs 1,50,000 crores and restriction of ECBs that only up to $20 million could be brought into the country”
My Question: Why should short term yeilds spike following monetory tightening?
Although I have a vague idea, I am not sure about it.
Here is the link to the article - http://www.thehindubusinessline.com/2007/08/29/stories/2007082952411300.htm
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I am thinkin' answer which can be terribly wrong...plz correct me if i am wrong -->
Monetary Tightening Measures (as mentioned in the article) --> Race to raise money in the debt market --> Secondary Market for debt has securities with shorter tenor, which are more attractive right now as yield curve is close to flat --> sale of such papers in the market to raise cash --> increase in volume of short term papers --> Fall in Prices --> Increase in Yields (a Spike in the Yield curve!)
(As mentioned in class, there can be many more signaling reasons)
SANAT SATYAN
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