MONEY MARKET REVIEW
exceptions which are very clear. One fall-
Base Rate Transition and
Transparency Issues
EPW Research Foundation
While it will take some time for
the new base rate system to have
its full impact on the pricing of
loans, certain patterns are
already discernible. The BR of all
banks is considerably lower than
the former benchmark prime
lending rate and the range of the
BR in various bank groups is also
narrower than the BPLR earlier.
Following the State Bank of
India’s decision to launch
BR-based deposits, an intriguing
question is that while deposit
rates are to influence the BR, if
the latter itself determines the
former, what then is to determine
the BR?
With the shift to the BR,
corporates are showing signs of
moving to non-bank sources for
their working capital. The burden
of higher borrowing costs may
then fall on the public sector
which was earlier drawing on
sub-BPLR finance.
Team led by K Kanagasabapathy and supported
by V P Prasanth, Bipin K Deokar, Rema K Nair,
Anita B Shetty, Shruti J Pandey, Vishakha G
Tilak and Sharan P Shetty.
26
T
he new base rate (BR) system came
into force effective July 2010. But,
first, the initial evidence shows
that the fog has not cleared insofar as the
much expected transparency is con-
cerned. Second, because of some of the
transitional provisions, the full impact of
the BR system on loan pricing by banks
will be reflected only after a considerable
lapse of time. An attempt is made here to
raise related issues and other implications
of the shift, based on an analysis of the
benchmark prime lending rate (BPLR) – BR
matrix that has emerged after the BR sys-
tem came into vogue.
1.1 Transitional Provisions
The BR system has been made applicable
for all new loans and for those old loans
that come up for renewal. Existing loans
based on the BPLR system may run till
their maturity. In case the existing bor-
rowers want to switch to the new system
before expiry of the existing contracts, an
option may be given to them on mutually
agreed terms.
The transparency of the BR system
would depend upon two fundamental
things. First, while each bank can choose
its own benchmark for fixing the BR they
should document the detailed formula for
the calculation of the BR and the methodo-
logy. They are expected to consistently
apply this until as and when a revision
takes place based on a quarterly review.
This formula needs to be disclosed to the
Reserve Bank of India (RBI), which can
also scrutinise and check for its consistent
application. When the BPLR regime was
introduced, it was supposed to take into
account almost the same set of parameters
but no such documentation and disclosure
requirements were placed for a consis-
tency check.
Second, banks are not allowed to lend
below the BR, subject however to a few
August 21, 2010
out of this is that if some corporates enjoy
borrowing at below the BR that is being
fixed, then they may be chasing banks
with a lower BR to maintain their current
borrowing costs or attempt to substitute
their bank borrowings with either exter-
nal commercial borrowings which prove
to be cheaper because of interest rate dif-
ferentials or with medium or short-term
papers such as bonds and debentures or
commercial paper.
It is not clear whether there is a require-
ment that the detailed formula of each
bank’s BR be made public or it is only to be
available for review and scrutiny by the
RBI. Apparently, excepting one or two
banks, so far no bank has placed its cards
in the open regarding the method of fixa-
tion of the BR.
Who are the new borrowers and who
are the old borrowers? If the existing
borrower has a cash credit limit and if
this does not come up for renewal, that
might be treated as an old loan on the
basis of a long-term relationship with the
borrower. State Bank of India (SBI) Chair-
man O P Bhatt is reported to have recom-
mended a sunset clause according to
which borrowers would have to switch
over to the new BR system at a predeter-
mined date. Unless this is done, a parallel
run of the BPLR with BR may add to the
complexity of lending rates. For instance,
SBI itself has announced a change in its
BPLR from 11.75% to 12.25% while the BR
has been kept unchanged. Should the BR
also not be changed?
1.2 BPLR-BR Matrix
A comparison of the prevailing BPLR with
the BR after its announcement by different
banks presents some intriguing questions.
While the BRs announced by banks are on
the expected lines, the puzzling questions
are: if the same set of parameters was to
guide BR fixation, why is there such a
large divergence between these two rates?
Second, the bank group-wise reactions
are difficult to fathom.
Table 1 and Graph A (p 27) showing the
distribution of banks according to the
BPLR/BR reveal that (i) all banks have
fixed BRs at considerably lower levels
vol XLV No 34 EPW Economic & Political Weekly
 MONEY MARKET REVIEW
Table 1: Bank-wise Shift from BPLR to Base Rate compared to the BPLR; (ii) the range of the of loans or deposits. In the RBI circular
Last BPLR Base Difference
(Quarter Rate (BPLR – BR in all bank groups has narrowed in gen- which was based on the recommendations
Ending Base Rate) eral compared to the BPLR; (iii) foreign of the Mohanty working group the central
March 2010)
Public Sector Banks banks which had the highest range of bank had said that the base rate would be
1 State Bank of India* 11.75 7.50 4.25 BPLR (12.50%-16.00%) have moved to the linked to the cost of deposits, a negative
2 State Bank of Bikaner and
Jaipur 12.25 7.75 4.50 lowest range of BR (6.75%-7.75%) with carry for the statutory liquidity ratio and
3 State Bank of Hyderabad 12.75 7.75 5.00 high reductions in rates (5.00-9.25 per- the cash reserve ratio, overhead costs and
4 State Bank of Mysore 12.25 7.75 4.50
5 State Bank of Patiala 12.25 7.75 4.50 centage points); (iv) the public sector a profit margin. But in practice, the for-
6 State Bank of Travancore 12.25 7.75 4.50 banks operated at a lower range of both mula has effectively turned out to be more
7 Allahabad Bank 12.00 8.00 4.00
8 Andhra Bank 12.00 8.25 3.75
BPLR (11.00%-13.50%) and BR (7.50%- illustrative than being instructive. Funda-
9 Bank of Baroda 12.00 8.00 4.00 8.25%) and the extent of reduction in BR mentally, while deposit rates are to form
10 Bank of India 12.00 8.00 4.00 from BPLR was also relatively less (3.00- the basis for BR fixation, the logic is
11 Bank of Maharashtra 12.25 8.00 4.25
12 Canara Bank 12.00 8.00 4.00 5.30 percentage points); and (v) the pri- reversed if the BR is to form the bench-
13 Central Bank of India 12.00 8.00 4.00 vate banks had a wider and high range of mark for floating rate deposits. Then,
14 Corporation Bank 12.00 7.75 4.25
15 Dena Bank 12.50 8.25 4.25 BPLR (12.50%-16.75%) as also BR (7.00%- what will be the basis for fixation of the
16 Indian Bank 12.00 8.00 4.00 8.75%) with higher range of reductions in BR? Is it going to be arbitrary or will it be
17 Indian Overseas Bank 12.00 8.25 3.75
18 Oriental Bank of Commerce 12.00 8.00 4.00 rates (4.00-9.75 percentage points). linked to some external benchmark like
19 Punjab National Bank 11.00 8.00 3.00 The individual bank-wise shift from BPLR any policy rate?
20 Punjab and Sind Bank 13.50 8.20 5.30
21 Syndicate Bank 12.00 8.25 3.75
to BR reveals that the new private sector The growth in aggregate deposits of
22 Union Bank of India 11.75 8.00 3.75 banks and foreign banks are more or less scheduled commercial banks has consist-
23 United Bank of India 12.00 8.25 3.75
on the same footing posing significant com- ently been decelerating over the past three
24 UCO Bank 12.25 8.00 4.25
25 Vijaya Bank 12.25 8.25 4.00 petition to both public and private banks. years from 22.4% in 2007-08, to 19.9% in
26 IDBI Ltd 12.75 8.00 4.75 The old private banks are the ones to face 2008-09 and to 17.2% in 2009-10. Year on
Range: 11.00- 7.50- 3.00-
13.50 8.25 5.30 the stiffest competition in the process. year as on 30 July 2010, the growth rate
Private Sector Banks
27 Catholic Syrian Bank Ltd 14.75 8.00 6.75 Graph A: Base Rate-BPLR Relationship
28 City Union Bank Ltd 14.50 8.50 6.00 17
29 Dhanalaxmi Bank Ltd 16.00 7.00 9.00
16.5
30 Federal Bank Ltd 14.25 7.75 6.50
31 Jammu and Kashmir 16
Bank Ltd 12.75 8.25 4.50
32 Karnataka Bank Ltd 13.75 8.75 5.00 15.5
33 Karur Vysya Bank Ltd 13.50 8.50 5.00 15
34 Laxmi Vilas Bank Ltd 15.00 8.75 6.25
35 Nainital Bank Ltd 12.50 8.50 4.00 14.5
36 Ratnakar Bank Ltd 13.00 8.00 5.00 14
37 South Indian Bank Ltd 16.00 8.10 7.90
BPLR

38 Tamilnad Mercantile 13.5

Bank Ltd 14.00 8.50 5.50
13
39 ING Vysya Bank Ltd 15.75 7.25 8.50
40 SBICI Bank Ltd 13.00 7.50 5.50 12.5
41 Development Credit
12
Bank Ltd 14.75 7.80 6.95
42 Axis Bank 14.75 7.50 7.25 11.5
43 IndusInd Bank 16.75 7.00 9.75
44 ICICI Bank Ltd 16.75 7.50 9.25 11

45 HDFC Bank Ltd@ 15.75 7.25 8.50 10.5

46 Kotak Mahindra Bank 15.50 7.25 8.25
47 Yes Bank Ltd 16.50 7.00 9.50 10
Range: 12.50- 7.00- 4.00- 6.0 6.5 7.0 7.5 8.0 8.5 9.0
Base
Base Raterate
16.75 8.75 9.75
PSBs
PSBs PvtBanks
Pvt Banks For Banks
For.Banks
Foreign Banks
48 Citi Bank 14.75 7.25 7.50
49 Standard Chartered 14.25 7.25 7.00 1.3 Benchmark for Loans has been only 14%. Against this backdrop,
50 HSBC 15.50 7.00 8.50 or Deposits?
51 Abu Dhabi Commercial Bank 12.50 7.50 5.00
the SBI’s efforts to garner additional depos-
52 Bank of Bahrain and Kuwait 16.00 7.75 8.25 On 16 July 2010 the SBI launched base its are understandable. As the SBI is the
53 BNP Paribas 14.00 6.75 7.25
rate-linked deposit products for one, three leader at least among the public sector
54 Deutsche Bank 16.00 6.75 9.25
55 Development Bank of and five years. For one year the rate will be banks, if this practice is followed by other
Singapore 14.00 7.00 7.00 50 basis points (bps) lower than the base public sector banks that might place the
Range: 12.50- 6.75- 5.00-
16.00 7.75 9.25 rate. For three years, the deposit rate will be entire BR system in a tailspin mode.
+ - since revised to 12.25%. 25 bps lower and, for a five-year tenure, the
* - Cost of Deposits with tenure of six months, mainly due to the
large base of “current accounts, savings accounts” deposits at 47.0%. deposit rate will be equal to the base rate. 1.4 Other Implications
@ - Due to its CASA ratio of about 50% - the highest in the banking
industry. The bank has used the cost of one-three months’ deposits The announcement by SBI revising its It was feared that large corporates might
to arrive at its base rate.
But for these two banks there is no clear indicative as the method of deposit rates has posed the question move to other sources of short-term financ-
fixing base rate.
Source: Data compiled from websites of respective banks. whether the BR is a benchmark for pricing ing. Even as banks raise deposit rates,
Economic & Political Weekly EPW august 21, 2010 vol XLV No 34 27
MONEY MARKET REVIEW

short-term money became more expensive
over the recent period with corporations
trying to beat the base rate system. They
are instead opting to borrow through com-
mercial papers even at higher yield rates.
The commercial paper issues of Rs 75,506
crore outstanding as of end March 2010
had moved up to Rs 99,792 crore as of end
June 2010 and are expected to have moved
up further since then. Commercial banks’
investment in commercial papers increased
by 7.6% and 9.6%, respectively, in mid-
June and mid-July 2010, and investment in
bonds and debentures of companies
increased by 5.9% and 9.8%, respectively,
during the same period whereas the
growth in non-food credit was only 1.9%
and 3.8% during the same period. In fact,
the banks’ non-food credit during July
declined by 1.3% while commercial invest-
ments increased by 5.8%.
The available data show that compared
to the private corporate sector, the public
sector companies largely relied on the
banking system for their working capital
needs. These companies might have been
enjoying the so-called sub-BPLR borrow-
ings by virtue of government backing.
Thus, if the BR system leads to some
increase in borrowing costs, the public
sector companies will be the ones hard hit
compared to their private counterparts,
which will have some fiscal implications.
2 Money, Forex and Debt Markets
The RBI’s policy stance of exiting excessive
monetary accommodation has of late been
buttressed by a decisive shift in favour of
containing inflationary pressures and
expectations. The policy stance and
responses have been driven by growth-
inflation dynamics. In its first quarter
review of monetary policy for 2010-11
released on 27 July 2010, RBI raised the
repo rate from 5.5% to 5.75% and the
reverse repo rate from 4% to 4.50%, thus
narrowing the corridor to 125 bps. This
footing. Inflation as also the growth pro-
jection for the current year have been
scaled up by 50 bps each to 8.5% and
6.0%, respectively.
The tight liquidity conditions experi-
enced over the past three months follow-
ing an outflow of more than Rs 1 lakh
crore towards 3G licence fees along with
advance tax payment of around Rs 35,000
crore in the previous month continued to
have an impact on all the segments of the
money market during July as well. How-
ever, the end of the month reflected some
easing as banks parked with the RBI an
average amount of only Rs 4,000 crore in
the last three days of the month. Sub-
sequent to this, the RBI discontinued its
second Liquidity Adjustment Facility (LAF)
from 30 July on a daily basis.
Reflecting pressures on liquidity and
responding to policy signals, money mar-
ket rates across segments increased steeply
in July over June. Traded volume also
showed a rise. In the government securi-
ties market, central and state governments
continued with vigour their mobilisation
efforts, taking advantage of the still weak
credit demand. The secondary market vol-
umes showed a dip except in treasury bills.
The yield curve seemed tilted upwards at
the shorter end with the long-term yield
rates remaining more or less flat.
Reversing the trend of past several
months, the dollar weakened against most
global currencies. The rupee overall
appreciated marginally over the month
after a steep depreciation in May. During
the month, the global rating agency,
Moody’s Investors Service, upgraded
India’s local currency government bond
rating from Ba2 to Ba1. This helped the
rupee to strengthen against the US dollar
and other currencies.
In the currency futures segment, the
turnover fell in both the exchanges as in the
previous month. However, the Securities
and Exchange Board of India (SEBI) has
approved the launch of exchange-traded
currency options on the rupee-dollar spot
rate and it has been allowed to introduce
“premium-styled European call and put
options”. The move is expected to boost
the turnover of the exchange-traded cur-
rency derivatives segment. On 23 July, the
RBI issued revised draft guidelines on for-
eign exchange derivatives and overseas
hedging of commodity price and freight
risks. The draft guidelines suggest that
FIIs, persons having foreign direct invest-
ments in India and non-resident Indians
be allowed to hedge their contracted for-
eign exchange exposures through For-
ward Foreign Exchange Contracts and
Foreign Currency-INR Options.
In the corporate bonds market, the
mobilisation of resources through issu-
ance of bonds remained buoyant with
more financial institutions coming for-
ward to garner money from this route.
2.1 Money Market
During July, the short-term rates contin-
ued their hardening trend as in the previ-
ous month and stayed mostly within the
corridor of the repo rate and reverse rate
set by the RBI. The weighted average call
rates moved in a range of 4.43% to 5.88%
during July, higher than the 4.14% to
5.35% range during the previous month
implying the higher demand for short-
term funds. From 26 June to 1 July the
rates moved in a range of 5.10% to 5.58%.
But they touched their high of 6.5% on 30
June the first time in three months as
many banks were weighed down by the
Table 3: RBI’s Market Operations (in Rs crore)
Month/Year OMO (Net Purchase(+)/ LAF (Average Daily
Sale(-)) Injection (+)/Absorption(-))
January-10 -8 -76,949
February-10 -4 -80,674
March-10 -2 -44,404
April-10 10 -54,009
May-10 0 -34,749
June-10 -2 43,123
July-10 -16 48,740
Source: RBI’s Weekly Statistical Supplement.

was the second time during the month Table 2: Money Market Activity (Volume and Rates)
that the RBI raised these policy rates. Ear- Instruments July 2010 June 2010
Daily Average Monthly Range of Weighted Daily Average Monthly Weighted Range of Weighted
lier on 2 July the central bank took the Volume (Rs Crore) Weighted Average Daily Volume Average Rate (%) Average Daily Rate
market by surprise by unexpectedly rais- Average Rate (%) Rate (%) (Rs Crore) (%)
Call Money 8,387 5.54 4.43-5.88 6,216 5.18 4.14-5.35
ing repo and reverse repo rates by 50 bps
Notice Money 2,306 5.39 3.50-6.00 1,587 5.17 3.45-5.35
each to contain the continuous accelera- Term Money @ 112 - 4.40-7.60 90 - 4.25-7.00
tion of inflation and to ensure that eco- CBLO 28,832 5.26 4.15-5.56 32,247 5.18 4.03-5.32
nomic growth, which is back on track, Market Repo 11,621 5.39 350-5.89 10,233 5.27 2.00-5.36
@ Range of rates during the month.
is placed on a firmer and sustainable Source: www.rbi.org.in. and www.ccilindia.com.

28 august 21, 2010 vol XLV No 34 EPW Economic & Political Weekly
 MONEY MARKET REVIEW
liquidity crunch. The mood was also influ- the end of June over the end of May. The most of the global currencies as the
enced by the forthcoming monetary policy outstanding CPs stood at Rs 99,792 crore mounting concerns about the recovery in
review on 27 July. Rates during the last on 30 June. The tight liquidity in the sys- the US economy dampened sentiments.
week of the month showed a somewhat tem also had an impact on the CDs and CPs This was due to the weaker than expected
softening trend and ruled steady near the discount rates and both the instruments second quarter US GDP growth adding to
lower end of the interest rate corridor reflected a hardening of rates. the cautious outlook for global growth.
mainly because of improved liquidity On 30 July the capital market regulator The poor performance of the US dollar
since 28 July, after redemptions of informed all SEBI-regulated entities to index observed from the beginning of this
Rs 32,200 crore of government securities. report their OTC transactions related to CDs financial year continued during July also
The month ended with call money weight- and CPs on the fixed income, money mar- with the index losing a massive 450 bps.
ed average rates ruling at 4.43% on 30 ket and derivatives association of India Following the upbeat interest from for-
July as there was not much demand for (FIMMDA) reporting platform within 15 eign investors in the Indian market along
funds with banks having borrowed ahead minutes of the trade. The move followed a with the positive stock price movements,
to meet their fortnight-end requirements. similar directive issued by the RBI to all the rupee recovered from its earlier lows
Table 4: Foreign Exchange Market: Select Indicators RBI-regulated entities. and appreciated marginally during the
Month Reference Rate Appreciation (+)/ FII Flows Net Purchases BSE Sensex US Dollar The RBI’s LAF window month of July. The FIIs invested heavily in
(Last Friday Depreciation (-) ($ Million) by RBI (Month-end Index
of the Month) of Rs/$ (in %) ($ Million) Closing) continued to witness the equity and debt markets in July and the
Dec-09 46.73 -0.53 1,873 (+) 525 17,465 78.22 injection of funds to the net amount touched a high of Rs 25,000
Jan-10 46.37 0.78 1,849 (+) 525 16,358 79.65 participating banks to crore or $5.3 billion. The equity market
Feb-10 46.37 0.00 946 (+) 525 16,430 80.44 meet their daily liquidity also gained 167 points during the month.
Mar-10 45.34 2.27 6,465 (+) 370 17,528 81.29 requirements and the RBI The rupee started the month with a
Apr-10 44.44 2.03 2,783 (+) 370 17,559 81.99
infused an average daily marginal depreciation on 1 July at
May-10 46.54 -4.51 -1,505 (+) 370 16,945 86.58
net amount of Rs 49,000 Rs 46.68 per dollar and tracked the vola-
Jun-10 46.54 0.00 2,424 (+) 270 17,701 86.28
crore during July. The tile movement of the euro. The rupee was
Jul-10 46.46 0.17 5,285 Not available 17,868 81.65
Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.gov.in), Imf.org.in, RBI’s open market opera- flat against the dollar on 5 July amid low
www.futures.tradingcharts.com tions window continued volumes due to the nationwide strike. The
All the money market instruments ruled to remain inactive with a meagre net sales rupee weakened by 12 paise against the
above 5.00% level in July. The notice money figure of Rs 16 crore (Table 3, p 28). dollar on 6 July, despite gains in the
rates also followed the same trend and ruled During the month of July, the interest domestic equity markets. Strong dollar
in a range of 3.50% to 6.0% in July. The rate futures segment of the National Stock demand by importers and large corpo-
monthly weighted average rate of collateral- Exchange (NSE) continued to show a dras- rates put pressure on the rupee on 7 July.
ised borrowing and lending obligations tic decline in its turnover and the average Thereafter, the rupee continuously appre-
(CBLO) hardened in July to 5.26% compared daily volume plunged from Rs 78 lakh to ciated for three days in a row and rose to
to 5.18% in June. The daily average market Rs 17 lakh during the month over the pre- Rs 46.73 against the dollar on 12 July
repo rate also displayed a similar trend and vious month. tracking the positive equity market senti-
weighted average rates ruled at 5.39% ment. From 15 July onwards the rupee
against 3.74% during the same period. 2.2 Forex Market again continued to fall till 22 July and
The volumes in money market saw a Reversing the past trend, the dollar weak- touched a low of Rs 47.33 per greenback
massive expansion during the month over ened substantially against the euro and as the Index of Industrial Production data
the previous month. The daily average vol-
Table 5: Details of Central Government Market Borrowings (Amount in Rs crore)
ume of call money transactions increased Date of Auction Nomenclature of Loan Notified Amount Bid Cover Ratio Devolvement on YTM at Cut-off Price
Primary Dealers (in %)
by 35% to Rs 8,387 crore in July. Similarly,
02-Jul-10 7.46% 2017 R 3,000 3.56 nil 7.51% (Rs 99.71)
the notice money and term money volumes
8.20% 2022 R 4,000 2.21 nil 7.92% (Rs 102.09)
witnessed a 45% and 25% rise, respective- 8.30% 2040 N 3,000 2.87 nil 8.30%
ly, in a period of one month. The turnover 09-Jul-10 7.17% 2015 R 4,000 3.19 nil 7.40% (Rs 99.05)
of a major collateralised instrument, CBLO, 7.80% 2020 R 5,000 1.72 nil 7.67% (Rs 100.87)
however shed 11% while those of market 8.32% 2032 R 3,000 1.89 nil 8.33% (Rs 99.92)
16-Jul-10 7.46% 2017 R 5,000 2.48 nil 7.62% (Rs 99.13)
repo recorded an increase of 14% during
8.20% 2022 R 5,000 2.49 nil 8.00% (Rs 101.46)
the month (Table 2, p 28).
8.26% 2027 R 3,000 2.37 nil 8.24% (Rs 100.19)
The volume of outstanding certificates 30-Jul-10 7.17% 2015 R 5,000 1.87 nil 7.61% (Rs 98.22)
of deposit (CDs) dipped by about Rs 14,600 7.80% 2020 R 5,000 2.07 nil 7.78% (Rs 100.11)
crore on 16 July from 2 July and the total 8.24% 2027 R 3,000 1.68 nil 8.35% (Rs 99.05)
outstanding amount stood at Rs 3,27,720 8.30% 2040 R 2,000 2.33 nil 8.33% (Rs 99.67)
crore on 16 July. Similarly, the volume of Total for July 50,000 2.33
Total for June 50,000 2.24
outstanding commercial papers (CPs) also
R: Re-issue, N: New issue,
declined by around Rs 9,000 crore during Source: RBI press releases.

Economic & Political Weekly EPW august 21, 2010 vol XLV No 34 29
MONEY MARKET REVIEW

for May indicated a slowdown in industri- The forward premia sho- Graph B: Spot Quotations and Annualised Forward Premia for the US
Dollar in the Domestic Inter-Bank Market
al production from April. The rupee fell wed a continuous hardening
6 60
Monthly Averages (Daily) Working Days
below the 47-level against the greenback trend from the beginning (April 2007 to June 2010)
Spot
July 2010
on 19 July due to the arbitrage opportuni- of the month due to paying 5 50
ties in the non-deliverable forward market of interest following the 4
40
putting pressure on the rupee. However, increase in yields in the gov-
3
from 23 July to 28 July, the rupee gained ernment securities market. 30
by around 76 paise and touched Rs 46.57 Among the three tenures, 2
per dollar tracking a strong euro against the one-month premia ruled 1 20
6-month
the greenback. This was also followed by higher than the three and
0 10
the raising of debt rating of Indian cur- six-month premia. The one- 1-month

rency to Ba1 by Moody’s Investors Service. month premia recorded a -1 0

Another reason that stemmed the rupee continuous rising trend and
from appreciating further was the moved in a range of 4.51% to 5.94% during 5.51% (4.21%) and 6-month at 4.91%
increased capital inflows into the capital the month. The three-month and six- (3.67%) (Graph B).
market. On 29 July the rupee dropped by month premia also observed a similar The forex market turnover recorded a
6 paise but managed to end the month trend. All the three tenures touched their fall of 6.6% during July over June. The
with a marginal appreciation of 0.17% and high on 30 July. On 30 July the one-month turnover in the merchant segment showed
the rupee closed the month at Rs 46.46 premia ended substantially higher at the maximum fall of 12% while inter-
per dollar on 30 July (Table 4, p 29). 5.94% (4.51% on 3 June), three-month at bank transactions shed 4% during June.

Table 6: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)
Descriptions July 2010 Previous Month Three Months Six Months
Last Week (30th) First Week (2nd) Total for the Month (June 2010) Ago (April 2010) Ago (January 2009)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
1 Treasury Bills 5080.67 7815.71 26139.26 24724.29 61864.45 45918.40
A 91-Day Bills 1983.52 5.72 4433.94 5.42 13697.18 5.5 14148.87 5.24 46632.98 3.85 36881.33 3.58
B 182-Day Bills 1780.25 5.75 2150 5.34 6904.65 5.51 4300.24 5.2 6865.18 4.14 3628.38 3.76
C 364-Day Bills 1316.9 6.08 1231.77 5.47 5537.43 5.71 6275.18 5.27 8366.29 4.81 5408.69 3.81
2 GOI Dated Securities 49902.76 7.7 73120.55 7.47 250927.49 7.57 290135.12 7.56 249090.36 7.44 226991.91 7.20
Year of (No of
Maturity Securities)
2010 2 100.11 6.22 220.00 5.37 345.00 5.53 910.55 5.37 11644.73 4.03 9822.73 4.01
2011 6 2105.04 6.85 2466.15 5.38 5047.57 5.54 4540.57 5.21 6146.61 5.24 11900.34 5.21
2012 5 1580.00 7.07 1985.77 6.21 6952.23 6.47 7330.38 6.08 15322.65 6.08 16921.08 6.22
2013 3 360.00 7.24 1631.00 6.75 4821.41 6.88 4172.63 6.61 6111.01 6.68 1234.87 6.84
2014 7 5513.00 7.51 612.92 7.03 1290.80 7.11 2693.66 6.98 5547.05 7.19 8793.68 7.20
2015 4 803.50 7.66 8125.60 7.29 26850.90 7.38 10582.32 7.32 19784.65 7.58 2889.79 7.43
2016 4 2215.00 7.68 1929.75 7.58 4475.99 7.61 8914.66 7.63 67632.62 7.58 35352.20 7.41
2017 4 70.10 7.88 960.00 7.52 8767.96 7.62 242.46 7.53 162.88 7.56 303.51 7.51
2018 2 11.00 7.78 0.12 7.61 115.34 7.80 161.13 8.20 89.26 7.90 70.01 7.71
2019 2 30295.01 7.72 65.00 7.72 159.93 7.75 453.14 7.51 1615.50 7.92 39462.14 7.71
2020 3 10.57 7.94 40382.02 7.55 154935.30 7.62 154498.78 7.54 63076.48 7.89 87576.09 7.55
2021 2 2861.94 8.04 114.14 8.08 331.61 7.99 34.16 8.63 96.77 7.99 300.03 7.77
2022 3 16.61 8.20 12651.40 7.92 25520.46 7.96 88556.25 7.89 42848.82 8.12 428.54 8.06
2023 3 1715.07 8.29 16.43 8.11 85.08 8.17 160.57 8.04 32.70 7.86 362.96 8.26
2024 4 - - 77.56 8.09 3237.18 8.27 460.57 8.16 241.12 8.25 739.11 7.91
2025 1 - - 1.61 7.90 1.61 7.90 70.00 8.12 6.71 8.28 15.75 8.34
2026 1 839.34 8.29 49.60 8.19 98.60 8.19 147.13 8.17 1884.23 8.34 2662.31 8.33
2027 2 - - 774.88 8.18 2953.68 8.23 4437.29 8.18 3625.49 8.36 4983.21 8.25
2028 1 647.95 8.28 0.20 8.04 0.50 8.16 37.00 8.07 42.39 8.18 3.96 8.16
2032 3 26.50 8.16 739.22 8.25 2663.25 8.27 2535.89 8.21 3023.01 8.56 2612.89 8.30
2034 1 - - 42.50 8.10 168.00 8.13 106.75 8.12 72.65 8.24 224.59 8.26
2035 1 4.60 8.30 - - 1.00 8.04 54.75 8.09 58.00 8.26 122.62 8.22
2036 1 - - - - 128.13 8.29 39.84 7.21 25.01 8.54 196.25 8.27
2039 1 727.42 8.33 - - 4.00 8.07 0.40 7.91 - - 13.25 8.06
2040 1 - - 274.68 8.30 1971.95 8.32 - - - - - -
3 State Govt Securities 230.61 8.17 1331.24 7.94 3040.98 8.01 3172.84 7.34 9496.66 8.07 8912.40 8.16
Grand total (1 to 3) 55214.04 82267.5 280107.73 318032.25 320451.47 281822.71
(-) Means no trading. YTM = Yield to maturity in per cent per annum. NDS = Negotiated Dealing System. OM = Order Matching Segment. (1) Yields are weighted yields, weighted by the amounts of each transaction.
Source: Compiled by EPWRF; base data from RBI, CCIL.

30 august 21, 2010 vol XLV No 34 EPW Economic & Political Weekly
 MONEY MARKET REVIEW
The spot and forward market turnover issued, namely, 8.32% 2032, 8.26% 2027 State governments tapped the market
also declined by 8% and 5%, respectively, and 8.24% 2027. Yields of 8.32% 2032 twice for an aggregate amount of Rs 8,319
during the same period. and 8.26% 2027 were when compared crore against Rs 5,715 crore in June. In the
The trading in the currency futures seg- with yields of the same securities in first auction, held on 6 July, seven state
ment of both NSE and MCX-SX continued to June auctions. governments took part for an accepted
show the same trend as the last month and Despite the tight liquidity situation, amount of Rs 4,888 crore with YTM of
the turnover fell by 30% during July. This stubborn inflation and the expected hike 8.17% and weighted average yield of
was partly due to a levy of stamp duty by in key policy rates, all auctions were 8.14%. In the first auction, an additional
the Delhi government on proprietary fully subscribed without devolvement on amount of Rs 187.50 crore and Rs 200
trades. The aggregate average daily turn- primary dealers. crore, over and above the specified noti-
over decreased by 30% over the previous A continuing shortage of liquidity and fied amounts, were raised by Tamil Nadu
month to Rs 24,244 crore from Rs 34,203 consistent higher inflation rate resulted in and Uttar Pradesh, respectively. In the
crore. The average daily turnover in the lower traded volumes of dated central second auction, on 20 July, four states par-
MCX-SX and NSE stood at Rs 14,546 crore government securities and state develop- ticipated mopping Rs 3,431 crore with
and Rs 9,698 crore, respectively. The mar- ment loans (SDLs) in the secondary mar- YTM of 8.15% and weighted average yield
ket share of MCX-SX over NSE stood at ket. The traded volume of dated gov- of 8.14%. Here again, Maharashtra and
60:40 during the month. The total number ernment securities in July dipped by Tamil Nadu issued additional SDLs worth
of contracts traded in the two exchanges almost 14% to Rs 2,50,927 crore against Rs 200 crore and Rs 181 crore, respectively
also fell by 30% over the previous month. Rs 2,90,135 crore in June. Trading volume (Table 8). Total traded volume, in the
Among the traded currencies in the cur- took a hit particularly towards the end of secondary market marginally dropped to
rency futures segment on both NSE and the month, the volume of dated govern- Rs 3,040 crore with YTM of 8.01% against
MCX-SX, the rupee-dollar futures con- ment securities in the last week of the Rs 3,173 crore in June with YTM of 7.34%.
tinued to rule the top position and month, showing trades of Rs 49,903 crore
accounted for 91% of the total notional against Rs 73,121 crore in the first week of 2.4 Treasury Bills
value followed by rupee-euro by 7% the month. Hikes in policy rates were During the month, 91-day, 182-day and
during the month. somewhat anticipated by the market, 364-day treasury bills were issued for
but concerns related to high inflation Rs 8,000 crore, Rs 3,000 crore and
2.3 Government Securities Market led the market to believe that rates could Rs 2,000 crore, respectively, taking the
Four auctions of dated government securi- go up further and this dampened the aggegate amount to Rs 13,000 crore in
ties were held, after skipping one sched- trading sentiment in the market, parti- July against Rs 15,000 crore in June.
uled auction in the third week of the cularly in the second half of the month. Cut-off-yields and weighted average
month for notified amounts ranging from Overall, yields increased
Rs 10,000 crore to Rs 15,000 crore mop- during the month with few Table 7: Yield Spreads (Weighted Average): Central Government Securities –
July 2010 (basis points (bps))
ping up an aggregate Rs 50,000 crore, the exceptions and a surge in Yield Current Month Previous Three Six Months
same as that in June. The bid cover ratio yields was reflected more Spread in bps Last Week First Week Entire Month Month Months Ago Ago
1 Year - 5 Year 81 191 184 211 234 222
for July was 2.33 times against 2.24 times in short-term maturities,
5 Year - 10 Year 28 26 24 22 31 12
in June. which can also be seen
10 Year - 15 Year - 35 28 58 39 79
During the month, viz, five securities, from the yield curve of 1 Year - 10 Year 109 217 208 233 265 234
7.46% 2017, 8.20% 2022, 7.17%2015, July. Accordingly, the yield Source: As in Table 5.
7.80% 2020 and 8.30% 2040 were issued spread for one and five-
twice, in the first half of the month and year maturities narrowed Table 8: Details of State Government Borrowings (Amount in Rs crore)
again in the second half. Among these to 184 bps against 211 bps Date of Auction Number of
Participating
Total
Amount
Bid Cover
Ratio
YTM at
Cut-off Price
Weighted
Average
five securities, only two securities, in June and the spread of States Accepted (in %) Yield (%)

10-year benchmark security and 12-year yield between one and ten- 06-Jul-10 7 4,888 2.15 8.17 8.14
security, were able to improve bid cover year securities also fell to 20-Jul-10 4 3,431 2.61 8.15 8.14
ratios from the first issue to the second. 208 bps from 233 bps in Total for July 11 8,319 2.34 8.17 8.14

Since the last auction followed the first
quarter review, the cut-off yields firmed
up with bid cover ratios coming down. A
new security issued on 2 July, maturing in
2040 with a cut-off yield of 8.30% when
issued again in the last auction of the
month witnessed a yield rate rising from
8.30% to 8.33% (Table 5, p 30).
Apart from the above-mentioned five
securities, three more securities were
Economic & Political Weekly EPW august 21, 2010
June. The trading volume Total for June 8 5,715 3.01 8.10 8.08
Source: RBI press releases.
of government securities
was shared by two predominant securi- yields across the maturities moved
ties, namely, 7.80% 2020 and 8.20% 2022 northward due to liquidity pressure
comprising 83% of overall trade in gov- prevailing in the market along with a
ernment securities. Trading volume of high inflation rate and expected rates
SDLs also dropped in July to Rs 3,041 hike in the quarterly review of the mone-
crore with yield to maturity (YTM) of tary policy. Bid cover ratio for 91-day
8.01% against Rs 3,173 crore with YTM of treasury bills remained constant,
7.34% in June (Table 6, p 30 and Table 7). improved for 182-day treasury bills and
vol XLV No 34 31
MONEY MARKET REVIEW

fell in the case of 364-day treasury total amount raised stood at Rs 12,515 The non-banking financial corpora-
bills (Table 9). crore in July against Rs 8,923 crore in tions’ (NBFCs) participation improved
In the secondary market, yield rates of the previous month and Rs 10,430 crore notably during the month and they
short-term securities went up in July. The a year ago. contributed around 15% of the total mobi-
traded volume of treasury bills witnessed In the overseas market, SBI has raised lisations and raised Rs 1,930 crore in July.
Table 9: Auctions of Treasury Bills (Amount in Rs crore)
$1 billion (nearly Rs 4,700 Indiabulls raised the highest amount of
Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted crore), selling bonds that Rs 1,260 crore by issuing zero coupon
Accepted Ratio Yield (%) Average Price (Rs) Average will mature in five years. NCDs for three years. Bajaj Auto Finance
Yield (%) Price (Rs)
A: 91-Day Treasury Bills As per the bank’s state- also issued zero coupon NCDs. Among the
07-Jul-10 2000 4.18 5.37 5.32 98.68 98.69 ment the bond sale, exe- four issues, three were NCDs. Infrastruc-
14-Jul-10 2000 2.75 5.41 5.37 98.67 98.68 cuted through SBI’s Lon- ture Development Finance Corp raised
21-Jul-10 2000 2.76 5.74 5.61 98.59 98.62 don branch, was sub- money through issuance of bonds and
28-Jul-10 2000 4.76 5.74 5.74 98.59 98.59 scribed by 4.8 times and offered the maximum coupon rate of
Total for July 8000 3.61 5.56 5.51 98.63 98.65 saw demand from over 350 8.80% for 15 years paper.
Total for June 10000 3.61 5.29 5.24 98.70 98.71 investors. The debt will Central undertakings’ renewed interest
B: 182-Day Treasury Bills
carry a coupon of 4.50% continued in July also and they accounted
07-Jul-10 1500 1.83 5.78 5.63 97.20 97.27
per annum, the same as for 45% of primary issues during the
21-Jul-10 1500 3.04 5.95 5.86 97.12 97.16
SBI’s prev ious $750 million month amounting to Rs 5,680 crore
Total for July 3000 2.44 5.86 5.75 97.16 97.215
Total for June 2000 3.52 5.31 5.29 97.42 97.43
(over Rs 3,500 crore) bond through issuance of bonds offering 7.10%
C: 364-Day Treasury Bills offering of October 2009. and 8.75% for 2 to 15 years maturity.
14-Jul-10 1000 5.46 5.69 5.66 94.63 94.66 ICICI Bank has raised Power Grid Corporation raised the highest
28-Jul-10 1000 3.05 6.30 6.21 94.09 94.17 $500 million through an amount of Rs 2,880 crore by offering
Total for July 2000 4.26 5.99 5.93 94.36 94.42 international bond issue 8.50% for 10 years through issuance of
Total for June 3000 2.91 5.49 5.42 94.81 94.87 through the bank’s Hong Separate Trading of Registered Interest
Source: RBI's press releases.
Kong branch. As per the and Principal of Securities (STRIPS). Rural
during July increased to Rs 26,139 crore press release, the coupon rate for the Electrification Corporation also raised
against Rs 24,724 crore in June. But 5.5 year bond is 5%, with a spread of Rs 2,000 core by issuance of bonds and
across the maturities, volumes of 91-day 275 basis points over Libor. offered 8.70% and 8.75%, respectively for
and 364-day treasury bills came down In the domestic bonds market, banks/ 9 years and 15 years maturity.
in July as compared to amounts traded financial institutions (FIs) accounted for In July, only one corporate tapped the
in these categories during June. But the 36% of the total mobilisation through market through issuance of NCDs for
traded amount of 182-day treasury eight issues raising an aggregate amount Rs 350 crore offering 9.15% for 15 years
bills compensated for the fall in the other of Rs 4,555 crore. The bonds carried (Table 10).
securities traded. The traded amount coupon rates varying
increased by more than Rs 2,000 crore to between 7.29% and 8.79% Table 10: Details of Commercial Bond Issues during July 2010
Institutional Category No of Issues Volume in Range of Range of Maturity
Rs 6,905 crore in July against Rs 4,300 for maturity periods from Rs Crore Coupon Rates in Years (Y) and
crore in June. three years to 15 years. (in %) Months (m)

HDFC raised the highest FIs/Banks 8 4,555 7.29-8.79 3y,6m-15 y

2.5 Corporate Bonds Market amount among the banks NBFCs 4 1,930 7.23-8.80 1y-15y
Central Undertakings 5 5,680 7.10-8.75 2y-15y
The finance ministry has placed a limit on by hitting the market four
Corporates 1 350 9.15 15y
the value of infrastructure bonds that times during July through
Total for July 2010 18 12,515 6.85-11.50 1y-15y
IFCI, IDFC, LIC and infrastructure financ- issuance of upper tier II Total for June 2010 15 8,923 6.85-11.50 2y-20y
ing companies can issue during 2010-11. bonds for Rs 1,105 crore, Source: www.debtonnet.com.
The Central Board of Direct Taxes (CBDT) lower tier II bonds for
has said that the volume of issuance dur- Rs 500 crore and NCDs for Rs 1,000 crore. The secondary market transactions in
ing the financial year will be restricted to The bank offered 7.29% and 7.65% for commercial bonds increased marginally
25% of the incremental infrastructure NCDs maturing in two years while for during the month over the previous month
investments made by the issuer during upper tier II bonds it offered 8.70% despite reduced participation from FIIs.
2009-10. While the minimum tenure for with the step up of 50 bps if call According to the data published by SEBI,
the bond should be 10 years, a minimum is not exercised at the end of 10 years. the aggregate turnover as well as the aver-
lock-in of five years has also been speci- The lower tier II bonds carried the age daily turnover in the corporate bonds
fied for an investor. coupon rate of 8.79% for 10 years. All the reported by BSE, NSE and FIMMDA
In the primary market for corporate four issues enjoyed the triple A rating. improved by 17% each over a period of one
bonds, there was a tremendous 40% rise Among other FIs/banks, EXIM Bank month. The average daily turnover
in the mobilisation of resources during offered the highest rate of 8.68% for enlarged to Rs 2,899 crore from Rs 2,473
July over the previous month and the 12-year maturity. crore recorded in the previous month.
32 august 21, 2010 vol XLV No 34 EPW Economic & Political Weekly