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Movements in the Exchange Rate

The new indices of nominal and effective exchange rates of the rupee have been thoughtfully constructed and have been expanded rather significantly in their scope and coverage. What stands out in the coverage is the very rapid expansion in trade with Hong Kong and China, with the latter turning out to be the largest source of India's imports. The most illuminating revelation is that through the divergent interventions and non-interventions, the Reserve Bank of India has succeeded in pursuing an exchange rate policy that has sustained the effective rate "around the benchmark" - truly a commendable feat despite having to shock the market occasionally with sharp interventions to curb the speculative proclivities of some dealers.

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Movements in the Exchange Rate

Trends in New Indices of Nominal and Effective Rates

The new indices of nominal and effective exchange rates of the rupee have been thoughtfully constructed and have been expanded rather significantly in their scope and coverage. What stands out in the coverage is the very rapid expansion in trade with Hong Kong and China, with the latter turning out to be the largest source of India’s imports. The most illuminating revelation is that through the divergent interventions and non-interventions, the Reserve Bank of India has succeeded in pursuing an exchange rate policy that has sustained the effective rate “around the benchmark”

– truly a commendable feat despite having to shock the market occasionally with sharp interventions to curb the speculative proclivities of some dealers.

EPW RESEARCH FOUNDATION countries. Likewise, the 36-country index

has been substituted by a36-currency index

covering 47 countries. Both the expansions

I

have been facilitated by the presence of

Revised NEER and REER

a unified currency for the 12 Eurozone

T
he just-released and much-awaited countries. It is the increase in foreign trade new indices of nominal and effec-coverage that appears more impressive in tive exchange rates (NEER and both the sets of indices. The six-currency REER) provide some insightful answers index now covers around 40 per cent of for the mysterious behaviour of the rupee’s India’s foreign trade in 2004-05 as against exchange rate. The revisions themselves 22 per cent covered in the earlier fivehave been thoughtfully done and should country index, and 36-currency index be warmly welcomed. Both the sets of captures 77 per cent of India’s total trade indices hitherto constructed have been ex-and 89 per cent of exports during 2002panded rather significantly in their scope 03 to 2004-05 in contrast to the lower and coverage. The five-country index has coverage earlier of 61 per cent and 66 per been replaced by a six-currency index cent, respectively. These improvements in implying a coverage of as many as 17 coverage of total trade in the indices are

Table 1: NEER and REER Indices

(All Total Trade-Based)

also reflective of the vast regional diversification that has taken place in favour of emerging economies. What stands out is the very rapid expansion in trade with Hong Kong and China. The latter in particular has gained in India’s foreign trade share from 0.2 per cent in 1991-92 to 6.1 per cent in 2004-05. China has turned out to be the largest source of India’s imports, surpassing the US. In the normalised weighting diagram for the sixcurrency NEER/REER indices, the weights of China and Hong Kong together have shot up from 5.56 per cent in 1993-94 to

19.41 per cent in 2004-05. In this measure, China has replaced (with a 11.96 per cent normalised weight) both Japan and UK in the importance of India’s foreign trade. Finally, the scope of the indices has been improved not only by bringing forward the base period from 1985 to 1993-94, but also by presenting six-currency indices with two base years, 1993-94 as a fixed base and 2003-04 as a moving base, which would be carried forward every year. The weights for both the sets of indices would be three-year moving averages of normalised weights.

An important revelation that the revised NEER and REER have provided is the close proximity that the new six-currency indices, both in their nominal and real constructions, hold to the old five-country indices. A major reason for this obviously has been the stubborn way the Chinese have pursued an undervalued yuan policy. Hence, the inclusion of the Chinese currency has made no difference to the implied appreciation in real terms or depreciation in nominal terms of the Indian rupee vis-à-vis the basket of currencies. A more interesting revelation is the difference in the extent of nominal depreciation as between the six-currency NEER and 36-currency NEER. While the six-currency

Year Existing 5-Country Index New 6-Currency Index Existing 36-Country New 36-Currency Index Index Base: 1993-94 = 100 Base: 2003-04 = 100 Base: 1993-94 = 100 Base: 2003-04 = 100 Base: 1985 = 100 Base: 1993-94 = 100 NEER REER NEER REER NEER REER NEER REER NEER REER NEER REER

1993-94 100.00 100.00 148.45 100.40 100.00 100.00 143.34 101.14 44.69 61.59 100.00 100.00 2003-04 67.36 99.60 100.00 100.00 69.75 98.85 100.00 100.00 36.25 74.14 87.14 99.56 2004-05 66.09 101.91 98.11 102.32 69.26 101.35 99.29 102.53 35.64 76.96 87.31 102.50 2005-06 (For

November 25, 2005) 68.22£ 108.41£ 101.27£ 108.84£ 70.32 106.39 100.81 107.63 37.26$ 83.47$ 90.47* 108.21*

£ For October 14, 2005; $ For August 2005; * For September 2005.

NEER shows a depreciation of about 30 per cent up to November 2005, compared with the base year 1993-94, the 36currency NEER places it at about 10 per cent (up to September 2005), implying that the rupee has appreciated during the intervening period rather sizeably against the balance 30-country basket outside the six-currency set. Considering that India has pursued a fairly stable but flexible exchange rate policy and at the same time, sustained its export competitiveness as the revised indices suggest, it is quite likely that many of these countries have adopted substantial depreciation of their currencies in nominal terms. At the same time, it appears interesting that with India’s inflation rate being relatively higher than those countries, the difference in the level of rupee depreciation at the nominal level as between six-currency and 36-currency indices gets eliminated at the REER level.

This, finally brings us to the most illuminating revelation that through the processes of divergent interventions and noninterventions, the Reserve Bank of India has succeeded in pursuing an exchange rate policy that has sustained the effective rate “around the benchmark” – truly a commendable feat despite having to shock the market occasionally with sharp interventions to curb speculative proclivities of some dealers.

A minor suggestion or two at the end would be in order. The three-month timelag in the construction of 36-currency indices can also be avoided as now we indices are available on an ongoing basis, a brief table may be inserted in the RBI’s Weekly Statistical Supplement as shown in Table 1.

II Money and Forex Markets

Given the impending redemption of India Millennium Deposits (IMDs) towards the end of December and advance quarterly tax payments in the mid-month, the money and government securities market remained subdued throughout the month; as tax payments were effected before December 15 and as the date of IMD redemptions approached in the second-half of the month, there arose an extremely stringent liquidity position which manifested itself in a firmness in overnight rates as well as yields rates on treasury bills and a sharp plunge in reverse repo bids. Further, the RBI governor’s statement regarding the possibility of temporary constraints on domestic liquidity prompted the market to be extra cautious. Apart from these immediate reasons, the overall liquidity scenario has been under pressure as the foreign currency inflows have been somewhat lower; consequently, RBI has not been actively carrying out sterilisation activities and there has been a significant increase in credit offtake. To restore the balance, RBI has been instead unwinding the MSS borrowings under treasury bills and persistently injecting liquidity through repo auctions in the second-half of the month. Also, despite pressures, both the central and state governments managed to raise funds at much lower cost. Besides, the decision of the Employees’ Provident Fund Organisation (EPFO) to cut the provident fund rate to 8.5 per cent buoyed the market sentiments. In the forex market, the rupeedollar exchange rate oscillated responding to the US dollar’s movements against the euro and the yen, inflow of foreign currency assets and demand for dollar from corporates, while the RBI refrained from stemming its movements in any direction. Overall, the month saw some strengthening of the rupee rate after significant depreciation in the initial part of the month. Over a longer period, the rupee remains overvalued even after the revision of NEER and REER indices.

The Money Market

In December, the weighted averages of the call borrowing rate has responded to the underlying liquidity scenario; in the

Table 3: Comparison of Call, Overnight CBLO and Repo Rates

Week-Ending Weighted Average Rates Daily Average Volumes
(in Per Cent) (Rs crore)
Call Overnight Repo Call Overnight Repo
CBLO CBLO

have the required data on the exchange rate 2-Dec-05 5.39 5.27 5.32 12272.62 10169.14 6451.69

9-Dec-05 5.34 5.27 5.29 14238.30 10032.07 5869.65and CPI (or other inflation indicators) in 16-Dec-05 5.96 5.89 5.94 14419.95 11395.58 7346.46 the IMF’s special data dissemination 23-Dec-05 6.30 6.11 6.21 14238.30 12405.59 6521.20

30-Dec-05 6.93 6.39 6.41 10572.05 8986.28 5155.03

standards (SDDS) with a much shorter time-lag. Secondly, as the six-currency Source: CCIL.

Table 2: Money Market Operations (RBI’s Daily Data)

Average December 2005 Average November 2005 Items for Five for Four Weeks 30 23(RF)* 16 9(RF)* 2 Weeks 25(RF)* 18 11(RF)*

No of working days 30 6 6 6 6 621 6 5 5 5

Call Money

Weighted average of call rates: per cent (weekly range) per annum 5.25-7.15 6.27-7.15 5.68-6.39 5.61-6.12 5.25-5.34 5.25-5.45 3.90-6.65 3.90-6.09 6.23-6.38 5.72-6.65 5.33-5.54 Daily averages (Rupees crore) (5.68) (5.33) (3.90) (6.65) Total call market borrowings 9679 8340 10751 11151 8465 9689 9617 8696 8499 11190 10265

(295) (496) (533) (1029) Of which: by banks 7337 6920 8047 8465 5963 7293 7977 6792 7262 9064 1029

(293) (496) (533) (1029)

Notice Money

Weighted average of notice money rates: per cent (weekly range) per annum 5.06-7.19 5.87-7.19 5.49-6.12 5.33-6.15 5.06-5.36 5.15-5.58 5.00-6.40 5.20-5.72 6.02-6.40 5.20-6.30 5.00-5.53 Daily averages (Rupees crore) (6.12) (5.36) (5.36) (6.28) Total notice market borrowings 2292 1779 2624 2811 2100 2145 2394 2670 2509 2312 1489 (11030) (11974) (13166) (11216) Of which: by banks 1789 1436 1842 2057 1625 1991 1967 1836 3107 2325 1095 (15699) (7717) (9007) (8977)Turnover in term money market 331 361 312 270 260 475 228 136 258 316 220 (borrowings) $$ (125) (480) (287) (31)

* Data for reporting Fridays are given within brackets and they are also included in the weekly range/daily averages. $$ No of reporting/traded days is fewer than given above.

Economic and Political Weekly January 21, 2006

Graph A: Trends in Weighted AveragesGraph B: Spot Quotations for the UScollateralised one. The daily averages ofof Call Rates, Repo Rates, CBLO Rates andDollar in the Domestic Inter-Bank Market

call money borrowings rose marginally to

Call Money Borrowing – December 2005

50.0

Rs 9,679 crore in December from Rs 9,617

8 20.5

Weighted Average (Per Cent)5.5 6.5 7.5 il iMonthly Averages (Jan 2001 to Nov 2005) (Daily Working Days Dec 2005)
crore in November, while the borrowings

from notice money market witnessed a

48.0

decline at Rs 2,292 crore from Rs 2,394

15.5

(Rupees thousand crore)Rupees per US dollar

crore (Table 3). Among the three short

term instruments, the highest interest

10.5

rate and volume traded have thus been in

46.0

call money, followed by CBLO and repo

outside the RBI. Notice money rate has, as

5.5

expected, remained below the call money rate.

44.0

Forex Market

0.5

Deceber 2005

ll l

-i

Call Money Volume (Rs Cr)

Repo Rates – Outside the RBI

42.0

In December, though the rupee-dollar

  • ll
  • Call Rates
  • CBLO Rates

    exchange rate gyrated responding to the

    second-half of the month due to the constrained liquidity, the call rates were pushed to rule above the repo rate of 6.25 per cent (Table 2). The month began with the overnight rate ruling at 5.45 per cent due to the prevailing comfortable liquidity situation, the rate eased to 5.34 per cent on December 5. Despite the central loan floatation on December 6, the rate eased to 5.33 per cent. Even on the first reporting Friday, December 9, the rate ruled steady at 5.33 per cent. As constraints on liquidity increased, the overnight rate jumped to 5.78 per cent on December 10. Thereafter, the call rate began to rule firm as the liquidity strain began due to outflows on account of advance tax payments. It steadily rose to 6.11 per cent on December 16, but on December 17, it breached the repo rate and ruled at 6.28 per cent.

    It touched a high of 6.30 per cent on December 19. As the RBI initiated liquidity injection through its repo window, the call rate ruled in a narrow band of 6.36

    6.39 per cent. On the second reporting Friday, December 23, the rate slipped to

    5.68 per cent, as banks had already covered their positions. Ahead of the IMD redemption, the pressure on liquidity heightened, pushing the call rate to rule above 7 per cent. The overnight rate rose from 6.27 per cent on December 24 to 6.96 per cent on December 28 and further to a peak of 7.19 per cent on December 29 (Graph A).

    Even as the call rate rose sharply in the last week of December, the other shortterm rates such as the market repo and CBLO rates rose moderately, indicating the preference of market participants towards uncollateralised market over the dollar’s movements against the euro and the yen, inflow of foreign currency assets and demand for dollars from corporates, overall it has firmed up. Meanwhile, the RBI refrained from modulating the movements of currency allowing it to respond to market forces, despite the rupee breaching the psychologically important Rs 46 barrier. As against the outflows of foreign currency assets of US $ 1,633 million in November, there has been an inflow of US $ 2,210 million in December, except for the IMD effect which was reflected in foreign currency outflow to the extent of $ 7,191 million in the week ending December 30.

    The month began with the rupee weakening against the US dollar, amidst residual month-end demand and a rebounding dollar overseas even as FII inflows continued. The rupee depreciated against the dollar

    Table 4: Auctions of 91-Day Treasury Bills

    (Amount in rupees crore)

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Outstanding
    Auction Amount
    Devolved Price Yield on the Date of Issue
    No Face Value No Face Value on RBI (Rupees) Rate
    (Amount) (Amount) (Amount) (Per Cent) Total With RBI Outside RBI
    (1) (2) (3) (4) (5) (6) (7)* (8) (9) (10) (11) (12)
    2004
    December 1 500.00 47 2458.00 13 500.00 0.00 98.73 5.15 20616.42 0.00 20616.42
    December 8 2000.00 (2) 64 (256.73) 3591.00 (2) 37 (256.73) 2000.00 0.00 [98.73] 98.73 [5.15] 5.15 21009.43 0.00 21009.43
    December 15 2000.00 (2) 71 (950.00) 3206.00 (2) 54 (950.00) 2000.00 0.00 [98.73] 98.67 [5.15] 5.39 22311.51 0.00 22311.51
    December 22 2000.00 (1) 58 (7.08) 3546.50 (1) 36 (7.08) 2000.00 0.00 [98.68] 98.65 [5.35] 5.47 22311.51 0.00 22311.51
    December 29 2000.00 (0) 55 (0.00) 4715.00 (0) 16 (0.00) 2000.00 0.00 [98.66] 98.67 [5.43] 5.39 22311.51 0.00 22311.51
    2005 (0) (0.00) (0) (0.00) [98.68] [5.35]
    November 30 500.00 43 2015.50 18 500.00 0.00 98.59 5.72 28630.73 0.00 28630.73
    December 7 500.00 (1)35 (363.00) 2386.94 (1)1 (363.00) 500.00 0.00 [98.60] 98.61 [5.68]5.65 25437.95 0.00 25437.95
    December 14 500.00 (4)40 (1230.89) 1820.11 (4)10 (1230.89) 500.00 0.00 [98.61]98.58 [5.64]5.78 21937.95 0.00 21937.95
    December 21 500.00 (0)41 (0.00) 922.15 (0)26 (0.00) 500.00 0.00 [98.58]98.52 [5.76]6.02 21521.32 0.00 21521.32
    December 28 500.00 (2)32 (3352.69) 1016.65 (2)18 (3352.69) 500.00 0.00 [98.54]98.50 [5.93]6.11 19719.73 0.00 19719.73
    (1) (200.00) (1) (200.00) [98.51] [6.05]

    Figures in parentheses in cols 3 to 6 represent numbers and amounts of non-competitive bids which are not included in the total. Figures in the square brackets under cols 8 and 9 represent weighted average price and respective yield.

    * Bracketed figures in col 7, if any, relate to devolvement on primary dealers, exclusive of RBI.

    Graph C: Annualised Forward Premia in Graph D: Yield Curves for Datedcurrencies, the rupee appreciated to close Percentage for the US Dollar in theSecurities – Weighted Average for at Rs 45.07 on December 30. Even so, the

    Domestic Inter-Bank Market and WeightedWeeks of December 2005

    rupee ended 3.5 per cent weaker over the

    Averages of Call Rates for Dec 2005

    8

    1st Week 2nd Week 3rd Week 4th Week 5th Week
    calendar year to register its first annual

    8.0

    depreciation in four years (Graph B). As

    7.5

    per the latest RBI data, irrespective of the

    1 ---i i Weighted Averages of Call Rates (Right Axis) 1-month 3-month 6-month
    6.0

    Yield (per cent per annum)

    revision in the indices of REER, the rupee

    7

    still remains overvalued by 7.63 per cent

    Per cent per annum

    as on November 25 on basis of the revised

    6.5

    six-currency REER with 2003-04 as the

    base year.

    In the forward segment, given the ap

    6

    prehension over the narrowing of interest

    4.0

    rate differentials as well as hectic activity

    1.0

    5.5

    in the NDF market due to the available

    0.5

    arbitrage opportunities, the six-month

    5

    1 2 3 4 5 6 7 8 9 1011121314151617232930

    premia remained volatile throughout the

    2.0

    Working Days

    from Rs 45.99 on December 1 to Rs 46.28 on December 5. The US dollar was bolstered by the highest Fed target rate since 2001 and a fourth year of faster pace of growth than Europe and Japan, while bearish sentiments towards the rupee were due to the widening trade deficit and huge oil import payments. Also, the RBI has not been intervening in the market, and thus allowing the rupee to depreciate even as the rupee dipped to Rs 46.33 on December 8. The depreciating trend had been strengthened by the arbitrage opportunities on the nondelivery forward (NDF) market aboard. However, such a high level was not sustained, due to the increased inflows mainly on account of the ICICI Bank’s ADS receipts. The market players were cautious ahead of the US Fed rate meeting as they expected a hike in the benchmark rate, but after the US Fed actually effected a rise by 25 basis points to 4.25 per cent on December 13, a rider in the form of the removal of any reference to policy of accommodation tended to nullify the effect and introduced a signal of neutral interest rate policy. As a result, the dollar fell against other major currencies. The rupee too edged higher at Rs 46.06 – a process that generally continued till the end of the month. Following the RBI’s comment that it would meet the IMD redemption pressure from the huge foreign reserves coupled with steady international crude oil prices and huge foreign currency inflows, the rupee value further moved up closing at Rs 45.84 on December 14. Again, record FII inflows in stock market amidst a retreating overseas dollar saw the rupee strengthening to Rs 45.03 on December 20. There was a brief break when speculation that the European Central Bank was likely to raise its interest rates twice in the calendar year 2006 coupled with reemergence of

    Years to Maturity month. Among the three tenures, the one

    month ruled above the three-month and arbitrage opportunities on the NDF market six-month throughout December. The led to a fall in the rupee rate to Rs 45.37 month began with the six-month premia on December 21. But dollar selling by ruling at 0.83 per cent on December 1. banks seeking to raise funds amidst tight-Despite depreciation of the rupee, the ness in the call money market ahead of the premia for the US dollar fell to 0.71 per IMD redemption pulled back the rupee cent on December 5, but rose further to rate to Rs 45.12. As the month-end dollar 0.83 per cent despite of the rupee appredemand by corporates firmed up amid ciation on December 7. Thereafter, the limited dollar supplies due to US holidays premia remained stable amid growing and as the dollar firmed up against yen, apprehensions over the US Fed meeting. the rupee edged lower at Rs 45.26. How-However, subsequent to the US rate hike, ever, with the robust FII inflows offsetting the premia tracked the spot rupee as it rose the month-end dollar demand as well as from 0.82 per cent on December 14 to 1.37 the dollar weakening against major per cent on December 20. But, a volatile

    Table 5: Auctions of 182-Day Treasury Bills

    (Amount in rupees crore)

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on RBI (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue

    2005 Nov 30 500.00 27 1095.13 13 500.00 0.00 97.16 5.90 14886.50

  • (0) (0.00) [97.16] [5.85] Dec 14 500.00 38 1561.33 8 500.00 0.00 97.12 5.94 13886.50
  • (0) (0.00) (0) (0.00) [97.13] [5.61] Dec 28 500.00 41 1408.00 13 500.00 0.00 97.04 6.14 14996.00
  • (2) (609.23) (2) (609.23) [97.04] [6.10]

    Figures in the square brackets represent weighted average price and the respective yield. Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.

    Table 6: Auctions of 364-Day Treasury Bills

    (Amount in rupees crore)

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on RBI (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue

    2004 Dec 8 2000.00 87 5161.00 42 2000.00 0.00 94.69 5.61 41126

    (0) (0.00) [94.67] [5.63] Dec 22 1000.00 60 3281.00 16 1000.00 0.00 94.59 5.72 41126

    (0) (0.00) [94.60] [5.71]

    2005 Dec 7 1000.00 33 2551.00 12 1000.00 0.00 94.35 6.00 48858

    (1) (170.00) (1) (170.00) [94.36] [5.98] Dec 21 1000.00 49 2161.00 31 1000.00 0.00 94.20 6.17 48858

    (0) (0.00) (0) (0.00) [94.23] [6.12]

    Figures in the square brackets represent weighted average price and the respective yield. Figures in brackets represent devolvement on primary dealers (PDs).

    Economic and Political Weekly January 21, 2006 spot rate coupled with a firm overseas dollar saw the premia easing to 1.12 per cent on December 23. It again rose to 1.62 per cent amid increased month–end dollar demand coupled with a volatile sport rupee rate. Thereafter, it eased to 1.44 per cent on December 28 and further to 1.32 per cent on December 30 (Graph C). The rising current account deficit is providing signals for a possible fall in the rupee value.

    Primary Market

    Dated Securities

    In December, the government, as per the indicative calendar of issuances, mobilised Rs 8,000 crore on December 6 through re-issue of 8.07 per cent 2017 and 7.40 per cent 2035 for notified amounts of Rs 5,000 crore and Rs 3,000 crore, respectively, through price-based auctions using the multiple price method. For the respective securities, the RBI received 291 competitive bids for Rs 8,823.90 crore and 283 competitive bids worth Rs 8,623.90 crore. Of these, 145 bids worth Rs 4,948.20 crore and five bids for Rs 2,954.35 crore have been accepted for the 12-year and 30-year papers, respectively. The cut-off yield has been set for the 12year paper at 7.24 per cent. For the 30-year paper, despite the prevailing pressure of liquidity, the RBI has managed to offer a lower yield of 7.56 per cent in its third reissuance; earlier in November it was set at

    7.73 per cent, while in its first re-issuance in October the yield was set at 7.66 per cent; initially when the paper was auctioned in September, the cut-off yield accepted was 7.40 per cent. This happened at a time when the lending rates of banks were edging up, thus ensuring that sovereign yields do not firm up to unreasonable levels.

    On December 15, the state government of Kerala auctioned a 10-year loan for a notified amount of Rs 361.14 crore through a yield-based auction using multiple price auction method. For this, 56 bids worth Rs 1,172.28 crore were received, of which 12 bids for the notified amount have been accepted at a cut-off yield of 7.33 per cent; this is almost similar to the yield offered by Andhra Pradesh at 7.34 per cent in November.

    Table 7: Operations of RBI’s Liquidity Adjustment Facility and Liquidity Support

    (Amount in rupees crore)

    Repo/RR Repo Auctions/Injection by RBI* Reverse Repo Auctions/Absorption by RBI** Net Outstanding
    Date of Auction Period Bids Tendered Bids Accepted@ Bids Tendered Bids Accepted@ Injection Amount@
    Days Number Amount Number Amount Number Amount Number Amount (+)/
    28-Nov-05 1 16 4620 16 4620 –4,620
    $ 1 11 1625 11 1625 –1,625 6245
    29-Nov-2005 $ 1 1 – – – – – – – – 14 6 4975 570 14 6 4975 570 –4,975 –570 5545
    30-Nov-2005 1 7 1195 7 1195 –1,195
    $ 1 8 1760 8 1760 –1,760 2955
    1-Dec-2005 1 10 2660 10 2660 –2,660
    $ 1 18 3990 18 3990 –3,990 6650
    2-Dec-2005 $ 3 3 – – – – – – – – 14 19 9665 7210 14 19 9665 7210 –9,665 –7,210 16875
    5-Dec-2005 1 19 15320 19 15320 –15,320
    $ 1 27 5315 27 5315 –5,315 20635
    6-Dec-2005 1 22 17460 22 17460 –17,460
    7-Dec-2005 $ 1 1 – – – – – – – – 21 15 9780 13500 21 15 9780 13500 –9,780 –13,500 27240
    $ 1 11 4030 11 4030 –4,030 17530
    8-Dec-2005 1 10 8450 10 8450 –8,450
    $ 1 13 2325 13 2325 –2,325 10775
    9-Dec-2005 3 13 6335 13 6335 –6,335
    $ 12-Dec-2005 3 1 – – – – – – – – 29 8 5125 2680 29 8 5125 2680 –5,125 –2,680 11460
    $ 1 6 1345 6 1345 –1,345 4025
    13-Dec-2005 1 5 560 5 560 –560
    $ 1 2 380 2 380 –380 940
    14-Dec-2005 1 4 550 4 550 –550
    $ 1 3 485 3 485 –485 1035
    15-Dec-2005 1 3 545 3 545 –545
    $ 1 3 5205 3 5205 –5,205 5750
    16-Dec-2005 3 5 3390 5 3390 –3,390
    $ 3 3 1085 3 1085 1 20 1 20 1065 2325
    19-Dec-2005 1 9 5240 9 5240 2 225 2 225 5015
    $ 20-Dec-2005 1 1 3 8 220 2140 3 8 220 2140 1 3 300 480 1 3 300 480 –80 1660 –4,935
    $ 1 4 745 4 745 2 355 2 355 390 –2,050
    21-Dec-2005 1 6 1580 6 1580 2 1120 2 1120 460
    $ 1 7 1460 7 1460 3 805 3 805 655 –1,115
    22-Dec-2005 1 22 9160 22 9160 2 100 2 100 9060
    $ 23-Dec-2005 1 3 1 5 300 1330 1 5 300 1330 10 2 3850 150 10 2 3850 150 –3,550 1180 –5,510
    $ 3 1 170 1 170 16 7220 16 7220 –7,050 5870
    26-Dec-2005 1 22 10925 22 10925 1 125 1 125 10800
    $ 1 19 6755 19 6755 1 10 1 10 6745 –17,545
    27-Dec-2005 1 36 17835 36 17835 17835
    $ 28-Dec-2005 1 1 8 36 3580 22165 8 36 3580 22165 2 3 480 900 2 3 480 900 3100 21265 –20,935
    $ 1 11 4520 11 4520 2 1115 2 1115 3405 –24,670
    29-Dec-2005 1 36 24365 36 24365 24365
    $ 1 16 5745 16 5745 3 3220 3 3220 2525 –26,890
    30-Dec-2005 3 38 23085 38 23085 23085
    $ 3 11 6710 11 6710 3 2040 3 2040 4670 –27,755

    * All at 6.25 per cent rate of discount ** All at 5.25 per cent rate of discount @ Net of overnight repo – No bid was received in the auction. Notes: (1) With effect from October 29, 2004, the nomenclature of Repo and Reverse Repo has been interchanged as per international usages.

    (2) ($) Second LAF auction introduced with effect from November 28, 2005.

    liquidity to remain in the system now for cent on November 30 to 5.65 per cent on

    Treasury Bills

    two consecutive months, when the noti-December 7, but rose to 5.78 per cent on

    To ease the strain on liquidity, the RBI fied amounts under MSS have been can-December 14 and jumped to 6.02 per has been unwinding the MSS borrowings celled. Under the regular issues, the cent and 6.11 per cent on December 21 under treasury bills, thereby allowing yields on 91-day TBs eased from 5.72 per and 28, respectively (Table 4). Likewise,

    Appendix Table: Secondary Market Operations in Government Paper – RBI’s SGL Data

    (Amount in rupees crore)

    Descriptions Week Ending December 2005: Yield to Maturity on Actual Trading Total for the Month
    30 23 16 9 2 of December 2005
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury BillsA 91-Day Bills B 182-Day Bills C 364-Day Bills 2 GOI Dated Securities 420.61 131.28 887.94 6.06 6.22 6.09 323.57 255.28 1079.36 5.93 5.98 6.06 604.02 1082.28 1696.87 5.71 5.89 5.90 708.06 430.00 1780.48 5.55 5.75 5.77 821.32 854.20 1458.09 5.68 5.82 5.79 2877.58 2753.04 6902.73 5.74 5.87 5.89
    A Regular (Per Cent: Year)4.83 , 2006 35.00 6.75 , 2006 5.22 11.5 , 2006 3.00 11.68 , 2006 105.00 13.85 , 2006 -14 , 2006 -6.75 , 2007 0.07 11.5 , 2007 -11.9 , 2007 123.25 11.4 , 2008 25.00 11.5 , 2008 100.00 12 , 2008 40.00 12.1 , 2008 200.00 12.22 , 2008 400.00 6.65 , 2009 41.95 7 , 2009 0.05 11.5 , 2009 500.00 7.5 , 2010 31.67 7.55 , 2010 44.43 8.75 , 2010 -12.25 , 2010 5.00 8 , 2011 3.57 9.39 , 2011 70.00 11.5 , 2011 -12 , 2011 45.00 12.32 , 2011 -6.85 , 2012 66.76 7.4 , 2012 -9.4 , 2012 -11.03 , 2012 0.20 7.27 , 2013 58.70 9 , 2013 0.86 12.4 , 2013 -6.72 , 2014 -7.37 , 2014 128.84 10 , 2014 5.30 11.83 , 2014 -5.78 , 2015 FRB 10.00 7.38 , 2015 -9.85 , 2015 -10.47 , 2015 -11.43 , 2015 -11.5 , 2015 6.48 10.71 , 2016 -12.3 , 2016 11.79 7.46 , 2017 2.90 7.49 , 2017 72.25 8.07 , 2017 1079.98 5.69 , 2018 4.64 6.25 , 2018 22.50 10.45 , 2018 60.00 5.64 , 2019 1.00 6.05 , 2019 44.23 10.03 , 2019 4.73 6.35 , 2020 1.86 10.25 , 2021 671.84 8.35 , 2022 541.68 6.17 , 2023 21.50 10.18 , 2026 -6.01 , 2028 13.10 6.13 , 2028 6.85 7.5 , 2034 51.87 7.4 , 2035 229.45 Sub-total 4903.27 6.22 4.87 6.08 6.73 6.21 11.29 6.15 11.51 ----6.49 6.72 --6.23 11.06 6.42 10.17 6.47 10.36 6.37 10.71 6.46 10.74 6.50 10.78 6.42 6.61 6.83 6.97 6.60 10.04 6.67 7.28 6.57 7.28 --6.67 10.09 6.80 7.60 6.71 8.37 --6.87 9.66 --6.77 6.82 ----6.85 9.06 6.91 7.12 6.89 8.03 ----6.99 7.20 7.15 8.49 --5.87 5.82 --------7.25 8.94 --7.23 8.99 7.21 7.32 7.23 7.34 7.19 7.57 7.29 6.55 7.31 6.82 7.34 8.36 7.37 6.58 7.32 6.78 7.43 8.22 7.31 6.93 7.36 8.11 7.39 7.66 7.47 7.06 --7.51 7.16 7.41 7.12 7.49 7.49 7.46 7.45 6.99 8.53 50.00 12.00 0.25 10.00 --34.52 0.01 75.00 20.00 -350.00 20.00 -1.02 -2.20 30.50 160.33 -30.01 35.00 165.52 ---15.50 -0.30 0.20 60.00 1.02 20.00 -90.32 0.25 25.00 10.00 10.00 0.74 10.00 7.00 1.01 8.00 63.37 0.77 50.07 693.84 1.80 5.31 -2.31 32.50 1.36 32.02 395.36 368.47 2.50 1.92 10.29 5.25 15.70 131.25 3074.85 6.13 6.21 5.98 6.08 --6.30 7.40 6.20 6.37 -6.38 6.42 -6.41 -6.61 6.68 6.59 -6.71 6.81 6.71 ---6.79 -6.92 6.81 6.92 6.93 7.05 -7.00 7.12 7.14 5.86 7.13 7.14 7.19 7.20 7.25 7.29 7.25 7.21 7.24 7.23 7.25 7.23 -7.37 7.31 7.38 7.34 7.38 7.42 7.44 7.43 7.45 7.40 7.51 7.48 7.02 4.87 6.74 11.27 11.49 --6.70 10.78 11.05 10.15 -10.71 10.72 -6.61 -10.03 7.28 7.29 -10.09 7.60 8.37 ---6.83 -8.31 9.04 7.12 8.05 9.45 -7.21 8.47 9.07 5.81 7.26 8.28 8.61 8.86 8.94 8.60 9.00 7.32 7.35 7.59 6.53 6.78 -6.59 6.78 8.19 6.95 8.13 7.68 7.04 7.90 7.12 7.11 7.51 7.47 8.16 5.00 0.00 32.00 49.00 --0.01 -95.00 -300.00 530.00 700.00 --0.01 10.20 45.50 220.75 11.58 -20.00 60.00 --15.00 51.35 --5.60 105.00 6.63 20.00 20.00 196.30 2.03 10.00 5.00 -7.10 0.72 11.00 0.40 -81.37 0.74 243.93 1238.09 38.02 4.49 -1.50 52.40 0.84 17.53 901.15 547.21 2.54 -8.15 1.20 1.68 224.57 5915.68 5.97 6.73 6.06 5.96 --6.75 -6.18 -6.41 6.35 6.41 --6.83 6.57 6.69 6.59 6.74 -6.81 6.70 --6.71 6.78 --6.94 6.91 7.12 7.03 7.05 6.99 7.19 7.12 5.84 -7.22 7.31 7.28 7.29 -7.22 7.33 7.23 7.22 7.27 7.28 -7.42 7.33 7.38 7.37 7.38 7.42 7.35 -7.43 7.25 7.52 7.49 6.97 4.87 6.75 11.26 11.48 --6.75 -11.04 -10.33 10.69 10.71 --6.97 10.01 7.28 7.29 8.07 -7.60 8.36 --9.94 6.83 --9.09 7.12 8.13 9.44 6.86 7.20 8.51 9.05 5.80 -8.33 8.67 8.90 8.96 -8.97 7.38 7.35 7.58 6.54 6.80 -6.62 6.78 8.19 6.97 8.12 7.68 6.98 -7.10 6.99 7.52 7.48 8.55 22.80 --85.00 13.32 10.00 3.10 9.33 178.00 70.00 -25.00 -0.67 -33.10 -4.96 285.00 ---171.90 --25.00 17.50 75.00 10.00 40.46 101.04 1.16 10.00 75.00 170.56 -20.00 -30.50 0.40 ----78.23 3.00 615.06 2581.67 21.50 9.67 --15.50 -3.81 971.26 123.90 3.00 3.86 5.50 1.00 2.10 337.49 6267.50 5.92 --5.82 5.99 5.94 6.09 6.20 6.10 6.34 -6.29 -6.25 -6.58 -6.56 6.58 ---6.70 --6.72 6.78 6.82 6.94 6.91 6.91 6.91 7.03 7.04 6.99 -7.11 -7.09 7.14 ----7.29 7.25 7.22 7.23 7.25 7.27 --7.33 -7.32 7.38 7.41 7.40 7.45 7.36 7.38 7.51 7.52 7.12 4.87 --11.46 13.14 13.69 6.67 10.56 11.01 10.14 -10.67 -10.69 -6.91 -7.24 7.28 ---8.36 --9.94 6.83 7.19 8.31 9.07 7.12 8.03 9.43 6.86 7.20 -9.04 -7.24 8.28 ----9.01 7.34 7.34 7.59 6.53 6.80 --6.79 -6.93 8.12 7.67 7.01 7.92 7.04 7.10 7.51 7.51 7.86 20.00 --95.00 ----335.00 75.00 ---0.94 5.43 -0.25 -477.00 ---300.50 66.05 -70.00 107.00 2.00 1.00 0.12 41.00 1.00 0.06 -203.09 -10.00 --2.21 -20.10 26.00 -64.72 5.85 836.97 102.20 81.83 19.30 0.02 1.07 15.00 1.10 23.50 657.33 107.11 -1.67 1.10 3.28 7.57 519.26 4311.34 5.88 --5.71 ----6.10 6.31 ---6.27 6.42 -6.61 -6.56 ---6.70 6.78 -6.71 6.76 6.86 6.94 6.80 6.90 6.92 6.99 -6.97 -7.09 --7.19 -7.16 7.07 -7.24 7.24 7.21 7.22 7.25 7.27 7.26 7.26 7.33 7.40 7.36 7.40 7.41 -7.43 7.34 7.43 7.54 7.54 7.00 4.87 132.80 -17.22 -35.25 11.45 344.00 -13.32 -10.00 -37.70 -9.34 11.01 806.25 10.12 190.00 -400.00 -945.00 -920.00 10.69 401.61 6.61 48.40 -33.15 10.01 512.65 -112.63 7.28 1187.51 -11.58 -35.01 -58.57 8.36 767.92 9.40 66.05 -45.00 9.93 110.00 6.82 258.11 7.20 77.00 8.31 11.30 9.02 46.58 7.11 365.74 8.04 10.66 9.41 50.06 -95.00 7.19 789.11 -7.58 9.03 65.00 -25.00 -40.50 8.31 10.45 -10.72 8.83 38.10 8.83 33.89 -8.00 8.98 299.48 7.33 13.26 7.33 1818.28 7.58 5695.77 6.53 147.79 6.80 61.27 8.31 60.02 6.52 5.88 6.79 159.63 8.20 8.03 6.96 78.72 8.13 3596.94 7.67 1688.37 -29.54 7.90 7.45 7.03 38.14 7.13 17.58 7.54 78.92 7.53 1442.02 8.05 24472.63 6.08 6.17 6.07 5.92 5.99 5.94 6.28 6.20 6.14 6.34 6.42 6.36 6.42 6.50 6.42 6.58 6.60 6.68 6.57 6.74 6.70 6.81 6.70 6.78 6.87 6.71 6.77 6.82 6.94 6.91 6.91 7.04 7.04 7.04 6.99 7.16 7.12 5.86 7.10 7.20 7.20 7.20 7.11 7.29 7.25 7.24 7.22 7.22 7.26 7.28 7.34 7.36 7.32 7.41 7.35 7.38 7.41 7.45 7.44 7.45 7.40 7.50 7.51 7.02 4.87 6.74 11.26 11.47 13.14 13.69 6.69 10.56 11.02 10.14 10.34 10.70 10.71 10.78 6.61 6.91 10.04 7.28 7.28 8.07 10.09 7.60 8.36 9.40 9.66 9.93 6.82 7.19 8.31 9.08 7.12 8.09 9.44 6.86 7.20 8.49 9.05 5.81 7.24 8.32 8.61 8.86 8.86 8.60 8.99 7.33 7.34 7.58 6.54 6.81 8.36 6.58 6.78 8.21 6.95 8.12 7.67 7.04 7.91 7.12 7.11 7.50 7.50 8.23
    B RBI’s Open MarketOperations -(A+B) 4903.27 3 REPO 32697.79 -6.99 --8.53 3074.85 39813.34 -7.02 --8.16 5915.68 44793.31 -6.97 --8.55 6267.50 36476.21 -7.12 -58.00 7.86 4369.34 39237.26 -7.00 -58.00 8.05 24530.63 193017.91 -7.02 -8.23
    Sub-total 26729.95 32557.55 40388.52 29859.12 38492.71 168027.85
    4 State Govt Securities 167.00 7.26 7.79 272.20 7.21 8.03 227.90 7.26 7.81 268.60 7.17 8.46 375.50 7.26 7.82 1311.20 7.23 7.99
    Grand total (1 to 4) 39207.88 44818.59 54320.06 45930.84 47115.71 231393.08

    (-) means no trading YTM = Yield to maturity in percentage per annum CY = Current yield in per cent per annum SGL = (RBI’s) Subsidiary General Ledger Securities with small-size transactions (Rs 5 crore or less) have been dropped from the above list but included in the respective totals. Notes: (1) Yields are weighted yields, weighted by the amounts of each transaction. (2) Current yield has not been worked out for treasury bills. (3) For Floating Rate Bonds (FRB’s) Current yields are based on the latest half-year yield determined in the auction.

    Economic and Political Weekly January 21, 2006 the yield on 364-day bill rose from 5.94 per cent on November 23 to 6 per cent on December 7 and further to 6.17 per cent on December 21 (Table 6). However, the yield on 182-day bills rose moderately from 5.90 per cent on November 30 to 5.94 per cent on December 14 and further to 6.14 on December 28 (Table 5).

    Corporate Debt

    During the calendar year 2005, the mobilisation of funds from the corporate debt market has been higher at Rs 51,450 crore compared with about Rs 35,000 crore mobilised in the previous year, though the number of issuers to tap the market has declined to 117 from 143 in 2004. There has been a surge in the total mobilisation of funds by banks and FIs from Rs 15,891 crore in 2004 to Rs 26,180 crore. On the other hand, the aggregate amount mobilised by corporates has nosedived to a meagre Rs 250 crore as compared with Rs 3,564 crore in the previous year.

    In December, there has been an increase in mobilisation at Rs 4,809 crore (by 10 issuers) as compared with Rs 2,443 crore (by six issuers) in November. The highest amount of Rs 2,309 crore has been mobilised by the six FIs and banks that tapped the market, followed by three central government undertakings at Rs 1,750 crore and the remaining amount has been mobilised by a sole NBFC.

    Interestingly, among FIs and banks, despite sharing similar credit ratings as well as loan duration, ICICI Bank had to pay slightly higher coupon of 7.75 per cent for 12 years as against 7.60 per cent offered by HDFC Bank.

    Among the central government undertaking, the Food Corporation of India has raised Rs 1,000 crore by offering higher coupon rates of 7.25 per cent and

    7.58 per cent for five-year and ten-year maturities, respectively, as against Rs 977 crore at 7.18 per cent for both five years and 10 years tenure issued in June.

    In a major step to widen the debt market as well as to encourage investments in housing, the government has proposed to let the mortgage-based securities to be traded as listed securities on the stock market. However, for this the definition of securities as currently stated in the Securities Contract (Regulations) Act, 1956 needs to be amended. The cabinet has recently given its approval to amend the act. The proposed amendment includes securitised debt under the definition of “securities”, thereby bringing the securitised debt to the mainstream of the capital market. It is expected that this increase in the availability of different instruments to invest in would in turn lead to more liquidity in the debt market. Further, with the possibility of the amendment providing for the listing of Pass-Through-Certificates (PTCs), PSU banks which are currently restricted in investing in securitised debt due to the 10 per cent limit on investment in unlisted paper will have additional investment opportunities.

    IV Secondary Market

    Following the acute liquidity pressure in the market due to the impending IMD redemption as well as advance tax outflows, the secondary market for gilt– edged securities turned subdued. This trend began in the early part of the month when, despite comfortable liquidity, the turnover in the week ending December 2 fell to Rs 12,238 crore from Rs 20,256 crore in week ending November 25 as the market remained cautious ahead of the upcoming advance tax payments. However, RBI’s comment regarding a comfortable liquidity and with the inflation rate within expectations, the turnover slightly improved to Rs 14,351 crore in the week ending December 9. Thereafter, the actual outflow on account of advance tax payments coupled with RBI’s comment that there would be temporary pressure on liquidity due to the forthcoming IMD, saw the turnover falling to Rs 11,573 crore and to Rs 6,145 crore for the weeks ending December 16 and 23, respectively. The successful redemption of IMD and expectations of easing of liquidity conditions with inflows of around Rs 10,000 crore from the special deposit schemes helped to push up the turnover at Rs 9,884 crore for the week ending December 30.

    In December, market yields on the shortterm gilt-edged securities have risen, whereas those on very long-term securities have slipped week by week (Appendix Table) and on medium-term and long-term securities have remained sticky; this has resulted in flattening of the yield curve (Graph D). The spread between 11.68 per cent 2006 and 8.07per cent 2017 papers has narrowed down from 151 basis points during the week ending December 2 to 105 basis points during the week ending December 30. Also, the spread between

    8.07 per cent 2017 and 7.40 per cent 2035 papers have eased from 32 basis points to 27 basis points.

    RBI Reverse Repos, OMOs and MSS

    In December, RBI used the instrument of LAF repo to modulate liquidity for balancing the market conditions, especially in the last week wherein a huge injection of funds was carried out to smoothen the impact of IMD redemptions. Over the month, RBI has injected a whopping Rs 1,49,115 crore in the second-half of the month, while it absorbed Rs 1,48,820 crore during the entire month. The week-by-week tendering of bids both for the normal and second LAF (SLAF) reflects the underlying liquidity scenario. In the week ending December 2, the reverse repo bids worth Rs 38,270 crore were tendered and accepted, of which Rs 15,155 crore were accepted under the SLAF. In the next week, ending December 9, despite outflows on account of central loan floatation, the reverse repo bids tendered rose to Rs 87,640 crore (Rs 26,575 crore under SLAF). As the liquidity situation came under stress in the week ending December 16, the bids tendered fell to Rs 15,160 crore and RBI injected Rs 1,085 crore. As the situation worsened in week ending December 23, the RBI injected Rs 22,345 crore, even as it absorbed 14,605 crore through reverse repo auctions. In the final week, RBI had to inject liquidity to the extent of Rs 1,25,685 crore, the highest ever weekly injection of liquidity, to stem the pressure on liquidity; nevertheless, it absorbed Rs 7,890 crore (Table 7). During the month RBI carried out OMO purchases of a meagre amount of Rs 58 crore.

    The repo transactions in government paper outside the RBI have risen from Rs 1,38,718 crore in November to Rs 1,93,018 crore in December.

    Commercial Bonds

    The secondary market for corporate bonds has witnessed a marginal increase in its turnover from Rs 46 crore in November to Rs 61 crore in December, keeping in sync with buoyant primary market mobilisation in the corporate debt market. The trading in debentures has increased from Rs 305 crore in the previous month to Rs 617 crore in December.

    l:i

    [V P Prasanth has compiled the regular data setfor this review; the review itself has been drafted by Piyusha Hukeri.]

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