It is a widespread practice among central banks over the world to report the base interest rates of the economy in terms of constant maturity yield curves for default risk free government securities. The Indian debt market being very thin and relatively less mature, so far there was no published information on constant maturity yields for the economy, in this paper, we have sought to fill this void, by refining our already existing yield curve to reflect constant maturity yields in place of yields for wide maturity bands. In order to deal with the existing problem of low frequency of trades and the resulting paucity of data while estimating the constant maturity yields, instead of maturity points we specify maturity "windows". These windows are the narrowest possible ones being chosen on considerations of precision as well as representation of a sizable number of traded securities. A comparison with our former yield curve shows that we have indeed achieved in terms of precision in this attempt. A rigorous comparison with the existing zero-coupon yield estimates published by the National Stock Exchange by testing two hypotheses - one of the equality of monthly yields based on the two methods and another of the cointegration of the two series shows that the constant maturity yields adequately reflect the movements of the term-structure of interest rates of the Indian economy though there remains significant difference in the level of monthly yields. Testing the same two hypotheses for yields of money market instruments, which are also zero-coupon securities, we come up with a striking result that the difference between the constant maturity and zero-coupon yields increase alarmingly. The shape of the zero-coupon yield curve is inverted at the very short end while constant maturity yield curves exhibit no such trend. Such inverted yield curves is not a regular feature of the Indian economy and shows the inability of the zero-coupon yield estimates to reflect the realised yields at the short end. It is concluded that given the current market scenario the estimated constant maturity yield curves can well represent the short, medium and long-term interest rates for the Indian economy.
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