Debt market in India 2012

INDEX

SR. NO.

PARTICULARS

PAGE NO. 5 7 11 17 19 21 23 24 25 26 27 31 32

1. Executive Summery 2. Introduction of the Bank 3. Introduction of the Debt Market 4. Structure of Debt Market 5. Market Participants 6. Debt Market Instruments 7. Issuer and Investors 8. Factors Affecting Debt Market 9. Benefits of investing in Debt market 10. Methodology 11. Outcome of the Study 12. Learning Experience 13. Bibliography

[Type text]

Page 1

Debt market in India 2012

EXECUTIVE SUMMERY

About the Project :

The project is about Indian debt market. It describes how debt market operates & it also depend upon Indian Economy. Debt market is a financial market where investors buy & sell debt secrurities, mostly in the form of Bonds. The Debt Market is an important source of funds, especially in developing countries like India. Debt markets are pre-dominantly wholesale markets, with dominant institutional investor participation. The investors in the debt markets concentrate in banks, financial institutions, mutual funds, provident funds, insurance companies and corporates. Many of these participants are also issuers of debt instruments. The smaller number of large players has resulted in the debt markets being fairly concentrated, and evolving into a wholesale negotiated dealings market. Most debt issues are privately placed or auctioned to the participants. Secondary market dealings are mostly done on telephone, through negotiations. In some segments such as the government securities market, market makers in the form of primary dealers have emerged, who enable a broader holding of treasury securities. Debt funds of the mutual fund industry, comprising of liquid funds, bond funds and gilt funds, represent a recent mode of intermediation of retail investments into the debt markets, apart from banks, insurance, provident funds and financial institutions, who have traditionally been major intermediaries of retail funds into debt market products. The government securities market, one of the most important components of the financial sector in a modern economy performs many important roles. From the viewpoint of the government, it is an [Type text] Page 2

Debt market in India 2012 important source of funds and from the viewpoint of investor it is an investment that is free from default risk. In so far as the domestic financial markets are concerned invariability the G-sec market is the most liquid segment of the market. Also the major transactions in the banking sector are also of call money transactions in order to maintain the necessary CRR. They lend or borrow money from market. The introduction of CBLO has definitely hastened these procedures.

This report deals mainly with the Indian Debt Market structure and different factors involved in it.

Objective:
To get a thorough understanding of the present debt market. To analyze the various factors affecting these markets. To know the Indian Debt Market and its operations. To study the different instruments in the debt market. To know the issuer and participants in the debt market. Factors influencing debt market.

[Type text]

Page 3

Debt market in India 2012

Scope:
The scope of this report is to know various parameters of the calculation of the CRR and SLR. And also, to know the process of government security transaction and the call money transactions.

Limitations:
This report deals with the procedures and the various parameters of CRR, SLR and also Call market. But the limitation of this report would be that it only cover only cover the part of Banking sector i.e. only of non-scheduled Co-Op. banks. So it is not applicable to scheduled banks fully.

[Type text]

Page 4

Debt market in India 2012

INTRODUCTION

[Type text]

Page 5

Debt market in India 2012

INTRODUCTION OF THE BANK

THE MUMBAI DISTRICT CENTRAL CO-OPERATIVE BANK LIMITED, MUMBAI

Mumbai Bank Bhavan, 207, Dr. D.N. Road, Fort, Mumbai 400 001.

OBJECTS: The objects of the Bank are 1) To finance affiliated societies in Mumbai excluding federal societies the area of operation of which extends beyond Mumbai and generally to carry on Banking Business. 2) To participate in the Share Capital of primary Credit and multipurpose or other societies registered under the Act with the approval of the Registrar. 3) To arrange for Supervision and inspection of affiliated societies and to assess their credit. 4) To act as a balancing centre for the surplus funds of the societies. a. To finance societies registered under the societies Regulation Act, 1860 for their industrial activities. b. To finance Industrial Co-operative Societies or other societies or association and other societies having artisans as their members and Industrial activities for their members, to establish and conduct industries on their account. 5) BANKING BUSINESS [Type text] Page 6

Debt market in India 2012 a) Accepting for the purpose of lending or investment deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, drafts, and order or otherwise.

VISION STATMENT
To make the Department capable of withstand the competition in Financial & Debt Market and to earn optimum profit for the Bank.

SALIENT FEATURES
A biggest District Central Co-operative Bank in Asia, standing on very sound financial footing. Central financing Agency and Balancing Centre for surplus Funds of all types of co-op Societies in Brihan Mumbai District. As per provision under section 70 of MCS Act 1960, Society is required to deposit entire funds with this bank. [Type text] Page 7

Debt market in India 2012 Immediate Service of cleaning, Demand Draft, Pay Order, Mail Transfer etc. Free guidance for formation of Co-operative Societies of any type. Banking Services throughout the week. Any Branch Banking facility available.

[Type text]

Page 8

Debt market in India 2012

Organization Structure of Funds & Investment Department

Funds & Investments

G-sec

Investments

Call Money

Liquidity

SLR
o NABARD Bonds o IDBI Bonds o EXIM Bonds o GSFC etc.

Non-SLR
o o o o MKVDC Bonds MSEB Bonds MSCGF MPSID etc.

MSCB

[Type text]

Page 9

Debt market in India 2012

Flow of Work for Call Money: Opening Balance (from Clearing Department) Call Money Status Report Communicating with sub-members and branches Non-SLR (Sales / Interest/ Maturity) Lending and Borrowing operations Daily Paperwork

Flow of Work for NDS (G-Sec):

Day Begin

Market Watch Dealing / Bidding (Front Office) Call Money (Funds Availability) Bridge Station / Internet / News Papers

Settlement (Back Office) Maturity / Coupon Interest collection

Entries on Magic Software (Back Office)

Reporting Funds Transactions to Call Money

[Type text]

Page 10

Debt market in India 2012

1. INTRODUCTION OF DEBT MARKET

Debt market is the financial market where debt securities can be buy and sell by investors, mostly in the form of Bonds. Debt market is an important source of funds, especially in developing country like India. Debt market in India also considered a useful substitute to banking channel for finance.

The most distinguishing feature of these instruments is that the return is fixed. It means returns are almost risk-free. The fixed return on the bond is known as the interest rate or the coupon rate. Thus, the buyer of a bond gives seller a loan at a fixed rate, which is equal to the coupon rate. Debt markets are therefore, markets for fixed income securities issued by: Central and State Governments Municipal Corporations Entities like Financial Institutions, Banks, Public Sector Units and Public Ltd. companies.

The money market also deals in fixed income instruments. However, difference between money and bond markets is that the instruments in the bond markets have a larger time to maturity (more than one year). The money market on the other hand deals with instruments that have a lifetime of less than one year.

1.1 ADVANTAGES:
The biggest advantage of investing in Indian debt market is its assured returns. This return is almost riskfree. Another advantage of investing in Indian debt market is its high liquidity. [Type text] Page 11

Debt market in India 2012

1.2 DISADVANTAGES:
As there are several advantages of investing in Indian debt market, there are certain disadvantages as well. As the returns here are risk free, those are not as high as the equities market at the same time. So, at one hand you are getting assured returns, but on the other hand, you are getting less return at the same time.

DEBT MARKET DIVIDED INTO TWO SECTORS:

PRIMARY MARKET: The primary market provides the channel for sale of new securities. Primary market provides opportunities to issuers of securities; government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation. The primary market issuance is done either through public issues or private placement. A public issue does not limit any entity in investing while in private placement, the issuance is done to select people. There are two major types of issuer who issue securities. The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the government (central and state government) issue debt securities (dated securities, T-bills). Methods of issuing securities in the primary market are: o Initial Public Offering o Right Issue o Preferential Issue

SECONDARY MARKET: Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market. Secondary market comprises of equity market and the debt markets. The secondary market enables participants who hold securities to [Type text] Page 12

Debt market in India 2012 adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. The secondary market has further two components, namely the over-the-counter (OTC) market and the exchange-traded market. OTC markets are essentially informal markets where trades are negotiated. Most of the trades in government securities are in the OTC market.

Trading of Government securities on Stock Exchanges: Government bonds are deemed to be listed as soon as they are issued. Markets for government securities are pre-dominantly wholesale markets, with trades done on telephone negotiation. NSE WDM provides a trading platform for Government bonds, and reports over 65% of all secondary markets trades in government securities. Since participants have to report their trades to the PDO, and effect settlement through the SGL, RBIs reports on SGL transactions provide summary data on secondary market transactions in government bonds. Repo and Reverse Repo: Repo or Repurchase Agreements are short-term money market instruments. Repo is nothing but collateralized borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. In a typical repo transaction, the counter-parties agree to exchange securities and cash, with a simultaneous agreement to reverse the transactions after a given period. A reverse repo is the mirror image of a repo. When one is doing a repo, it is reverse repo for the other party. For, in a reverse repo, securities are acquired with a simultaneous commitment to resell. However, whether a transaction is a repo or a reverse repo is determined only in terms of who initiated the first leg of the transaction. [Type text] Page 13

Debt market in India 2012 Negotiated Dealing System: The first step towards electronic bond trading in India was the introduction of the RBIs Negotiated Dealing System in February 2002. NDS, interalia, facilitates screen based negotiated dealing for secondary market transactions in government securities and money market instruments, online reporting of transactions in the instruments available on the NDS and dissemination of trade information to the market. Government securities (including T-bills), call money, notice/term money, repos in eligible securities are available for negotiated dealing through NDS among the members. NDS members concluding deals in the telephone market in instruments available on NDS, are required to report the deal on NDS system within 15 minutes of concluding the deal. NDS interfaces with CCIL for settlement of government securities transactions for both outright and repo trades done/reported by NDS members. Other instruments viz, call money, notice/term money, commercial paper and certificate of deposits settle as per existing settlement procedure.

The benefits of NDS include: Transparency of trades in money and government securities market, Electronic connectivity with securities settlement systems, thus, eliminating submission of physical SGL form, Settlement through electronic SGL transfer, Elimination of errors and discrepancies and delay inherent in manual processing system, and [Type text] Page 14 Electronic audit trail for better monitoring and control.

Debt market in India 2012 Wholesale Debt Market of NSE: The wholesale debt market (WDM) segment of NSE commenced operations on June 30, 1994 and provided the first formal screen-based trading facility for the debt market in the country. Initially, government securities, T-bills and bonds issued by PSUs were made available in this segment. The WDM trading system, known as NEAT (National Exchange for Automated Trading). Retail Debt Market: With a view to encouraging wider participation of all classes of investors across the country (including retail investors) in government securities, the Government, RBI and SEBI have introduced trading in government securities for retail investors. Trading in this retail debt market segment (RDM) on NSE has been introduced w.e.f. January 16, 2003. RDM Trading: Trading takes place in the existing Capital Market segment of the Exchange and in the same manner in which the trading takes place in the equities (Capital Market) segment. The RETDEBT Market facility on the NEAT system of Capital Market Segment is used for entering transactions in RDM session. The trading holidays and market timings of the RDM segment are the same as the Equities segment. Trading in Retail Debt Market is permitted under Rolling Settlement, where in each trading day is considered as a trading period and trades executed during the day are settled based on the obligations for the day. Settlement is on a T+2 basis i.e. on the 2nd working day. National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed in Retail Debt Market.

[Type text]

Page 15

Debt market in India 2012 INDIAN DEBT MARKET CAN BE CLASSIFIED INTO TWO CATEGORIES: a. Government securities market (G-Sec Market) b. Bond market

DebtMarket

G-Secs

Bonds

Central Govt.

State Govt.

FI Bonds

PSU Bonds

Corporate Securuties

[Type text]

Page 16

Debt market in India 2012

SEGMENTS OF DEBT MARKETS:

There are three main segments in the Debt markets in India, o Government Securities, o Public Sector Units (PSUs) bond and o Corporate Securities.

The market for Government securities comprises the Centre, State and State-Sponsored securities. The PSU bonds are generally treated as surrogates of sovereign paper, sometimes due to explicit guarantee and often due to the comfort of public ownership. Some of the PSU bonds are tax free while most bonds, including government securities are not tax free. The Government Securities segment is the most dominant among these three segments. Many of the reforms in pre-1997 period were fundamental, like introduction of auction systems and PDs. The reform in the Government Securities market which began in 1992, with Reserve Bank playing a lead role, entered into a very active phase since April 1997, with particular emphasis on development of secondary and retail markets.

[Type text]

Page 17

Debt market in India 2012

2. STRUCTURE OF INDIAN DEBT MARKET

There is no single location or exchange where debt market participants interact for common business. Participants talk to each other, conclude deals, send confirmations etc. on the telephone, with clerical staff doing the running around for settling trades. In that sense, the wholesale debt market is a virtual market. In order to understand the entirety of the wholesale debt market we have looked at it through a framework based on its main elements. The market is best understood by understanding these elements and their mutual interaction. These elements are as follows:

Instruments - the instruments that are being traded in the debt market. Issuers - entity which issue these instruments. Investors - entities which invest in these instruments or trade in these instruments. Interventionists or Regulators - the regulators and the regulations governing the market.

It is necessary to understand microstructure of any market to identify processes, products and issues governing its structure and development. In this section a schematic presentation is attempted on the micro-structure of Indian corporate debt market so that the issues are placed in a proper perspective. Figure gives a birds eye view of the Indian debt market structure.

[Type text]

Page 18

Debt market in India 2012 REGULATOR

SEBI, RBI, DCA

MARKET SEGMENT

ISSUER

INSTRUMENTS o Treasury bills o State Govt.

Govt. Securities

Central Govt.

State Govt.

Securities o Zero coupon Bonds o Coupon Bearing Bonds

Govt. Agencies / Statutory Bonds Public sector Bonds

Govt. Guaranteed Bonds PSU Bonds, Debentures, C.P. C.D., Debentures, Bonds

Public sector units Commercial Banks

Corporates Private sector Bonds

o Debentures o Commercial

Papers o Bonds o Floating Rate Bonds Pvt. Sector Banks

C.D., Debentures, Bonds

Page 19

[Type text]

Debt market in India 2012

3. MARKET PARTICIPANTS IN INDIAN DEBT MARKET

Central Government: It raises money through Bond and T-bill issues to fund budgetary deficit and other short and long-term funding requirements.

Reserve Bank of India (RBI): Its act as investment banker to the government. It raises funds for the government through dated securities and T-bill issues and also participates in the market through open-market operations in the course of conduct of monetary policy. RBI also conducts daily repo and reverse repo to moderate money supply in the economy. RBI also regulates the bank rates and repo rates, and uses these rates as tools of its monetary policy. Changes in these benchmark rates directly impact debt markets and all participants in the market as other interest rates realign themselves with these changes.

Primary Dealers (PDs): It plays role of market intermediaries appointed by RBI, underwrite and make market in government securities by providing two-way quotes, and have access to the call and repo markets for funds. Their performance is accessed by RBI on the basis of their bidding commitments and the success ratio achieved at primary auctions. In the secondary market, their outright turnover has to three times their holdings in dated securities and five times their holdings in treasury bills.

[Type text]

Page 20

Debt market in India 2012

State governments, municipal and local bodies: They issue securities in the debt markets to fund their developmental projects as well as to finance their budgetary deficit.

Public Sector Undertakings (PSUs): PSUs and their finance corporations are large issuers of debt securities. They raise funds to meet the long term and working capital needs. These corporations are also investors in bonds issued in the debt markets.

Corporates: It issues short and long-term paper to meet their financial requirements. They are also investors in debt securities issued in market.

Development Financial Institutions (DFIs): DFIs regularly issue bonds for funding their financing requirements and working capital needs. They also invest in bonds issued by other entities in the debt markets. Most FIs hold government securities in their investment and trading portfolios.

Mutual Funds: Mutual Funds have emerged as important players in the debt market, owing to the growing number of debt funds that have mobilized significant amounts from the investors. It used for meeting very short-term liquidity requirements.

[Type text]

Page 21

Debt market in India 2012

Provident and pension funds: They are large investors in the debt markets. The prudential regulations governing the deployment of the funds mobilized by them mandate investments predominantly in treasury and PSU bonds.

Charitable institutions, trusts: Charitable institutions, trusts and societies are also large investors in the debt markets. They are, however, governed by their rules and bye-laws with respect to the kind of bonds they can buy and the manner in which they can trade on their debt portfolios.

[Type text]

Page 22

Debt market in India 2012

4. DEBT MARKET INSTRUMENTS

Commercial Paper (CP): They are primarily issued by corporate entities. It is compulsory for the issuance of CPs that the company be assigned a rating of at least P1 by a recognized credit rating agency. An important point to be noted is that funds raised through CPs do not represent fresh borrowings but are substitutes to a part of the banking limits available to them.

Certificates of Deposit (CD): While banks are allowed to issue CDs with a maturity period of less than 1 year, financial institutions can issue CDs with a maturity of at least 1 year. The prime reason for an active market in CDs in India is that their issuance does not warrant reserve requirements for bank.

Treasury Bills (T-Bills): T-Bills are issued by the RBI at the behest of the Government of India and thus are actually a class of Government Securities. Presently T-Bills are issued in maturity periods of 91 days, 182 days and 364 days. Potential investors have to put in competitive bids. Non-competitive bids are also allowed in auctions (only from specified entities like State Governments and their undertakings, statutory bodies and individuals) wherein the bidder is allotted T-Bills at the weighted average cut off price.

Long-term debt instruments: These instruments have a maturity period exceeding 1year. The main instruments are Government of India dated securities (GOISEC), State Government securities (state loans), Public Sector Undertaking bonds (PSU bonds) and corporate

[Type text]

Page 23

Debt market in India 2012 bonds/debenture. Majority of these instruments are coupon bearing i.e. interest payments are payable at pre specified dates.

Government of India dated securities (GOISECs): Issued by the RBI on behalf of the Central Government, they form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). They have a maturity period ranging from 1 year to 30 years.

GOISECs are issued through the auction route with the RBI pre specifying an approximate amount of dated securities that it intends to issue through the year. But unlike T-Bills, there is no pre set schedule for the auction dates. The RBI also issues products other than plain vanilla bonds at times, such as floating rate bonds, inflation-linked bonds and zero coupon bonds.

State Government Securities (state loans): Although these are issued by the State Governments, the RBI organizes the process of selling these securities. The entire process, 17 right from selling to auction allotment is akin to that for GOISECs. They also form a part of the SLR requirements and interest payment and other modalities are analogous to GOISECs. Although there is no Central Government guarantee on these loans, they are believed to be exceedingly secure. One important point is that the coupon rates on state oans are slightly higher than those of GOISECs, probably denoting their sub-sovereign status.

[Type text]

Page 24

Debt market in India 2012

Public Sector Undertaking Bonds (PSU Bonds): These are long-term debt instruments issued generally through private placement. The Ministry of Finance has granted certain PSUs, the right to issue tax-free bonds. This was done to lower the interest cost for those PSUs who could not afford to pay market determined interest rates.

Bonds of Public Financial Institutions (PFIs): Financial Institutions are also allowed to issue bonds, through two ways - through public issues for retail investors and trusts and secondly through private placements to large institutional investors.

Corporate debentures: These are long-term debt instruments issued by private companies and have maturities ranging from 1 to 10 years. Debentures are generally less liquid as compared to PSU bonds.

[Type text]

Page 25

Debt market in India 2012

5. ISSUER AND INVESTORS IN DEBT MARKET :

Issuer and Investor in Debt Market

Ref: NCFM Module

[Type text]

Page 26

Debt market in India 2012

REGULATORS:

The Securities Contracts Regulation Act (SCRA) defines the regulatory role of various regulators in the securities market. Accordingly, with its powers to regulate the money and Government securities market, the RBI regulates the money market segment of the debt products (CPs, CDs) and the Government securities market. The non Government bond market is regulated by the SEBI. The SEBI also regulates the stock exchanges.

6. FACTORS AFFECTING DEBT MARKET

INTERNAL FACTORS Interest rate movement in the system RBI economic policies Demand for money Government borrowings to tide over its fiscal deficit Supply of money Inflation rate Credit quality of the issuer

EXTERNAL FACTORS World Economy and its impact Foreign Exchange Crude Oil prices Economic Indicators Page 27

[Type text]

Debt market in India 2012

7. BENEFITS OF INVESTING IN A DEBT MARKET

Safety: The Zero Default Risk is the greatest attraction for investments in Government securities.
It enjoys the greatest amount of security possible, as the Government of India issues it. Hence they are also known as Gilt-Edged Securities or Gilts.

Fixed Income: During the term of the security there is likely to be fluctuations in the Government
security prices and thus there exists a price risk associated with investment in government security. However, the return on the holding of investments is fixed if the security is held till maturity and the effective yield at the time of purchase is known and certain. In other words the investment becomes a fixed investment if the buyer holds the security till maturity.

Convenience: Government securities do not attract deduction of tax at source (TDS) and hence the
investor having a non-taxable gross income need not file a return only to obtain a TDS refund.

Simplicity: To buy and sell government securities all an individual has to do is call his/her Broker
and place an order. If an individual does not trade in the Equity markets, he/she has to open a demat account and then can commence trading through any broker.

Liquidity: Government security when actively traded on exchanges will be highly liquid, since a
national trading platform is available to the investors.

Diversification: Government Securities are available with a tenor of a few months up to 30 years.
An investor then has a wide time horizon, thus providing greater diversification opportunities.

[Type text]

Page 28

Debt market in India 2012

METHODOLOGY

Source of Data: Secondary Data

Sample area: Mumbai.

To know the growth of Indian Debt Market we adopt Trend Analysis method. For this we select Mumbai region and Data is collected from the Secondary Source. TURNOVER IN GOVT SECURITIES MARKET (FACE VALUE) AT MUMBAI

GOVT. OF INDIA SECURITIES MARKET

2,000,000.00 1,800,000.00 1,600,000.00 1,400,000.00 1,200,000.00 1,000,000.00 800,000.00 600,000.00 400,000.00 200,000.00 april may jun july aug sep oct nov dec jan feb marc 2009-10 2008-09 2007-08 2006-07

[Type text]

Page 29

Debt market in India 2012

GROWTH OF INDIAN DEBT MARKET (Mumbai region)

Months
April May June July August September October November December January February March

2006-07
1,10,559.28 1,00,542.72 77,255.06 65,538.70 1,48,081.02 2,84,464.66 1,22,101.80 2,57,667.60 2,39,765.16 1,40,660.36 1,13,360.08 1,10,983.52

2007-08
1,29,393.26 1,14,658.96 2,20,172.02 3,83,106.46 2,41,706.99 1,74,533.46 1,45,814.85 1,73,573.07 2,12,467.87 5,54,272.55 4,34,802.32 1,72,568.68

2008-09
1,63,277.17 3,18,354.85 1,95,337.16 1,44,355.59 2,67,462.66 2,98,155.18 2,81,273.77 3,52,322.10 6,07,851.56 6,95,344.05 3,31,881.02 2,73,558.86

2009-10
4,39,334.81 5,44,075.82 3,89,434.91 5,97,737.07 2,80,993.15 4,98,808.92 4,15,134.87 5,04,784.77 4,13,982.37 4,38,066.63 2,97,462.88 2,23,961.35

This table shows the turnover of government of Indian securities market in Mumbai District. It also provides the information on monthly basis Trend for Government of India is for last 4 years

[Type text]

Page 30

Debt market in India 2012

OUTCOME OF THE STUDY

1. TO CALCULATE QUARTELY GROWTH OF INDIAN DEBT MARKET(MUMBAI

REGION)
QUARTERS AVERAGE QUARTERLY GROWTH

Apr-June 06 July-Sept 06 Oct-Dec 06 Jan-Mar 07 Apr-June 07 July-Sept 07 Oct-Dec 07 Jan-Mar 08 Apr-June 08 July-Sept 08 Oct-Dec 08 Jan-Mar 09 Apr-June 09 July-Sept 09 Oct-Dec 09 Jan-Mar 10

96,119.02 1,66,028.13 2,06,511.52 1,21,667.99 1,17,912.29 1,18,345.25 1,54,741.41 2,39,312.48 2,81,661.82 2,66,448.97 1,87,351.77 1,64,640.46 1,77,285.26 3,13,437.83 4,00,514.25 3,87,214.52

0.73 0.24 -0.41 -0.03 0.00 0.31 0.55 0.18 -0.05 -0.30 -0.12 0.08 0.77 0.28 -0.03

[Type text]

Page 31

Debt market in India 2012

We can use this data to calculate Quarterly Average and Quarterly Growth to compare growth rate with last quarter. We can also put it in to a diagram to understand it easily.

450,000.00 400,000.00

350,000.00
300,000.00 250,000.00 200,000.00 Quarterly Growth 150,000.00 100,000.00 50,000.00 Apr-June 06 July-Sept 06 Oct-Dec 06 Jan-Mar 07 Apr-June 07 July-Sept 07 Oct-Dec 07 Jan-Mar 08 Apr-June 08 July-Sept 08 Oct-Dec 08 Jan-Mar 09 Apr-June 09 July-Sept 09 Oct-Dec 09 Jan-Mar 10 [Type text]

Page 32

Debt market in India 2012

2. TO CALCULATE OF MONTHLY GROWTH OF INDIAN DEBT MARKET

MONTHLY GROWTH MONTHS 2006-2007 2007-2008 2008-2009 2009-2010

April May June July August September October November December January February March

-0.09 -0.23 -0.15 1.26 0.92 -0.57 1.11 -0.07 -0.41 -0.19 -0.02

-0.11 0.92 0.74 -0.37 -0.28 -0.16 0.19 0.22 1.61 -0.22 -0.60

0.95 -0.39 -0.26 0.85 0.11 -0.06 0.25 0.73 0.14 -0.52 -0.18

0.24 -0.28 0.53 -0.53 0.78 -0.17 0.22 -0.18 0.06 -0.32 -0.25

We can also use this data to calculate Monthly Growth and Monthly Average. We can represent this data in diagram. 2.00 1.50 1.00 2006-07 2007-08 2008-09 April May June July Aug Sept Oct Nov Dec Jan Feb Mar 2009-10

0.50
-0.50 -1.00 [Type text]

Page 33

Debt market in India 2012

CURRENT RATE

Indicator Current rate Inflation 7.23 Bank rate 9% CRR 4.75% SLR 23% Repo rate 8% Reverse repo rate 7%

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Cash Reserve Ratio (CRR) :

Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate ( [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3% and 20% of total of their demand and time liabilities]. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 4.75%. ( As on Date- 25 June, 2012).

[Type text]

Page 34

Debt market in India 2012

Statutory Liquidity Ratio (SLR) : Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an antiinflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. In well-developed economies, central banks use open market operationsbuying and selling of eligible securities by central bank in the money marketto influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.

[Type text]

Page 35

Debt market in India 2012

INTREST RATE OF CERTIFICATE OF DEPOSIT AND G-SEC

Despite two rate hikes in six weeks, the debt market seems unaffected as short-term rates reflected by three-month certificates of deposit (CD) and three-month commercial papers remain largely unchanged in the last couple of months. Even 12-month CD rates havent moved much; from 9.5% at the end of August, 12-month CD rate is now at levels of 9.6%. In September, the government announced an increased borrowing program sending bond yields higher. This had an immediate impact on 10-year government securities (G-secs) yield, which is now at around 8.8%. So for all practical purposes, the debt market is no longer concerned about rate hikes and is only focusing on the fiscal situation and potential slippages. The policy rate hikes are yet to be translated to higher base rates in case of most large banks. Liquid funds, short-term income funds and fixed maturity plans are giving returns upwards of 8.5% per annum. Fixed deposits of one-three years are offering 9-10% per annum. If you hold a pure income fund, chances are the returns in October were negative given the sharp rise in yields. The recent increase in long-term yields would have upset returns of bond funds with exposure to long-term bonds, specifically 10-year G-secs. [Type text] Page 36

Debt market in India 2012

YIELD OF VARIOUS SECURITIES

High Yields Due to the six continuous rates hikes by the Reserve Bank of India (RBI) in 2010 and the severe liquidity crunch faced in the system since the last few months, the bond yields have increased sharply. In the last 18 to 20 months, yields on the short-end and the long-end of the curve have significantly moved higher. On the 10 year G-Sec paper, the yields have risen by 180 basis points (bps) and on the Certificate of Deposits of time period between 3 and 12 months, the yields have risen by 400 to 500 bps. The yields on 3-12 months Commercial Papers have also risen by 400 to 550 bps

[Type text]

Page 37

Debt market in India 2012

BIBLIOGRAPHY

www.rbi.com www.slideshare.net www.mumbaidistrictbank.com http://www.marketoperation.com http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=11967 NCFM Module

[Type text]

Page 38