MONEY MARKET REVIEW

Indias Growth Story: Pre- and Post-Crisis

EPW Research Foundation

The earlier than expected recovery of the Indian economy from the effects of the global crisis has led to predictions of a return to the 9% growth rate witnessed in the 2003-08 period. But some awareness of the downside risks is necessary, for the Indian economy does not currently enjoy the benets of low ination, low interest rates and favourable debt indicators. It is also a cause for concern that between 2006-07 and 2010-11 some macroeconomic indicators such as the current account decit have shown a trend similar to that between 1986-87 and 1990-91, when India faced an acute balance of payments crisis. A cross-country comparison also shows that post-crisis India is poorly placed in respect of these parameters when compared to its counterparts.

1.1 Introduction

Team led by K Kanagasabapathy and supported by V P Prasanth, R Krishnaswamy, Rema K Nair, Anita B Shetty, Shruti J Pandey, Vishakha G Tilak and Sharan P Shetty.

ow that the economy has passed through the crisis and is on its recovery path sooner than expected, Indias growth story has been receiving greater attention both from academics and policymakers. Union Finance Minister Pranab Kumar Mukherjee while speaking at the World Economic Forum earlier this week pitched for growth to return soon to the trajectory of 9%, though the recovery is yet to regain the pre-crisis momentum. The Planning Com- 1.2 Downside Risks mission had earlier proposed targeting a In Second Quarter Review of Monetary growth of 10% in the next ve-year plan. Policy for 2010-11, Reserve Bank of India The Central Statistical Organisation (CSO) Governor D Subbarao showed an enorhas already revised upwards the growth mous awareness of the persisting downestimate for 2009-10 to 7.4%. The current side risks to recovery. First, while growth projections for 2010-11 are not less than in India is strongly supported by domestic 8.5% with an upside bias. But a cursory demand, the prospect of a prolonged slow analysis of the relevant factors would recovery process in advanced economies show that the pre- and post-crisis situa- may ultimately have an impact on Indias tions are different and macro policies growth performance as well. While Indias have to address several downside risks if exports as a percentage of GDP is relatively growth is to be sustained at a higher level. low, a widespread slowdown in global First, until the global crisis showed its trade will have an impact on both the head in mid-2007, the Indian economy was manufacturing and service sectors. witnessing a break in its growth and had Second, the current ination scenario is moved to a range of above 9%, supported a cause for concern, as the ination rate by strong domestic consumption, invest- continues well above the upper bound of ment and export demand. Table 1: India: Select Economic Indicators (1986-87 to 1992-93 The growing investment and 2006-07 to 2010-11) Year Fiscal Deficit Current A/c WPI Outstanding GDP at was nanced mostly by Centre States Combined Deficit Inflation Liabilities to GDP Factor Cost domestic savings. Both 1986-87 8.37 2.94 9.78 1.90 5.80 61.60 4.30 7.56 3.14 9.06 1.80 8.10 63.50 3.50 ination and interest rates 1987-88 7.28 2.75 8.45 2.70 7.50 63.00 10.20 were low, driven partly by 1988-89 7.31 3.16 8.84 2.30 10.30 64.40 6.10 external factors. Fiscal 1989-90 7.84 3.30 9.41 3.00 13.70 64.80 5.30 consolidation had led to a 1990-91 1991-92 5.55 2.89 7.00 0.30 10.10 63.90 1.40 reduced scal decit and 1992-93 5.34 2.78 6.96 1.70 8.40 63.60 5.40 improved debt indicators. 2006-07 3.33 1.81 5.38 1.00 5.40 77.20 9.70 Now, even as the country is 2007-08 2.56 1.53 4.12 1.30 4.70 74.30 9.20 on the road to recovery, it 2008-09 6.05 2.63 8.50 2.40 8.30 72.00 6.70 does not seem to enjoy 2009-10 6.70 3.40 10.00 2.90 10.20 72.50 7.40 these somewhat ideal fea- 2010-11 5.50 2.90 8.30 3.0-4.0 @ 8.6+ 73.60 8.50 tures and the sustenance Macroeconomic and Monetary Developments: Second Quarter Review 2010-11, November 2010. + - September @ - Expected (EPWRF). of high growth in the Source: Handbook of Statistics on Indian Economy, RBI , 2010.
november 20, 2010 vol XLV No 47
EPW Economic & Political Weekly

coming years will depend upon setting straight the macro balances straight. Second, a preliminary analysis of select macroeconomic parameters such as the scal decit, general government liabilities to GDP ratio, current account decit, ination and interest rates during the period 200607 to 2010-11 shows a similar trend compared to the period 1986-87 to 1990-91, when India faced its most serious balance of payments crisis. A cross-country comparison shows that post-crisis India is poorly placed in respect of these parameters when compared to its counterparts, though well placed against the advanced economies. India may have to take an independent view on policy priorities and arrive at solutions based on what its own internal economic environment warrants.

32

MONEY MARKET REVIEW

Graph A: India: Select Economic Indicators (1986-87 to 1992-93 and 2006-07 to 2010-11)
10 9 8 7 6 5 4
3.2 2.7 2.2 1.7 1.2 0.7 0.2

Combined Fiscal Deficit (% of GDP)

Current A/c Deficit (% of GDP)

14 13 12 11 10 9 8 7 6 5 4

1986-87 to 1992-93

WPI Inflation (%) 2006-07 to 2010-11

back of a strong rebound of the domestic economy on the other. Fifth, rising scal decit and the consequent possibility of spillover onto the current account decit cannot be ruled out. The government liabilities to GDP ratio is also on the rise. Last, but not the least, while the above are short-term risks, from a medium-term perspective, revival of growth to a higher sustained level will depend also crucially upon the countrys ability to meet its infrastructure decit and improving agricultural output, which causes volatility in both output and ination. In sum, the favourable conditions which supported growth in the pre-crisis period no longer exist. Therefore, it cannot be taken for granted that the current recovery in growth will be automatically sustained. Policies should give utmost priority to addressing the current attendant risks.

the comfort zone. Though reecting improved supply conditions, there has been a moderation in the wholesale price index (WPI) ination to 8.6% in September from 10.0% in July 2010, but food ination has remained in double digits. The demand side also plays a role in food ination due to changing consumption patterns and a rise in income levels. Even if the supply position improves, it is less likely that ination at the end of the year would fall to the projected level of 6.0%. Given the current anti-inationary stance of the central bank, policy rates and hence the interest rates in the system are likely to be kept at higher levels which will also have a moderating inuence on growth. Third, the quantity easing by advanced economies has raised the prospect of additional capital inows that might cause exchange rate appreciation and also asset price booms. Maintaining the competitiveness of Indias exports will therefore be a challenge. The G -20 decision to allow exchange rates to be freely determined by market forces will put further pressure on RBI, preventing it from using market-related interventions to contain undue appreciation of the rupee. Fourth, Indias current account decit has widened in the recent period due to a slowdown of growth in exports and invisibles on the one hand and rising imports on the
Economic & Political Weekly EPW

1.3 Learning from the Past

The current situation is a somewhat sad reminder of what prevailed around 1990-91 in the build-up of the serious balance of payments crisis. It may be recalled that Indias 1991 crisis has been attributed essentially to scal decits spilling over on to the current account decits though the situation was made worse by problems related to the rst Gulf War of 1990-91. This was combined with a loss of condence in the government compounded by the weak credibility associated with high scal decits. An additional related component of the crisis was the rising debt levels of the general government. Foreign exchange reserves had declined steadily since the beginning of the 1980s, removing an important source of nancing for the current account decits and external debt. It is true that India has traversed a long way since 1990-91 with a series of structural reforms and the country now stands
Table 3: Money Market Activity (Volume and Rates)
Instruments Daily Average Volume (Rs Crore) October-10 Monthly Weighted Average Rate (%)

integrated with the rest of the world. But the trend in some of the crucial macroeconomic indicators affecting domestic and external sector sustainability in the current post-crisis period resembles the pre-1990-91 period. Table 1 (p 32) presents such relevant data for two periods, namely, 1986-87 to 1992-93 and 2006-07 to 2010-11. The trends in the combined scal decit, current account decit and WPI ination are illustratively captured in Graph A. All these indicators are at elevated levels currently as in the previous period. The current account decit for 2010-11 on an annualised basis may exceed 3% of GDP. The ination rate after touching double digit levels in 2009-10, still rules at a high level of 8.6%, way above the desired level of about 3-4%. The combined liabilities of government have increased since 2008-09. The combined scal decit ruled in the range of 8.3-10.0% in the last three years, after touching a low of 4.1% in the pre-crisis period. It may also be seen from Table 2 that on these parameters India compares very poorly with its Asian counterparts such as China, Malaysia, Indonesia, the Philippines and Thailand. It should be added that public sector saving which contributed to higher
Table 2: Debt and Deficit Indicators Select Countries 2009 (% of GDP)
General Government Gross Debt to GDP % Fiscal Deficit Current Consumer Price Account Inflation Deficit (2009)

India China Indonesia Malaysia Mexico Philippines Thailand G -7 G -20

77.7 18.6 28.6 55.4 44.9 48.9 45.2 102.8 72.6

10.1 3.0 1.6 5.5 4.9 3.9 3.2 10.1 7.6

-2.1 5.8 2.0 16.7 5.3 7.7 -2.9@ -0.9+

11.4 -0.8 2.6 -2.0 4.9 0.4 -1.3@ -

@ - US + Major Advanced Economies. Source: IMF, WEO, October 2010 & IMF Staff Calculations Economist dated 6 November 2010.

Range of Weighted Average Daily Rate (%)

Daily Average Volume (Rs Crore)

September-10 Monthly Weighted Range of Weighted Average Rate (%) Average Daily Rate (%)

Call Money Notice Money Term Money @ CBLO Market Repo

8,377 1,598 117 43,768 14,177

6.41 6.81 5.89 5.99

5.36-7.67 4.37-8.09 5.75-8.50 4.04-7.96 5.38-6.58

7,827 1,649 120 54,615 16,910

5.39 5.53 5.13 5.23

3.79-6.15 3.65-6.12 5.00-8.50 4.00-6.05 2.00-6.03

@: Range of rates during the month. Source: www.rbi.org.in. and www.ccilindia.com.

november 20, 2010

vol XLV No 47

33

MONEY MARKET REVIEW

Graph B: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO Rates October 2010
9 8

1.4 The Way Forward

These observations are not intended to sound a very pesCall Rates simistic note about Indias 7 growth prospects. Indian policy6 makers, after gaining a sub5 stantial grip over macro4 Repo RatesOutside the RBI economic management after CBLO Rates 3 the commencement of reforms 2 since the early 1990s, have 1 also successfully managed the 0 recent global crisis without 9/27 9/29 10/1 10/3 10/5 10/7 10/9 10/1110/1310/1510/1710/1910/2110/2310/2510/2710/29 undue disruption to the econoGraph C: Spot Quotations and Annualised Forward Premia my and markets. But, in the for the US Dollar in the Domestic Inter-Bank Market process, several structural de12 60 (Daily) Working Days Monthly Averages (Apr 2007 ciencies have crept in giving rise Oct 2010 to September 2010) 10 50 Spot to added risks for the recovery. 8 Fiscal consolidation is a 40 very important component of 6 6-month 30 this adjustment. The central 1-month 4 government is very fortunate 20 2 to have mobilised some windfall revenues from the tele10 0 com auctions this year. But, 1-month 6-month Spot 0 -2 this is a one-off position and may not be repeated in the Graph D: Yield Curves for Dated Securities Weighted Averages for October 2010 next period. The tax revenues 9.5 also have remained very Current month Previous month 8.5 buoyant. But despite the build-up of huge cash balanc7.5 es, the government went on a 6.5 borrowing spree creating an 3 months ago unwarranted liquidity tight5.5 ness in the system. A prudent 4.5 counter-cyclical policy would demand setting aside such 3.5 windfall revenues and ear2.5 marking them for building 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 22 24 26 30 much needed social and economic infrastructure. domestic savings during the recent While being a part of global nancial period has dropped dramatically from 5.0% of GDP in 2007-08 to 1.4% of GDP in architecture puts the burden of having to 2008-09, causing the savings rate to fall align with the global consensus, in evolvfrom 36.4% to 32.5%. Sustaining growth ing policies for Indias future pragmatism at higher levels will require restoration would demand a country-specic view. For of the domestic savings rate to pre-crisis instance, in the context of following the levels which would call for scal con- principle of market-determined exchange solidation early. Another feature of rates, an unduly misaligned exchange rate savings of the household sector in the no doubt will not be desirable. But in the recent period is the increased share of Indian context, exchange rate managesavings in the form of physical assets ment has to keep an eye on export comdepicting a kind of dis-intermediation of petitiveness. Unlike other emerging marthese savings. The domestic savings- kets, India suffers from twin decits. India investment balance will require steps had never been contributing to global to augment nancial saving of the imbalances, but because of integration it became a victim of the consequences of household sector.

such imbalances. Hence, Indian policymakers should rely on well-tested homegrown policies in taking the country to the higher and sustained growth path.

2 Money, Forex and Debt Markets

The stiff liquidity condition in the system for the past several months has not shown any sign of cooling off during the month of October also. Almost Rs 15,000 crore was drained to full the Coal India initial public offer (IPO), the countrys biggest IPO ever. The tightening of liquidity started in end-May when the 3G spectrum and wireless broadband auctions together sucked out more than Rs 1 lakh crore from the system. However, during the later part of August the situation eased a bit until early September. But buoyant advance tax payments again tightened the situation. During October, there was a huge outow of funds through increases in bank credit and bankers deposits with RBI and a fall in coupon payments. However, the half yearly crediting of interest helped the aggregate deposits to increase substantially. The Liquidity Adjustment Facility (LAF) window recorded the highest ever injection of Rs 1,31,360 crore by RBI on 29 October, 2010. In a move to reduce the frictional liquidity pressure, the RBI decided to conduct a second LAF and also allowed scheduled commercial banks to avail of additional liquidity support under the LAF to the extent of up to 1% of their NDTL and these measures were further extended up to 4 November 2010 with a view to provide additional liquidity comfort. Headline ination although having moderated in recent months still ruled above the comfort zone of the RBI. With an aim to contain ination, the RBI, in its Second Quarter Review of Monetary Policy for 2010-11, hiked repo and reverse repo rates under LAF by another 25 basis points each to 6.25% and 5.25%, respectively.

2.1 Money Market

The different short-term rates rmed up by 100-125 basis points and ruled above the LAF corridor of RBI during October. There was enormous pressure on liquidity during the entire month since advance tax payments by corporates for the second quarter of 2010-11 and issuance of the Coal India IPO took out huge funds from the
vol XLV No 47
EPW Economic & Political Weekly

34

november 20, 2010

MONEY MARKET REVIEW

Table 4: RBIs Market Operations (in Rs crore)
Month/Year OMO (Net Purchase(+)/ LAF (Average Daily Sale(-)) Injection (+)/Absorption(-))

April-10 May-10 June-10 July-10 August-10 September-10 October-10

10 0 -2 -16 -11 8 -1

-54,009 -34,749 43,123 48,740 1,207 14,364 62,309

Source: RBIs Weekly Statistical Supplement.

system. During the month, the weighted average call rates crossed the 7% mark and moved in a range of 5.36% and 7.67% vis--vis 3.75% and 6.15% during the previous month. During the rst week of October, the short-term money market rates traversed the 7% mark and ruled in a range of 6.17%-7.04%. However, during the second week, the rates somewhat softened and moved in a narrow range between 5.54% and 6.11%, ahead of the reporting fortnight, as banks met their daily cash needs promptly and the demand for funds waned. From the third week onwards, the rates hardened due to Coal India IPO. The situation continued till the end of the month and the liquidity tightened sharply owing to withdrawal of cash by the public from banks during the festival season and a lack of government spending. The call rates ruled in a substantially higher range of 6.22% and 7.67% during the last week of the month. While the notice money rates mostly stayed in a narrow range, in the last day of the month the rate touched a high of 8.09%. The term money market too witnessed a similar trend, the rates touching as high as 8.5% during the month. Similarly, the monthly weighted average rate of collateralised borrowing and lending obligations (CBLO) and market repo ruled higher at 5.89% and 5.99%, respectively, compared to 5.13% and 5.23% in the previous month. Except for call money, the volumes in other money market segments saw marginal drops during the month. The daily average turnover of call money transactions increased by 7% to Rs 8,377 crore in October reecting the crucial need of funds. The CBLO and market repo volumes dropped by 17% and 20%, respectively. (Table 3, p 33 and Graph B, p 34). The volume of outstanding certicates of deposit (CDs) fell by Rs 11,000 crore during
Economic & Political Weekly EPW

The term currency war has been used in recent months regarding the nancial imbalances in the world, as some have taken measures to devalue their currencies to help boost exports while others like China have refused to revalue their currency. However, with the global recovery so weak, nearly all countries have been complaining that their currencies are too strong. During the 2008 nancial crisis, most currencies fell against the dollar as investors bought the dollar as a safe haven. But, since then most currencies have slowly risen against the dollar. The US dollars performance has been relatively poor in recent times since US interest rates are near zero and the US is stuck in a weak recovery, making the dollar less attractive. The depreciation of the dollar continued during October also as the G-20 meeting failed to provide any reasonable plan on how to avoid competitive devaluation, fuelling the speculation about future quantitative easing by the Federal Reserve. Following the weakness in the dollar overseas and unrelenting portfolio inows into the domestic economy, the rupee continued to appreciate during October also and rose by 2.3% over SeptemTable 5: Foreign Exchange Market: Select Indicators ber. On the back of strong ecoMonth Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Rate (Last Friday Depreciation (-) ($ Million) (Month-end Index* nomic fundamentals, the FIIs of the Month) of Rs/$ (in %) Closing) invested heavily in equity marApr-10 44.44 2.03 2783 17,559 81.99 kets during October and the net May-10 46.54 -4.51 -1505 16,945 86.58 investment during the month Jun-10 46.54 0.00 2424 17,701 86.28 galloped to Rs 28,600 crore or Jul-10 46.46 0.17 5285 17,868 81.65 Aug-10 46.86 -0.85 3163 17,971 83.25 $6.4 billion, on top of Rs 32,700 Sep-10 45.54 2.90 7100 20,069 78.72 crore or $7.1 billion in the previOct-10 44.54 2.25 5468 20,032 77.27 ous month. The continuous ow Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.gov.in), www.futures.tradingcharts.com of funds in recent times kept
Table 6: Details of Central Government Market Borrowings (Amount in Rs crore)
Date of Auction Nomenclature of Loan Notified Amount Bid Cover Ratio Devolvement on Primary Dealers YTM at Cut-off Price (in %)

a period of one fortnight and the total outstanding amount stood at Rs 3,37,322 crore on 24 September 2010. However, the rates of this instrument continued to rise, reecting the higher demand for CDs. Despite a fall in volumes, the rates of commercial papers (CPs) continued to rise during September also and ranged between 6.65% and 9.90% during the second fortnight of the month, in alignment with other shortterm rates. The tight liquidity condition in the system was reected in the RBIs LAF window throughout the month of October. RBI injected an average daily amount of around Rs 64,000 crore through its repo window compared to around only Rs 14,000 crore in the previous month. On 29 October, the central bank initiated moves to ease the situation, allowing banks special access to liquidity windows for the next few days to provide liquidity comfort arising out of frictional liquidity pressure. The RBIs open market operations continued to be practically non-operational (Table 4). The interest rate futures segment of the NSE continued to shed its turnover during October.

2.2 Forex Market

01-Oct-10

08-Oct-10

15-Oct-10

22-Oct-10

7.17% 2015 8.08% 2022 8.26% 2027 7.99% 2017 8.13% 2022 8.30% 2040 7.17% 2015 7.80% 2020 8.26% 2027 7.99% 2017 8.08% 2022 8.30% 2040

R R R R R R R R R R R R

Total for October Total for September

R: Re-issue, N: New issue. Source: RBI press releases.

4000 4000 3000 4000 4000 3000 4000 4000 3000 4000 5000 2000 44000 34000

2.29 2.04 2.26 2.01 1.93 1.83 2.08 2.01 1.92 2.08 1.71 2.26 2.02 2.47

nil nil nil nil nil nil nil nil nil nil nil nil

7.74% (Rs.97.77) 8.04% (Rs.100.32) 8.31% (Rs.99.55) 7.92% (Rs.100.33) 8.08% (Rs.100.37) 8.42% (Rs.98.69) 7.80% (Rs.97.55) 8.07% (Rs.98.25) 8.40% (Rs.98.76) 7.93% (Rs.100.27) 8.11% (Rs.99.74) 8.47% (Rs.98.10)

november 20, 2010

vol XLV No 47

35

MONEY MARKET REVIEW

policymakers wondering about whether such ows need to be reduced or not, without affecting growth. This dilemma became acute with several RBI ofcials expressing different views on the central banks interventions in the forex market. There were strong expectations in late September that the RBI will step into forex market to arrest rupee appreciation. Finance Minister Pranab Mukherjee also hinted that central bank will intervene if the currency became too volatile or threatened to disrupt the macroeconomic situation of the country. Governor D Subbarao also afrmed that the RBI will intervene in the forex market if inows turn lumpy and volatile. However, after releasing the Q2 Monetary Policy Review for 2010-11, RBI ruled out any imminent intervention in the foreign exchange market, saying capital inows are still not lumpy and volatile. The rupee started the month with an appreciation of 24 paise to touch Rs 44.68
Descriptions Last Week (29th) AMT YTM

per dollar on 1 October buoyed by enor- the rupee moved in a narrow band during mous capital inows into the country and October, but sustained its appreciating further rose to Rs 44.37 on 4 October. trend and posted 2.25% appreciation Thereafter, the rupee displayed a mixed against the dollar (Table 5, p 35). Following the sharp appreciation of trend and moved in a narrow range of 44.28-44.38 for the second week of the the rupee against the dollar and the month tracking the stable stock market expectations of a possible central bank movements. On 12 October, the rupee intervention in successive periods, the weakened by 44 paise to Rs 44.74 per dol- forward premia across three maturity lar but again bounced back and appreci- segments rmed up. The one-month ated for three days in a row. From 18 premia hardened substantially and October onwards the rupee moved in a touched a high of 10.38% on 27 October relatively narrow range of 44.26-44.54 implying the expectation of rupee depreper dollar till the end of the month ciation in the near future with the possiresponding to the tapered ow of funds ble intervention by RBI. Similarly, the into the domestic stock Table 8: Yield Spreads (Weighted Average): Central Government Securities market. The market how- October 2010 (basis points (bps)) ever expected more Yield September 2010 Previous Three Six Months Last Week First Week Entire Month Month Months Ago Ago inows into the equity Spread in bps 1 Year - 5 Year 81 120 116 128 184 234 markets following the 5 Year - 10 Year 28 16 21 24 24 31 issuance of the Coal 10 Year - 15 Year 28 39 India IPO amounting to 1 Year - 10 Year 109 136 137 152 208 265 Rs 15,000 crore. Overall, Source: As in Table 7.
October 2010 First Week (1st) AMT YTM Previous Month (September 2010) AMT YTM Three Months Ago (July 2010) AMT YTM Six Months Ago (April 2010) AMT YTM

Table 7: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)
Total for the Month AMT YTM

1 Treasury Bills A 91-Day Bills B 182-Day Bills C 364-Day Bills 2 GOI Dated Securities Year of (No of Maturity Securities) 2010 2011 7 2012 4 2013 4 2014 7 2015 6 2016 4 2017 4 2018 5 2019 3 2020 5 2021 2 2022 4 2023 1 2024 2025 2026 1 2027 2 2028 1 2032 3 2034 1 2036 1 2040 1 3. State Govt. Securities Grand total (1 to 3)

3,822.26 2,184.23 577.85 1,060.18 42,769.08

6.60 6.97 6.95 8.00

3,359.19 2,014.66 554.93 789.60 55,320.99

18,512.63 6.28 12,014.55 6.30 1,533.24 6.41 4,964.84 7.83 2,40,054.67

15,768.39 6.42 11,315.07 6.60 1,356.91 6.73 3,096.41 7.96 2,20,322.38

5.97 6.21 6.31 7.93

26,139.26 13,697.18 6,904.65 5,537.43 2,50,927.49

61,864.45 5.5 46,632.98 5.51 6,865.18 5.71 8,366.29 7.57 2,49,090.36

3.85 4.14 4.81 7.44

420.00 2,515.47 365.00 465.00 2,056.13 130.00 12,954.80 5.00 1.76 6,020.01 1.30 16,455.54

7.03 7.26 7.27 7.55 7.84 7.88 7.98 8.18 8.15 8.12 8.09 8.12

1,605.24 1,676.37 241.20 220.04 5,930.66 325.00 4,596.58 58.50 40.00 23,261.00 50.40 14,177.27

6.50 7.00 7.24 7.57 7.70 7.83 7.82 8.02 7.93 7.86 8.01 8.00

2,335.27 6,107.90 1,946.86 1,815.42 18,618.92 1,131.63 31,222.78 104.04 213.65 76,663.81 96.05 88,841.83 5.05

6.60 615.16 7.12 3,056.57 7.26 1,535.36 7.55 855.00 7.76 27,528.91 7.90 1,332.10 7.94 6,822.84 8.05 138.17 8.03 205.21 7.97 1,06,674.04 8.03 2.04 8.07 63,454.84 8.35 5.05

6.43 6.93 7.20 7.54 7.71 7.91 7.96 8.09 8.02 7.95 8.24 8.04 8.51

0.12 887.23 21.67 10.90 459.15 983.99 47,575.33

8.38 8.41 8.41 8.33 8.47 8.43

2,381.50 2.10 115.32 5.96 57.00 576.85 346.18 59,026.36

8.29 8.30 8.31 8.14 8.34 8.35 8.30

0.52 7,451.47 2.10 216.76 34.41 80.50 3,165.66 2,368.83 2,60,936.13

8.41 8.34 8.30 8.35 8.27 8.32 8.42 8.35

6,224.54 3.42 518.74 60.00 50.00 1,240.39 2,679.40 2,38,770.17

8.36 8.18 8.25 8.26 8.40 8.38 8.20

345.00 5,047.57 6,952.23 4,821.41 1,290.80 26,850.90 4,475.99 8,767.96 115.34 159.93 1,54,935.30 331.61 25,520.46 85.08 3237.18 1.61 98.60 2,953.68 0.50 2,663.25 168.00 128.13 1,971.95 3,040.98 2,80,107.73

5.53 5.54 6.47 6.88 7.11 7.38 7.61 7.62 7.80 7.75 7.62 7.99 7.96 8.17 8.27 7.90 8.19 8.23 8.16 8.27 8.13 8.29 8.32 8.01

11,644.73 6,146.61 15,322.65 6,111.01 5,547.05 19,784.65 67,632.62 162.88 89.26 1,615.50 63,076.48 96.77 42,848.82 32.70 241.12 6.71 1884.23 3,625.49 42.39 3,023.01 72.65 25.01 9,496.66 3,20,451.47

4.03 5.24 6.08 6.68 7.19 7.58 7.58 7.56 7.90 7.92 7.89 7.99 8.12 7.86 8.25 8.28 8.34 8.36 8.18 8.56 8.24 8.54 8.07

(-) means no trading YTM = Yield to maturity in per cent per annum NDS = Negotiated Dealing System 1) Yields are weighted yields, weighted by the amounts of each transaction. Source: Compiled by EPWRF; base data from RBI, CCIL.

OM = Order Matching Segment

36

november 20, 2010

vol XLV No 47

EPW

Economic & Political Weekly

MONEY MARKET REVIEW

other two tenors, 3-months and 6-months also depicted a hardening trend and ended the month touching 6.92% and 6.47% respectively, on 29 October vis-vis 6.32% and 5.92%, on 29 September (Graph C, p 34). In the currency derivatives segment, the National Stock Exchange (NSE) and the newly set up United Stock Exchange (USE) commenced trading in options adopting European-style on 29 October. Both the exchanges offered currency options in the dollar-rupee pair with three monthly contracts (November, December 2010 and January 2011) and one quarterly contract (March 2011). The NSE recorded a notable Rs 1,383 crore turnover in a single day while in USE the trading was tepid with a meagre Rs 17 crore. Trading in the currency futures segment continued to gather momentum after the entry of USE. The aggregate currency futures turnover increased by 4% during October over September, but the average daily turnover fell by 28%.

2.3 Government Securities Market

The banking system continued to reel under liquidity shortage. The RBI has

attributed this to both structural and frictional factors. On the structural side, the deposit growth rate of the banking system has been sluggish even as credit growth has improved. On the frictional side, government cash balances had built up as a result of more than anticipated tax receipts. On top of it, there were large outows on account of 3G and broadband auctions and over-subscription of Coal India IPO. Given this situation, it looked somewhat strange that the central government was in its borrowing spree issuing larger volumes of securities in the primary market including treasury bills, augmenting their cash balances further on top of large balances already held. In October net borrowing of central government securities was Rs 41,852 crore while gross borrowing was Rs 44,000 crore, reecting very low redemptions during the month. Net borrowing through 91-day treasury bills also went up by about another Rs 6,000 crore. This shows that cash management and debt management strategies would require better monitoring and harmonisation. Not only that part of the LAF injection of funds went to support additional borrowing of the government, it also

pushed up the yield rates to higher levels than the situation would have normally warranted. Therefore to mitigate liquidity tightness the RBI in October came out with a slew of measures. One of them was buyback of three government securities maturing in 2010 and 2011. The rst tranche of multisecurity auction conducted for the purpose on 25 October 2010, received a tepid response as securities worth only Rs 2,148 crore were purchased out of the aggregate notied amount of Rs 12,000 crore. As these securities were maturing shortly within about a year, booking losses on sale prevented banks from responding to this auction. Open market operations (OMO) auction purchases were also conducted on 4 November for three securities, out of them two securities were relatively illiquid and thinly traded and the RBI successfully bought securities worth more than Rs 8,352 crore. Reissuance of central government securities was made through four auctions, on 1 October, 8 October, and 15 October and on 22 October, raising Rs 11,000 crore from each auction aggregating Rs 44,000 crore, 29.4% higher than the previous month (Table 6, p 35 and Graph D, p 35).

Table 9: Predominantly Traded Government Securities (Amount in Rs crore)

Descriptions Last Week (29th) AMT YTM October 2010 First Week (1st) AMT YTM Total for the Month AMT YTM Previous Month (September 2010) AMT YTM Three Months Ago (July 2010) AMT YTM Six Months Ago (April 2010) AMT YTM

GOI Dated Securities 6.57 , 2011 9.39 , 2011 7.40 , 2012 7.27 , 2013 7.32 , 2014 7.17 , 2015 7.38 , 2015 7.02 , 2016 7.46 , 2017 7.99 , 2017 6.90 , 2019 6.35 , 2020 7.80 , 2020 8.08 2022 8.13 , 2022 8.20 , 2022 8.24 , 2027 8.26 , 2027 8.28 , 2032 8.32 , 2032 8.30 , 2040 Total (All Securities) 290.00 1,975.00 365.00 345.00 1,646.07 60.06 130.00 302.00 12,635.65 0.30 11.36 5,808.30 4,284.04 12,081.50 90.00 887.13 10.67 11.00 459.15 42,769.08 7.05 7.28 7.27 7.55 7.83 7.85 7.88 8.02 7.98 8.04 8.22 8.12 8.12 8.12 8.19 8.41 8.40 8.42 8.47 8.00 0.11 955.00 1,226.00 235.00 5,847.25 71.06 320.00 1,245.13 3,351.25 35.00 103.50 23,057.50 3950.02 10,090.50 136.75 140.00 2,241.50 22.50 70.82 576.85 55,320.99 6.99 6.53 7.00 7.24 7.70 7.76 7.83 7.88 7.80 7.92 7.98 7.86 8.00 8.00 8.06 8.29 8.29 8.33 8.33 8.35 35.11 1,480.01 4,266.00 1,940.50 1,110.00 17,324.59 826.62 1,076.00 2,869.90 28,315.36 104.30 206.18 76,151.93 19,529.75 68,923.61 388.25 176.06 7,275.32 53.54 136.22 3,165.67 6.36 6.64 7.14 7.26 7.55 7.76 7.81 7.89 7.94 7.94 8.04 8.01 8.07 8.07 8.11 8.29 8.35 8.36 8.37 8.42 55.00 330.00 1,275.00 1,525.00 695.00 27,120.23 2.00 1,040.00 5,602.36 1,220.48 175.00 246.74 18,856.37 43,655.74 942.72 25.50 6,199.05 96.42 329.32 1,240.39 6.45 6.46 6.92 7.20 7.56 7.70 7.81 7.90 7.98 7.87 8.02 8.05 7.95 8.04 8.03 8.14 8.35 8.36 8.37 8.19 8.39 7.93 788.00 3,112.00 6,193.00 4,716.18 460.72 24,437.73 853.00 4,273.59 99.79 35.00 153.93 209.68 1,53,975.62 40.00 105.00 25,375.46 407.41 2,546.26 1,164.76 1,208.34 1,971.96 2,50,927.49 5.70 5.48 6.49 6.87 7.21 7.37 7.43 7.61 8.32 7.74 7.76 7.85 7.63 8.01 8.00 7.96 8.26 8.22 8.26 8.31 8.32 7.57 2,49,090.36 7.44 51.00 42,787.66 834.05 2,790.99 2,752.52 8.07 8.12 8.25 8.39 8.56 1,489.35 60,464.99 1,147.10 7.97 7.97 7.77 17,268.42 67,542.22 70.24 7.59 7.58 7.51 780.00 3,650.00 12,098.70 5,958.04 4,350.65 5.09 5.25 6.07 6.68 7.19

7.97 1,06,427.26

7.83 2,40,054.67

7.96 2,20,322.38

(-) means no trading. YTM = Yield to maturity in percentage per annum. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: As in Table 7. Economic & Political Weekly EPW

november 20, 2010

vol XLV No 47

37

MONEY MARKET REVIEW

Table 10: Details of State Government Borrowings (Amount in Rs crore)
Date of Auction Number of Participating States Total Amount Accepted Bid Cover YTM at Ratio Cut-off Price (in %) Weighted Average Yield (%)

05-Oct-10 12-Oct-10 26-Oct-10 Total for October Total for September

Source: RBI press releases.

4 1 11 16 11

2,100 500 8,602 11,202 9,800

3.50 3.52 2.33 2.60 3.45

8.35 8.39 8.52 8.49 8.39

8.34 8.38 8.50 8.46 8.38

Table 11: Auctions of Treasury Bills (Amount in Rs crore)

Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs)

A: 91-Day Treasury Bills 06-Oct-10 13-Oct-10 20-Oct-10 27-Oct-10 Total for October Total for September B: 182-Day Treasury Bills 13-Oct-10 27-Oct-10 Total for October Total for September C: 364-Day Treasury Bills 06-Oct-10 20-Oct-10 Total for October Total for September
Source: RBI's press releases.

4,000 4,000 4,000 4,000 16,000 10,000 2,000 2,000 4,000 4,500 2,000 2,000 4,000 2,000

1.85 2.08 2.69 2.32 2.24 3.11 1.72 2.69 2.20 2.84 2.27 2.65 2.46 3.07

6.40 6.56 6.77 6.85 6.65 6.14 6.82 7.06 6.94 6.46 6.86 7.09 6.97 6.59

6.36 6.52 6.73 6.77 6.59 6.12 6.78 6.99 6.89 6.42 6.78 7.06 6.92 6.53

98.43 98.39 98.34 98.32 98.37 98.49 96.71 96.60 96.66 96.88 93.60 93.40 93.50 93.84

98.44 98.40 98.35 98.34 98.38 98.50 96.73 96.63 96.68 96.90 93.67 93.42 93.55 93.89

Table 12: Details of Commercial Bond Issues during October 2010

Institutional Category No of Issues Volume in Rs Crore Range of Range of Maturity Coupon Rates in Years (y) and (in %) Months (m)

FIs/Banks NBFCs Stete Undertakings Central Undertakings Corporates Total for October 2010 Total for September 2010

3 2 1 2 1 9 11

1,275 1,200 1,000 4,587 300 8,362 4,100

8-45-9.50 7.50-8.88 8.49-8.74 8.80-8.84 10.25-10.47 7.50-10.47 8.00-9.05

Source: HSBC InvestDirect (India) Limited.

Yield rates in the primary market for the auctioned securities were in alignment with the secondary market yields. But during the month yield for all ve securities rmed up in second auction over the rst. Monthly bid cover ratio fell to 2.02 times in October from 2.47 times in the previous month, reective of a lower interest of investors. Total traded volume under government securities also increased in the secondary market by 8.96% to Rs 2,40,055 crore from the previous month. Yield rates at shorter maturities continued to rm up, but at the longer end the upward pressure was only marginal. During the month 7.80% 2020 and 8.13% 2022 accounted for more than 60% of the total traded volume

Aggregate mobilisation through treasury bills of all maturities clocked at Rs 24,000 crore in October, 45.5% higher as compared to Rs 16,500 crore in the previous month; the auction amounts were higher in respect of 91-day bills and 364-day bills, but lower in 182-day bills. Across all categories, cut-off yield and weighted average yield moved up in subsequent auctions during the month. For 91-day treasury bills the weighted average yield increased roughly to 6.59% from 6.12% in September. There were steep increases in other maturities as well (Table 11). In the secondary market, turnover of treasury bills across all categories improved by 17% at Rs 18,513 crore from Rs 15,768 crore of the previous month. Total traded volumes in 91-day, 182-day

2y-15y 5y-10y 10y-12y 10y-15y 8y-12y 2y-15y 3y-15y

of the government securities with Rs 76,152 crore and Rs 68,924 crore at yield rates of 7.97% and 8.07%, respectively. The 1 to 5 year yield spread narrowed to 116 bps compared to 128 bps in the previous month mainly because of a rming up of short-term yields. The amount raised through state development loans (SDLs) in October was also higher by 14.30% at Rs 11,202 crore compared to the previous month. Sixteen states participated in three auctions against eleven in the earlier month. The response to SDL auctions used to be consistently better, but the bid cover ratio for SDLs also plunged to 2.60 times from 3.45 times of the previous month. Contrary to central government papers, traded volume in secondary market of SDLs dipped to Rs 2,369 crore with 8.35% yield from Rs 2,694 crore of September (Table 10).

and 364-day treasury bills were Rs 12,015 crore, Rs 1,533 crore and Rs 4,965 crore, with yield rates of 6.42%, 6.60% and 6.73%, respectively. Yield of all kinds of treasury bills rmed up during the month as compared to the previous month.

2.5 Corporate Bonds Market

Following the euphoria in the primary equity market after the oversubscription of the Coal India IPO issue, the institutions revived their interest in tapping the corporate bonds market through issuances of bonds during October. The total mobilised amount more than doubled to Rs 8,362 crore during October compared to Rs 4,100 crore of the previous month. However, the number of issues was less compared to September. It can be noted that after a gap of two months, central and state undertakings also showed some interest in garnering funds through this route. The coupon rates offered by these institutions reected stable behaviour, but corporates offered relatively higher rates for their bonds. Mobilisation of funds by banks/nancial institutions (FIs) and NBFCs came down during the month of October compared to the previous month, together contributing to about 30% of the total mobilisation through ve issues raising an aggregate amount of Rs 2,475 crore. State and central undertakings jointly added 67% of the total garnered amount with Power Grid Corporation of India raising the highest amount of Rs 3,487 crore. United Phosphorus was the only corporate to tap the bond market during October which raised Rs 300 crore, through issuance of non-convertible debentures implying that corporates increased their interest relatively in the primary equity market rather than in the bond market, following the good performance of stocks in recent times (Table 12). The secondary market transactions in commercial bonds also remained subdued due to limited participation by FIIs as the foreign investor interest also turned to the equity market. According to the data published by SEBI, the aggregate as well as the average daily turnover in the corporate bonds reported by BSE, NSE and FIMMDA was up by 10% each, over a period of one month.
vol XLV No 47
EPW Economic & Political Weekly

2.4 Treasury Bills

38

november 20, 2010