Every modern US recession followed a yield curve inversion. Does that mean we should worry every time it happens?
Probably not in isolation. The predictive track record outside the US is much weaker. An inversion might just mean short-term inflation expectations are falling faster than long-term ones - which is a different story from imminent contraction.
Indian data shows inversions in 1989, 2000, 2006, 2019 - each followed by 28–56% market falls before recovery. Pattern exists. Causality is harder to pin.
Worth watching. Not worth panicking about.
A normal curve pays more for longer money, because time is risk. When short-term money costs more than long-term money, the market is usually pricing rate cuts, and rates fall when central banks expect weakness. It is also partly self-fulfilling. Banks borrow short and lend long, so an inverted spread makes lending less profitable and slows it.
The US record is strong, not perfect. In 1966 and 1998 inversions came and went without a recession. And when it does work, the lag runs anywhere from 6 months to 2 years. Useless for timing.
In India, the G-sec curve bends to RBI liquidity operations and the government borrowing calendar. Neither has much to do with recession risk. The four inversions I listed each came before 28-56% market falls. Plenty of other things did too. Correlation is not a trading signal.
Credit growth, earnings, and RBI’s commentary tell you more than the curve does.