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Can Primary Dealers Replace RBI in Security Issues?

With the RBI now prohibited from participating in the primary issues of government securities, the management of liquidity has become a more delicate and complex task. In this context, the RBI has sought to expand the role of the primary dealers of securities; this is in the right direction but it may prove insufficient. The entire edifice that is being constructed for the PDs is on shaky ground. The PDs are highly vulnerable to market conditions wherein, for instance, a rising interest rate situation may wipe out the entire net worth.

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Can Primary DealersReplace RBI inSecurity Issues?

With the RBI now prohibited from participating in the primary issues of government securities, the management of liquidity has become a more delicate and complex task. In this context, the RBI has sought to expand the role of the primary dealers of securities; this is in the right direction but it may prove insufficient. The entire edifice that is being constructed for the PDs is on shaky ground. The PDs are highly vulnerable to market conditions wherein, for instance, a rising interest rate situation may wipe out

the entire net worth.

EPW RESEARCH FOUNDATION

I PDs Are Not Enough of aSupport for Primary Issues

W
ith effect from April 1, 2006, the Reserve Bank of India (RBI) has been prohibited from participating in the primary issues of government securities as per the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, thus making the central government entirely market dependent for its borrowings. The implications of this development would be manifold. First, it will have repercussions not only on the cost of government borrowings, but also on the entire structure of interest rates which cannot be, at this stage of development, left to the market forces. As a result of surrendering the leverage that existed on the gilt-edged yield rates front, the RBI would be called upon to intervene to stabilise other commercial components of the interest rate structure more frequently and with more determination.

Secondly, and more importantly, the management of liquidity by the central banking authorities would become much more of a delicate and complex task. The information system for tracking the ebbs and flows of liquidity, the market intelligence as well as empirical models required for anticipating the shape of things to come, and the sensitivity with which policy actions are to be put in place in an appropriate extent and manner – all become important components of the new task. Recent actions in the form of hiking the interest rate ceiling on FCNR-B accounts and sharp interventions in the foreign exchange market to inject liquidity, are a case in point; they also imply an additional cost to the system.

It is in the above two respects that the RBI’s attempt to fill the institutional gap created by the FRBM Act through the expansion of the role of the primary dealers (PDs), while it is in the right direction, may prove to be insufficient. No doubt, many action points have been put in place to strengthen the institution of PDs. First, banks have been made eligible to apply for primary dealerships to undertake PD business departmentally but by merging their existing PD business, if any, done through partly- or wholly-owned subsidiaries; it would, of course, be subject to fulfilling certain minimum eligibility criteria. Second, as PD activities themselves are risky and generally less profitable, the PDs have now been permitted to diversify their activities into equities and other businesses so as to facilitate better risk management through the generation of alternate streams of income. Third, with a view to insulating the PDs from the vagaries of asset fluctuations, intra-day short-selling of government securities has been permitted, and in the latest credit policy, a “when issued” market, similar to a futures market in which trading takes place between the time a new issue is announced and the time it is actually issued, has been introduced.

In the new set up, PDs’ obligations towards new issues have been expanded rather considerably. Unlike the earlier requirements of bidding commitment and voluntary underwriting, the underwriting system now consists of two parts. First, minimum underwriting commitment (MUC) for each PD would be such that at least 50 per cent of each issue is mandatorily covered by the aggregate of all MUCs and is uniform for all PDs. The second part is in the form of additional competitive underwriting (ACU) for the remaining portion of the notified amount, which is open for competitive underwriting through auctions. In case of devolvement, PDs would be allowed to set-off the accepted bids in the auction against their underwriting commitment accepted by the RBI and would take place on pro rata basis. Moreover, the earlier condition wherein the total amount offered for underwriting by a PD on any single day could not exceed five times its net owned funds, has been dispensed with. The most crucial aspect of this new system is the liquidity support, which RBI provides through repos/refinance against central government securities; this would be provided only to stand-alone PDs (just two out of 17: STCI and DSP Merrill Lynch). Of the total liquidity support, half of the amount would be divided equally among all the stand-alone PDs and the remaining half would be extended on the basis of their performance in the primary auctions and turnover in the secondary market.

The entire edifice of PDs that is being envisaged is on a shaky ground. PDs are highly vulnerable to market conditions wherein, for instance, a rising interest rate situation may wipe out the entire net worth. For 2004-05, total incomes of both STCI and DFHI turned negative due to the losses made on sale of dated securities, finally turning their return on net worth negative at (-)10.49 per cent and (-) 6.27 per cent, respectively. Also, by definition, PDs can survive only on the liquidity support of the central bank. In such a situation, an arms length separation of PD and other activities becomes very crucial. Fi-termed the problem as “frictional”. How-window. Soon reverse repo bids began to nally, diversification that is permitted in ever, the banking industry, faced as it is increase gradually indicating improvement the activities of PDs, while it may provide with structural problems of a sharper in-in the underlying liquidity scenario, given an answer for some institutions to be crease in credit offtake as compared with the huge inflow of foreign currency assets profitable, there is no assurance that the the rise in deposits, was pressing for a hike and increases in governments’ year-end primary dealership in government securi-in interest rates. The finance minister spendings. Besides, in response to the prime ties per se will become profitable and perceived the hike to be inadvisable and minister’s suggestion to revisit the subject, sustainable in the long run. said that RBI would take measures to the RBI in consultation with the govern

address the liquidity crunch. Whereupon, ment appointed a committee to set out theII the RBI governor took firm measures on framework for full capital accountMoney and Forex Markets March 28 to augment liquidity: increased convertibility, which injected positive sen

interest rate on FCNR (B) deposits, bought timents in the market. Meanwhile, an RBI

The month of March began with the about $ 6 billion of foreign currency assets, deputy governor’s statement that monetary money and government securities markets and pumped in liquidity through the repo policy had still not much of an impact on apprehensive about the impending liquid-

Table 2: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum:

ity scenario, but as the month progressed,

Simple Statistical Characteristics

there emerged signs of improvement.

Month/Week Simple Standard Coefficient Simple Standard Coefficient

Initially, against the backdrop of a huge

Mean* Deviation of Variation Mean* Deviation of Variationincrease in credit offtake, IMD redemption (Percentages)$ (Percentages)$

of Rs 33,000 crore in December 2005 and

Call Money Notice Money**overall strained liquidity scenario, con-March 2006 All five weeks 6.57 0.31 4.78 6.60 0.45 6.88

cerns regarding outflows in the form of

31 (RF)* 6.24 0.28 4.41 6.68 0.89 13.29

advance tax payments to the tune of 24 6.96 0.17 2.42 6.82 0.23 3.37 Rs 25,000-Rs 30,000 crore, large borrow-17 (RF)* 6.29 0.26 4.14 6.26 0.24 3.84

10 6.71 0.08 1.13 6.78 0.27 3.99

ings by the central government as an

3 (RF)* 6.52 0.11 1.64 6.46 0.22 3.37 nounced in the union budget for 2006-07 February 2006 All four weeks 6.98 0.37 5.37 6.81 0.31 4.54

and issuance of SLR securities against

24 6.93 0.11 1.60 6.86 0.33 4.83recapitalisation bonds, impinged on the 17 (RF)* 6.87 0.28 4.04 6.67 0.18 2.77

market sentiments. Added to all these, the 10 7.11 0.09 1.25 6.80 0.36 5.33

3 (RF)* 7.04 0.69 9.86 6.89 0.37 5.39

market remained concerned about the yearend considerations. However, the ** Separate reportings began on March 15, 2005.

* Including data for reporting Fridays (RF). $ Based on original unrounded figures.

government’s decisions to privately place a security issue with the RBI and to post-Table 3: Comparison of Call, Overnight CBLO and Repo Rates

pone the conversion of recapitalisation

Week-Ending Weighted Average Rates Daily Average Volumes bonds to SLR bonds to the next fiscal year (in Per Cent) (Rs crore) provided the much-needed respite. The Call Overnight Repo Call Overnight Repo CBLO CBLO

finance minister requested the RBI, and in turn the central bank assured him, that 3-Mar-06 6.55 6.22 6.23 9364 18963 8231

10-Mar-06 6.71 6.45 6.47 10473 17797 7149

ample liquidity would be provided to the

17-Mar-06 6.22 5.72 5.89 10376 16293 8425 productive sectors. Yet, the governor 24-Mar-06 6.90 6.53 6.50 12394 16547 7138

31-Mar-06 6.27 5.96 6.00 8971 15997 6871

opined that advance tax payments would squeeze liquidity in the short-term, but Source: CCIL.

Table 1: Money Market Operations (RBI’s Daily Data)

Average March 2006 Average February 2006 Items for Five for Four Weeks 31(RF)* 24 17(RF)* 10 3(RF)* Weeks 24 17(RF)* 10 3(RF)*

No of working days 28 5 6 5 6 623 6 6 5 6

Call Money

Weighted average of call rates:

per cent (weekly range) per annum 5.95-7.10 5.95-6.48 6.65-7.10 6.02-6.62 6.57-6.77 6.37-6.64 5.69-7.67 6.73-7.05 6.41-7.11 6.97-7.20 5.69-7.67 Daily averages (Rupees crore)

Total call market borrowings 8092 6773 9529 6838 8115 7426 6030 6914 5251 5039 6755

(529) (487) (146) (935) Of which: by banks 6915 5090 8568 5588 7422 6230 5296 6228 4555 4343 5900

(529) (487) (146) (935)

Notice Money

Weighted average of notice money rates:

per cent (weekly range) per annum 5.90-8.02 5.94-8.02 6.62-7.25 5.90-6.50 6.40-7.16 6.16-6.82 6.24-7.25 6.43-7.25 6.33-6.84 6.24-7.12 6.45-7.53 Daily averages (Rupees crore)

Total notice market borrowings 2175 12226 2067 2930 1878 1547 1563 1961 1048 2087 1244 (10523) (13406) (8918) (6231) (7361) Of which: by banks 1766 1628 1724 2274 1680 1293 1297 1802 831 1689 930 (4929) (5506) Turnover in term money market 504 655 640 499 358 393 251 342 383 245 95 (borrowings) $$ (344) (258) (589) (113) (35)

* 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 April 29, 2006

Graph A: Trends in Weighted AveragesGraph B: Spot Quotations for the USit was followed by further easing andof Call Rates, Repo Rates, CBLO Rates andDollar in the Domestic Inter-Bank Market

Monthly Averages (Jan 2001 to Feb 2006) (Daily Working Days March 2006)
touched a low of 6.02 per cent, only to rise

Call Money Borrowing – March 2006 50.0

again to 6.10 per cent on the second re

8 20.5

porting Friday, March 17, due to advance

tax outflows. These outflows did inflict a

7.5

48.0

dip in liquidity which pushed the over

15.5

(Rupees thousand crore)Rupees per US dollar

night rates to rule above 7 per cent between

March 18-21 in the range of 7.03-7.10 per

10.5

cent. Thereafter, for the next 10 days, with

46.0

year-end increases in government spend

ing, the liquidity scenario improved and

5.5

the call rates tended to fall; they touched

44.0

a low of 5.95 per cent on March 29, ahead

of the reporting Friday on March 31, when

0.5

March 2006

-i

Call Money Volume (Rs Cr)

Repo Rates – Outside the RBI

ll

Call Rates

CBLO Rates

longer-term interest rates and that the credit growth at current rate could raise liquidity management problems, gave rise to uncertainty in the market. Further, with the huge central government borrowing scheduled for April, the market turned apprehensive.

Call Money Market

Unlike in the previous two months, the weighted averages of the call borrowing rates remained range bound during March (Table 1), though they tended to slide towards the end of the month (Graph A). The month began with the overnight rate easing ahead of the first reporting Friday as the market participants had already covered their positions and also due to the improvement in liquidity, it fell from 6.52 per cent on March 1 to 6.37 per cent on

42.0

March 3, the reporting Friday. Ahead of the advance tax outflows also, the market participants began covering their positions, which pushed the call rates to 6.77 per cent on March 6. But with no additional market borrowings scheduled for the month, the overnight rates tended to ease for a while; they fell to 6.51 per cent on March 11, but spiked to 6.62 per cent on the next day; in fact there were no call transactions as banks had already covered their positions.

While the volumes of all the three – call, CBLO and market repo – increased in the month of March, in terms of percentage increase in daily average turnover, the increase in call volumes by 32 per cent far exceeded those on CBLO (1.3 per cent) and market repo (29 per cent) (Table 3). This could be due to the decline in surplus marketable securities, which pushed the market participants towards the

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 OutstandingNo Face Value No Face Value on RBI (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue

2006 Mar 8 500.00 28 1678.00 7 500.00 0.00 96.76 6.72 9137.23

[96.77] [6.68] Mar 22 500.00 31 1753.50 3 500.00 0.00 96.81 6.61 9771.37

[96.81] [6.61]

Figures in the square brackets represent weighted average price and the respective yield.

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)
2005
Mar 2 2000.00 76 7085.05 34 2000.00 0.00 98.72 5.19 27525.02 0.00 27525.02
Mar 9 2000.00 (1)70 (350.00) 4726.85 (1)44 (350.00) 2000.00 0.00 [98.72] 98.72 [5.19]5.19 27561.84 0.00 27561.84
Mar 16 2000.00 (4)62 (986.82) 3877.06 (4)35 (986.82) 2000.00 0.00 [98.73] 98.72 [5.15]5.19 27559.76 0.00 27559.76
Mar 22 2000.00 (1)31 (5.00) 3199.50 (1)27 (5.00) 2000.00 0.00 [98.72]98.68 [5.19]5.35 27791.93 0.00 27791.93
Mar 30 2000.00 (2)44 (232.17) 4223.35 (2)23 (232.17) 2000.00 0.00 [98.69] 98.69 [5.31]5.31 27916.93 0.00 27916.93
2006 (1) (125.00) (1) (125.00) [98.69] [5.31]
Mar 1 500.00 37 1479.10 22 500.00 0.00 98.36 6.69 13563.57 0.00 13563.57
Mar 8 500.00 (2) 41 (461.82) 1896.44 (2) 16 (461.82) 500.00 0.00 [98.37] 98.37 [6.65] 6.65 12797.67 0.00 12797.67
Mar 14 500.00 (2) 48 (464.99) 1661.96 (2) 14 (464.99) 500.00 0.00 [98.37] 98.38 [6.65] 6.60 14002.67 0.00 14002.67
Mar 22 500.00 (7) 48 (1205.00) 2659.17 (7) 7 (1205.00) 500.00 0.00 [98.38] 98.40 [6.60] 6.52 11017.82 0.00 11017.82
Mar 29 500.00 (2) 45 (367.84) 2730.15 (2) 4 (367.84) 500.00 0.00 [98.41] 98.50 [6.46] 6.11 16318.08 0.00 16318.08
(2) (5500.26) (2) (5500.26) [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.

Per cent per annum

Graph C: Annualised Forward Premia in rate on the main refinancing operations, sustained inflow of foreign currency assets,Percentage for the US Dollar in theas also interest rates on the margin lending the rupee appreciated to Rs 44.38 on March

Domestic Inter-Bank Market and Weighted

facility and deposit facility. Also, as the 21. The hike in the US Fed rate by 25 basis

Averages of Call Rates for Mar 2006

US Fed signalled that there would be a points along with an upbeat policy state

6.0

-1-month -3-month -i 6-month Weighted Averages of Call Rates (Right Axis)
8.0

further hike in interest rates, the dollar ruled ment led to strengthening of the dollar in

5.5

firm, resulting in the rupee falling against international markets. Further, due to

5.0

the dollar to Rs 44.55 on March 9; the fall month-end demand for dollars combined

4.5

was also supported by the arbitrage oppor-with the RBI purchases of dollar and

4.0

6.0

tunities between onshore and offshore arbitrage opportunities between non-de

3.5

markets and firmness in international crude liverable forward (NDF) and domestic

3.0

oil prices. But, as Bank of Japan decided market, the rupee depreciated to Rs 44.69

2.5

to scrap its 5-year-old ultra easy monetary on March 29 (Graph B). Finally, the rupee

2.0

4.0

policy, the yen firmed up against the dollar, edged up to Rs 44.61 on March 31 as the

1.5

which in turn pushed the rupee upwards dollar fell due to speculation that some of

1.0

to Rs 44.41 on March 16. At this stage, the central banks of UAE and China were

0.5

RBI intervened in the market and the rupee shifting the composition of their reserves

0.0

fell to Rs 44.44 on March 20. Given the away from dollars.

-0.5

2.0

Working Days Table 6: Auctions of 364-Day Treasury Bills

(Amount in rupees crore)

non-collateralised call market. The notice Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount money market showed greater volatility Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on RBI (Rupees) Rate on the Date

(Table 2).

(Amount) (Amount) (Amount) (Per Cent) of Issue

Forex Market

The rupee-dollar exchange rate in March depreciated despite unprecedented huge inflow of foreign currency assets to the extent of US $ 9,953 million as compared to $ 1,874 million in February and $2,263 million in January essentially due to the RBI interventions in the market to arrest the sharp appreciation of the rupee against the dollar. The RBI’s anxiety is understandable considering the fact that despite its concerted efforts to keep the rupee exchange rate stable and close on par with some notion of an equilibrium rate, the effective rate firmed up. The NEER and REER (base: 2003-04 = 100) for 6-currency indices rose from 100.67 and 103.83 as on April 2005 to 102.27 and 109.00 as on March 17, 2006, respectively, thus showing that the rupee is overvalued by close to 2 per cent in nominal terms and 9 per cent on trade-weighted real terms. With effect from March 28, the RBI increased the interest rates on FCNR (B) deposits of all maturities equal to the LIBOR/SWAP rate as against 25 basis points below the reference rate, which had been effective from April 29, 2002.

The month began with the rupee-dollar exchange rate appreciating against the dollar from Rs 44.44 on February 28 to Rs 44.35 on March 1 due to inflow of foreign currency assets strengthening the rupee, but owing to the public sector banks’ interventions at the behest of RBI, the upward movement of the rupee was arrested. Meanwhile, European Central Bank (ECB) hiked by 25 basis points the minimum bid

2005 Mar 2 2000.00 75 6390.00 23 2000.00 0.00 94.70 5.60 46126

  • (0) (0.00) (0) (0.00) [94.71] [5.59] Mar 16 2000.00 77 4731.00 31 2000.00 0.00 94.70 5.60 47132
  • (1) (10.60) (1) (10.60) [94.71] [5.59] Mar 30 2000.00 65 5296.00 26 2000.00 0.00 94.66 5.64 48132
  • (0) (0.00) (0) (0.00) [94.68] [5.62]

    2006 Mar 1 1000.00 37 2646.00 9 1000.00 0.00 93.65 6.80 44260

  • (0) (0.00) (0) (0.00) [93.67] [6.76] Mar 14 1000.00 56 3441.00 21 1000.00 0.00 93.69 6.75 43266
  • (1) (17.00) (1) (17.00) [93.70] [6.72]Mar 29 1000.00 41 3996.00 11 1000.00 0.00 93.98 6.42 43016
  • (1) (750.00) (1) (750.00) [93.99] [6.39]

    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 7: Profile of Major Commercial Bond Issues during March 2006

    Issuing Company/Rating Nature of Coupon in Per Cent Per Annum Amount in Instrument and Tenor Rs Crore

    (1) (2) (3) (4)

    FIs/Banks

    1 IDBI NCD 8.75 per cent for 9 yearsAA + by Crisil, Icra and Fitch and 10 months 300 (200) 2 SIDBI NCD 7.90 per cent for 10 years 500 (250) AAA by Care

    3 Indian Overseas Bank Perpetual bonds 9.30 per cent with call option AA + by Crisil and AA by Icra at the end of 10th year 200 AA + by Icra, Care Tier-II bonds 8 per cent for 10 years 300

    4 Corporation Bank Tier-II bonds 7.90 per cent for 10 years 300 AAA by Crisil, Icra5 UCO Bank Perpetual bonds 9.50 per cent with call option AA by Crisil, Care at the end of 10th year 150

    Tier-II bonds 8.70 per cent for 15 years with call at the end of 10 years, ifcall not exercised the coupon would be stepped by 50 basispoints to 9.20 per cent 200 (100)

    6 Bank of India NCD 8 per cent for 10 years 200 AA + by Crisil, Icra and 3 months 7 ICICI Bank NCD 8.60 per cent for 119 months 1500 AAA by Icra, Care and 20 days 8 Central Bank of India NCD 8.15 per cent for 111 months 500 AA by Crisil, Care

    Central Govt Undertakings

    9 Power Finance Corporation NCD 8.09 per cent for 7 years AAA by Crisil, Icra 8.20 per cent for 10 years 1850 Total 6890*

    Total for Mar-05 (a year ago): Rs 9,726.64 crore. Total for Feb-06 (a month ago): Rs 3,265 crore Notes: *Total includes four more issues for Rs 150 crore or less (3 banks and 1 FI)

    The amount shown in brackets above denotes the greenshoe option of the issue.

    Economic and Political Weekly April 29, 2006

    8

    7.5

    7

    6.5

    6

    5.5

    Graph D: Yield Curves for DatedSecurities – Weighted Average for Weeks of March 2006

    1234 567 89 10 11 12 13 14 15 16 17 18 21 23 27 29 30 1st Week 2nd Week 3rd Week 4th Week 5th Week

    Yield (per cent per annum)

    Years to Maturity

    Despite the spot rupee depreciating, the forward premia eased over the month owing to a narrowing interest rate differential with the hikes in US Fed rate. Moreover, the huge inflow of foreign currency assets induced the spot rupee to appreciate which were contained through the RBIs’ intervention, thereby the short-term one month forward premia firmed up from 3.46 per cent on March 1 to 4.81 per cent on March 21; yet, the six-month premia eased over the month indicating that the rupee is unlikely to depreciate much in future given the improvement in the underlying liquidity in the domestic market and reduced arbitrage opportunities; as a result, the premia declined from 2.35 per cent on March 1 to 2.06 per cent on March 31; even the one month premia failed to sustain at such high levels and closed the month at

    2.47 per cent (Graph C).

    III Primary Market

    Dated Securities

    In March, outside the scheduled calendar of issuances, the government privately placed 7.40 per cent 2035 for a notified amount of Rs 10,000 crore at a price of Rs 95.72. With this, the government said that there would be no further issuances during the fiscal year 2005-06.

    On March 27, 12 state governments issued a 10-year state development 2016 stock for an aggregate amount of Rs 1,851.26 crore through a yield-based auction using multiple price auction. As against the notified amount, only Rs 1,820.62 crore could be mobilised, as the bonds of Tamil Nadu raised Rs 609.36 crore as against a target of Rs 640.01 crore. Among the 12 states, Nagaland managed to mobilise the notified amount at the lowest coupon rate of 7.69 per cent, while Punjab and Tamil Nadu paid the highest rate of 7.79 per cent; for the rest, the rates ranged between 7.71 per cent and 7.75 per cent.

    Under MSS, the annual ceiling for 200607 was fixed at Rs 70,000 crore as against Rs 80,000 crore in 2005-06. However, RBI continued with the suspension of the issue of treasury bills and dated securities under MSS, which began on December 30, 2005.

    As per the issuance calendar for marketable dated securities for the year’s first half from April 1, 2006 to September 30, 2006, the government is to borrow Rs 89,000 crore as against Rs 83,000 crore planned in the corresponding period last year, though the actual amount mobilised was Rs 81,000 crore. During 2005-06, gross market borrowings raised by the central government through dated securities stood at Rs 1,37,000 crore (net borrowing Rs 95,370 crore) as against Rs 1,05,350 crore (Rs 71,034 crore) in the previous year. All issuances were reissuances except for a 30-year paper issued in September 2005. The weighted average yield on dated securities firmed up to 7.30 per cent as against 6.11 per cent in the previous fiscal year and the weighted average maturities increased to 15.86 years as compared with

    14.13 years. The gross borrowings of state governments amounted to Rs 21,730 crore during 2005-06 as compared with Rs 38,668 crore in the pervious fiscal year.

    On March 7, the government issued “7.33 per cent oil marketing companies special bonds, 2009” for Rs 2,000 crore, 7.47 per cent 2012 for Rs 2,000 crore and 7.61 per cent 2015 for Rs 1,750 crore. In the next instance on March 23, 7.07 per cent 2009 for Rs 2,000 crore, 7.44 per cent 2012 for Rs 2,000 crore and 7.59 per cent 2015 for Rs 1,750 crore were issued. These bonds were issued to three oil marketing companies to compensate them for underrecoveries in their domestic LPG and kerosene (PDS) operations during the current financial year; they are Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL).

    Treasury Bills

    Given the easing of the domestic inflation rate and improvement in liquidity, the yields on all the treasury bills eased during March. The yield on 91-day TBs fell gradually from 6.69 per cent in the auction held on March 1 to 6.11 per cent on March 29 (Table 4). Likewise, the yield on 182-day TBs fell from 6.74 per cent on February 22 to 6.61 per cent on March 22 (Table 5). Similarly, there was

    Table 9: Repo Transactions inGovernment Paper@ (Other than withthe RBI) – March 2006

    Repo Period Amount Range of Interest in Number (Rupees (Per Cent of Days Crore) Per Annum)

    1 150102.00 5.00-6.25 (6.30) 2 22384.70 3.00-6.50 (5.75) 3 46137.80 4.00-7.25 (6.21) 4 1043.03 5.70-6.45 (6.08) 5 559.51 6.45-6.50 (6.49)

  • 6 2.35 5.50 (5.50) 7 255.70 5.95-6.20 (6.12)
  • 8 23.85 7.30-8.25 (8.05) 15 20.00 7.40 (7.40)
  • All Issues 1-15 220528.94 3.00-8.25 (6.23) [1-90] [132718.74] [5.50-8.50] [6.40]

    @ Cover all types of securities. Figures in round brackets are weighted average interest rate; in square brackets, the figure represents the previous month’s turnover/interest rate.

    Table 8: Operations of RBI’s Liquidity Adjustment Facility**

    (Amount in rupees crore)

    Range of Repo (Injection) Reverse Repo (Absorption) Net Injection Net
    For the Week Repo/RR Bids Received Bids Accepted Bids Tendered Bids Accepted@ (+)/ Outstanding
    March 2006 Period Number Amount Number Amount Number Amount Number Amount Absorption (-) Amount@
    Days of Liquidity at the
    Week End@
    27 Feb - 03 Mar 1-3 83 24505 83 24505 24 3730 24 3730 20775 -6360
    06 Mar - 10 Mar 1-3 109 42325 109 42325 13 1396 13 1396 40929 -6980
    13 Mar - 17 Mar 1-3 18 4140 18 4140 59 21765 59 21765 -17625 4360
    20 Mar - 24 Mar 1-3 177 107485 177 107485 17 3345 17 3345 104140 -11795
    27 Mar - 31 Mar 1-3 28 19030 28 19030 44 15555 44 15555 13075 -4030

    * with effect from January 24, 2006 the Repo Rate is 6.50 per cent and Reverse Repo Rate at 5.50 per cent. ** Includes Second LAF Auctions under Repo and Reverse Repo. @ Net of Repo and Reverse Repo Outstandings.

    a decline in yield on 364-day bills from Corporate Debt compared with Rs 19,207 crore mobilised

    6.80 per cent on March 1 to 6.42 per cent in the previous year. Likewise, the amount on March 29 (Table 6). During 2005-06, During the financial year 2005-06, the mopped up by the NBFCs rose to Rs 2,610 the TB yields firmed up by 83 basis amount mobilised through the bonds crore from Rs 1,418 crore over the same points,117 basis points and 78 basis points market rose fractionally to Rs 43,973 crore period. What stood out prominently in for 91-day, 182-day and 364-day bills, from Rs 43,683 crore in 2004-05; FIs and 2005-06 was that the corporates conrespectively. banks mobilised Rs 27,238 crore as sistently preferred other sources to the

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

    (Amount in rupees, crore)

    Descriptions Week Ending March 2006: Yield to Maturity on Actual Trading Total for the Month
    31 24 17 10 3 of March 2006
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury BillsA 91-Day Bills 365.43 B 182-Day Bills 289.20 C 364-Day Bills 1625.24 2 GOI Dated Securities 6.05 6.28 6.34 349.59 205.65 1163.36 6.48 6.46 6.56 551.14 291.04 1288.09 6.57 6.53 6.60 468.85 180.83 547.58 6.6 6.57 6.48 849.11 509.33 1240.58 6.64 6.53 6.69 2584.12 1476.05 5864.85 6.51 6.48 6.53
    A Regular (Per Cent: Year)4.83, 2006 54.42 11.50, 2006 265 11.68, 2006 186 13.85, 2006 0.75 13.85, 2006 INSTAL 1.05 14.00, 2006 -11.50, 2007 -11.90, 2007 105.99 13.05, 2007 0.4 9.50, 2008 102.2 11.40, 2008 175 11.50, 2008 0.15 12.00, 2008 248.45 12.10, 2008 100 12.25, 2008 5 6.65, 2009 50.67 6.96 , 2009 Oil Mkt Bond 50 7.33 , 2009 Oil Mkt Bond 60 11.99, 2009 150.18 7.50, 2010 4.09 7.55, 2010 100 11.30, 2010 15 11.50, 2010 0.57 12.25, 2010 5.5 12.29, 2010 25 9.39 , 2011 390.17 10.95, 2011 10.02 12.00, 2011 -6.85, 2012 10.35 10.25, 2012 1 11.03, 2012 1.78 7.27, 2013 150 7.46, 2013 -9.00, 2013 -12.40, 2013 1.27 7.37 , 2014 114.24 10.00, 2014 -11.83, 2014 0.09 7.38, 2015 35.05 9.85, 2015 26.68 11.43, 2015 2.14 11.50, 2015 52.03 5.59, 2016 -7.46 , 2017 16.16 7.49 , 2017 119.76 8.07 , 2017 381.65 5.69, 2018 2.45 6.25 , 2018 80.87 10.45, 2018 0.46 12.60, 2018 ON TAP 0.4 6.05, 2019 30.96 10.03, 2019 31.88 6.35, 2020 -10.25, 2021 119.47 8.35 , 2022 53.54 6.17, 2023 0.86 6.30, 2023 -10.18, 2026 0.33 6.01, 2028 1.68 6.13, 2028 3.17 7.95, 2032 0.68 7.40 , 2035 104.41 Sub-total 3470.81 6.56 4.86 6.41 11.07 6.52 11.66 6.79 13.47 6.86 13.63 ----6.52 11.24 6.41 12.24 6.75 9.07 6.78 10.35 6.67 10.50 6.70 10.89 6.77 10.92 6.74 10.94 6.77 6.67 7.26 7.01 7.42 7.35 6.82 10.53 7.14 7.41 6.99 7.41 6.98 9.75 7.10 9.94 7.04 10.31 7.01 10.46 7.20 8.58 7.07 9.40 --7.16 6.95 7.21 8.92 7.40 9.35 7.24 7.26 ----7.51 9.74 7.40 7.38 --7.59 9.35 7.41 7.40 7.46 8.49 7.38 9.00 7.45 9.09 --7.42 7.44 7.46 7.47 7.43 7.71 7.35 6.57 7.50 6.92 7.42 8.44 7.56 8.97 7.48 6.86 7.61 8.36 --7.63 8.32 7.66 7.85 7.44 7.02 --7.79 8.19 7.77 7.36 7.72 7.36 7.83 7.85 7.78 7.74 7.07 8.95 75 110 410 60.01 2.35 --88.47 0.14 1.6 -151.34 25.02 ----425 25 6.29 125 0.05 50 60 -723.65 0.04 0.24 15 1 0.18 50 -30 0.36 169.08 -227.3 20.04 0.04 1.15 68 -111.93 88.69 929.2 5.15 193.34 0.08 -42.15 0.21 -11.6 50.38 4.5 2.73 2 6 5.12 -136.31 4533.55 6.62 4.87 6.64 11.43 6.83 11.66 6.63 13.45 6.6 13.61 ----6.65 11.24 6.62 12.24 7.34 9.15 --6.84 10.53 6.74 10.90 --------7.45 7.35 6.99 10.57 7.24 7.43 7.06 7.42 7.47 9.92 7.05 9.92 7.12 10.33 --7.17 8.57 7.48 9.55 7.29 9.90 7.20 6.97 7.43 9.01 7.48 9.38 7.26 7.27 --7.35 8.25 7.40 9.68 7.35 7.36 --7.42 9.26 7.38 7.38 7.58 8.55 7.38 9.00 7.45 9.09 --7.42 7.44 7.45 7.47 7.37 7.68 7.42 6.61 7.52 6.93 7.64 8.57 --7.53 6.89 7.57 8.33 --7.59 8.28 7.57 7.79 7.52 7.09 7.38 7.03 7.57 8.02 7.56 7.19 7.55 7.22 --7.75 7.71 7.23 8.56 45 145 -5 -2 -128.35 199.99 57.16 -55 10 14 ---100 25 3.35 75 -50 25 -61.1 -0.65 25.79 0.53 44 55.02 -20.25 4.45 32.51 10.9 5 -50 10 50 54.36 23.61 86.84 280.3 30 12.75 5 0.3 56.01 25.06 55.5 21.4 10.21 5 -56.3 2.5 --48.18 2089.46 6.65 4.87 6.86 11.42 --6.74 13.43 --6.95 6.77 --6.76 11.25 6.85 12.26 6.95 9.09 --6.95 10.54 6.9 10.92 6.95 10.94 ------7.46 7.36 7.08 10.59 7.31 7.45 7.16 7.45 --7.21 9.96 7.16 10.34 --7.23 8.59 --7.42 9.95 7.25 6.99 7.3 8.95 7.37 9.33 7.28 7.28 --7.32 8.24 7.44 9.69 7.37 7.37 7.42 8.65 7.4 9.24 --7.46 8.48 7.39 9.00 7.46 9.09 7.49 6.45 7.44 7.45 7.46 7.47 7.40 7.69 7.6 6.71 7.48 6.91 7.52 8.50 7.47 8.90 7.52 6.89 7.59 8.34 7.62 7.12 7.70 8.35 7.58 7.80 7.57 7.12 --7.66 8.09 7.66 7.28 ----7.75 7.71 7.24 8.85 125 6.70 4.87 8 6.71 11.41 ---20 6.89 13.43 ---------15 6.81 11.25 ------0.01 6.89 10.36 ------25 6.98 10.94 0.3 6.91 10.93 125 7.05 6.72 ------------11.69 7.13 7.44 ---------25 7.2 10.50 1265.9 7.23 8.59 75 7.32 9.48 25 7.32 9.90 1.4 7.04 6.92 50 7.35 8.97 64 7.38 9.33 326 7.30 7.28 ---------76.49 7.37 7.37 ---0.06 7.79 9.45 20 7.40 7.39 20 7.46 8.48 ---------54.04 7.43 7.44 69.91 7.46 7.47 798.31 7.41 7.69 27.5 7.47 6.54 ------10 7.53 8.94 22.56 7.53 6.90 ------0.99 7.51 8.23 44.52 7.59 7.80 4 7.49 7.06 10 7.60 7.18 240 7.65 8.08 1 7.70 7.31 7 7.48 7.17 ---93.14 7.76 7.72 3675.37 7.31 8.03 94.75 20 85 40 10 15 20 111.3 50 --40 84.83 25 15 14.46 ----20 -0.01 15 50 838.35 10 -10.1 -5 169.11 25 -45.06 72.23 --15 1 -0.03 -83.28 130.87 1060.67 22.33 2.16 25 -8.99 -1.5 196.54 115.74 3.75 0.01 -20 7.2 15 1044.08 4642.06 6.80 6.75 6.38 6.91 6.83 7.14 6.87 6.84 6.85 --6.91 6.90 6.91 6.91 6.91 ----7.06 -7.26 7.06 7.19 7.13 7.28 -7.12 -7.35 7.29 7.46 -7.27 7.34 --7.39 7.5 -7.18 -7.43 7.46 7.38 7.53 7.37 7.49 -7.42 -7.45 7.53 7.58 7.37 7.22 -7.40 7.61 7.77 7.72 7.34 4.88 11.39 11.62 13.42 13.55 13.95 10.76 11.24 12.23 --10.52 10.90 10.92 10.92 6.70 ----7.42 -9.97 10.29 10.50 8.54 9.46 -6.94 -9.32 7.28 7.46 -9.60 7.36 --7.39 8.50 -8.93 -7.44 7.47 7.68 6.68 6.85 8.47 -6.83 -7.01 8.24 7.80 6.99 6.92 -7.07 7.28 7.79 7.68 8.25 394.17 548.00 681.00 125.76 13.40 17.00 20.00 449.11 250.53 160.96 175.01 246.49 368.30 164.00 20.30 190.13 50.00 585.00 200.18 13.73 331.69 15.05 100.58 105.50 100.00 3279.17 95.06 25.89 62.64 52.53 114.96 750.13 25.00 50.25 51.14 464.55 10.90 232.45 90.09 97.72 13.29 170.06 54.36 289.02 496.07 3450.13 87.43 289.12 30.54 10.70 160.67 57.15 57.00 350.00 274.39 18.11 12.74 298.63 31.18 22.49 15.68 1426.12 18411.25 6.68 6.59 6.69 6.76 6.79 7.12 6.87 6.70 6.85 6.83 6.78 6.88 6.75 6.84 6.87 6.97 7.26 7.45 6.87 7.23 7.06 6.98 7.13 7.12 7.15 7.19 7.29 7.32 7.20 7.35 7.38 7.28 7.46 7.34 7.29 7.37 7.42 7.42 7.40 7.46 7.38 7.45 7.49 7.43 7.46 7.39 7.52 7.51 7.49 7.53 7.51 7.60 7.62 7.58 7.59 7.49 7.55 7.65 7.48 7.57 7.77 7.73 7.24 4.87 11.25 11.65 13.44 13.57 13.11 10.76 11.24 12.25 9.07 10.35 10.53 10.90 10.92 10.93 6.71 7.01 7.35 10.54 7.43 7.42 9.75 9.94 10.32 10.49 8.57 9.47 9.90 6.97 8.97 9.33 7.28 7.46 8.25 9.61 7.37 8.65 9.26 7.39 8.48 9.00 9.09 6.45 7.44 7.47 7.69 6.64 6.93 8.48 8.94 6.88 8.35 7.11 8.27 7.81 7.07 7.15 8.08 7.13 7.24 7.80 7.69 8.48
    B RBI’s OMO: Sales 557.00 - - 1.00 - - - - - 10 - - 159 - - 727.00 - -
    Purchase 110.00 - - 260.00 - - 35.00 - - 75 - - 50 - - 530.00 - -
    Sub-total 667.00 - - 261.00 - - 35.00 - - 85.00 - - 209.00 - - 1257.00 - -
    3 Market Repo 36084.70 4 State Govt Securities 754.99 7.72 43998.28 7.85 172.55 7.63 43585.13 8.09 358.40 7.60 43939.40 8.68 623.20 7.58 52921.13 8.59 588.04 7.74 220528.64 7.79 2497.18 7.67 8.16
    Grand total (1 to 4) 43257.37 50683.98 48198.26 49520.23 60959.25 252619.09

    (-) 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 OMO = Open Market Operations Securities with small-size transactions (Rs 10 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 April 29, 2006 domestic debt market. There was a sharp fall in their mobilisation to Rs 200 crore as against Rs 3,332 crore in the previous year. The mobilisation through external commercial borrowings (ECBs) and equity increased in 2005-06; ECBs increased to US $ 13,645 million (April-February) from US $ 11,450 million in the corresponding period in the previous year. Likewise, the public equity offerings increased to Rs 9,949 crore from Rs 9,481.61 crore in 2004-05; interestingly, in 200405 only two issuers mobilised Rs 7,319.84 crore out of 25, while in 2005-06 the number of issuers were 90.

    The month of March saw the corporate bonds market turning buoyant as the total amount mobilised surged to Rs 6,890 crore (by 13 issuers) from Rs 3,265 crore (by 9 issuers) in the previous month. This buoyancy can be attributed to the fact that the banks rushed to tap the market in an attempt to push up their capital adequacy ratio (CAR) ahead of the financial yearend; also the RBI permission to banks to augment their capital funds by way of issuing innovative instruments such as perpetual bonds, innovative perpetual debt, debt capital, hybrid bonds, etc, further induced them to tap the market. This was quite evident from the fact that out of the 13 issuers to tap the market, 12 banks and FIs mobilised bulk of the amount of Rs 5,040 crore, while the remaining amount was mobilised by a sole central government undertaking (Table 7).

    Among the banks and FIs, UCO Bank became the first bank to mobilise longterm resources by issuing perpetual bonds. Perpetual bonds are those with no maturity dates and thus they will fetch interest indefinitely. The issuer generally retains the right to call such bonds. Funds mobilised through this bond will be part of the bank’s tier-I capital as per the recent RBI’s guidelines. However, the RBI can prohibit the bank from paying interest on these bonds if the bank’s capital adequacy ratio falls below the stipulated 9 per cent. UCO Bank was successful in mobilising around Rs 150 crore via perpetual bonds, wherein it has offered to pay an annualised interest rate of 9.50 per cent and thereafter 10 per cent per annum. The bond was rated ‘AA’ by Crisil and Icra, as the debt servicing in case of perpetual bonds is additionally linked to meeting the regulatory norms on capitalisation and reported profitability. The bank mobilised Rs 300 crore at 8.70 per cent through upper tier-II bonds, which are instruments having a minimum maturity of 15 years; it has no put option and only call option can be exercised but after 10 years with a limit of 100 per cent of tier-I capital. Meanwhile, Indian Overseas Bank had also tapped the market to mobilise Rs 200 crore via a perpetual bond having an interest rate of 9.3 per cent for the first 10 years with a call option after 10 years and if the call option is not exercised, the investors will get a 9.8 per cent interest rate after 10 years. The issue was rated ‘AA +’ by Crisil and Icra.

    Curiously, despite enjoying a similar rating, State Bank of Indore was able to mobilise Rs 110 crore by offering a higher coupon rate of 8.70 per cent for a 10-year maturity paper as compared to 7.90 per cent offered by Corporation Bank for an identical paper.

    Meanwhile, Power Finance Corporation, the sole central government undertaking to tap the market, was able to mobilise Rs 1,850 crore through two papers having maturity periods of 7 years and 10 years, respectively. For the 10-year paper, it had to offer a higher coupon rate of 8.20 per cent as compared to 7.95 per cent offered for a similar maturity paper in the previous month, an increase of 25 basis points. The issue was rated ‘AAA’ by Crisil and Icra.

    IV Secondary Market

    The secondary market for gilt-edged securities remained subdued for a variety of reasons such as the pressure of liquidity and impending annual closing of accounts, despite the decline in inflation rate. The weekly average turnover fell from Rs 9,121 crore in the week ended March 3 to Rs 4,198 crore in the week ended March 17 due to the advance tax outflows. Thereafter, the turnover remained range bound. After the government privately placed securities with the RBI, the market sentiments turned buoyant, but as the RBI governor said that the market participants had not yet factored in global risks, the market turned cautious.

    During the month, the yield curve turned steeper with the yields on the short-term securities easing sharply given the decline in inflation rate, while those on long and medium-term securities remained steady (Graph D). The spread between 11.90 per cent 2007 and 8.07 per cent 2017 increased from 46 basis points in the week ended March 3 to 91 basis points in week ended March 31, an increase of 55 basis points, while the spread between the above mentioned 11-year paper and 7.40 per cent 2035 remained range bound between 34 and 38 basis points. Over the financial year, the yield on 11.90 per cent 2007 paper increased to 6.70 per cent in March 2006, an increase of 79 basis points, while the yield on 7.95 per cent 2032 increased to 7.77 per cent, an increase of 64 basis points (Appendix Table).

    RBI Reverse Repos, OMOs and MSS

    The LAF repo and reverse repo remained potent instruments for modulating the liquidity in the market. Given the pressure on liquidity due to advance tax outflows and year-end considerations, RBI infused liquidity through repo. However, after a gap of almost three months, the reverse repo bids gradually increased reflecting an improvement in the underlying liquidity scenario following foreign currency flows and government spendings. As the call rates ruled below the repo rate of 6.50 per cent, subscriptions to the reverse repo began to rise, yet the amounts subscribed for reverse repo remained lower than those subscribed under the repo. The RBI accepted repo bids worth Rs 2,04,648 crore; of this Rs 1,07,485 crore were injected in the week ending March 24 to smoothen the liquidity impact following advance tax outflows. The daily average repo bids tendered fell from Rs 15,726 crore in February to Rs 8,898 crore in March, while that of reverse repo increased from Rs 876 to Rs 2,423 crore. Besides on March 31, as the reporting Friday coincided with annual closing of accounts, RBI conducted additional LAF between 9 and 9.30 pm to facilitate funds management. In it, the reverse repo bids worth Rs 14,185 crore and repo bids worth Rs 2,905 crore were tendered and accepted (Table 8). Unlike the secondary market turnover, the repo transactions outside RBI rose sharply from a daily average of Rs 5,770 crore in February to that of Rs 7,876 crore in March (Table 9).

    Commercial Bonds

    In sync with the primary corporate bonds market, the secondary market saw a surge in the daily average turnover from Rs 58 crore in February to Rs 61 crore in March, while the trading in all types of bonds fell except for PSU taxable bonds which have increased from Rs 103 crore to Rs 825 crore.

    m

    [The review has been drafted by Piyusha Hukeriand V P Prasanth compiled the regular data setfor the article.]

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