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Financial Inclusion in a Deregulated Regime

The RBI's avowed objective has been to progressively deregulate the financial system to allow it to operate in an environment of competition and efficiency. But, the system cannot be oblivious of its broader role in furthering the process of economic and social development. After a series of farmers' suicides, the main causes of which are found to be indebtedness, all banks are being urged to adopt "financial inclusion" as an operational policy. Banks, it seems, have failed to grasp the challenges of fulfilling their developmental responsibility and this has tended to question the tenability of financial sector reforms without adequate checks and balances.

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Financial Inclusion in a Deregulated Regime

The RBI’s avowed objective has been to progressively deregulate the financial system to allow it to operate in an environment of competition and efficiency. But, the system cannot be oblivious of its broader role in furthering the process of economic and social development. After a series of farmers’ suicides, the main causes of which are found to be indebtedness, all banks are being urged to adopt “financial inclusion” as an operational policy. Banks, it seems, have failed to grasp the challenges of fulfilling their developmental responsibility and this has tended to question the tenability of financial sector reforms without adequate checks and balances.

EPW RESEARCH FOUNDATION

I Imperatives for Greater CreditPolicy Interventions

A
number of developments in the banking field in the recent past seems to have exposed the inability of scheduled commercial banks to render banking services on healthy and inclusive lines without the calibrated interventions of the Reserve Bank of India (RBI) and the government. The RBI’s avowed objective has been to progressively deregulate the financial system so that it is allowed to operate in an environment of competition and efficiency. But, the system cannot be oblivious of its broader role in furthering the process of economic and social development. The recent developments under reference seem to suggest that the banks have failed to grasp the challenges of fulfilling this responsibility in an environment of liberalisation. It appears that the freedom has been used by banks to subvert the national policy objectives and this has tended to question the tenability of financial sector reforms without adequate checks and balances.

The latest development, amongst a string of developments in the recent period, relates to the RBI’s warning to the banks to ensure that bank loans are used for the purposes for which they have been sanctioned and not diverted to the capital market. One would have thought that this kind of “vigilant approach” was a routine part of banks’ internal discipline, monitoring and auditing and that of the central bank’s inspections and supervisory role; there was no need for the government to worry about the unprecedented rally by the stock market nor to take recourse to the directives of the Joint Parliamentary Committee (JPC) on the securities scam to closely monitor the end use of funds by corporate borrowers. In the process of liberalisation, the historical Tandon and Chore Committee norms for bank lendings for industrial borrowers were rightly dispensed with. However, the underlying principle of financial discipline to be observed by the borrowers, in terms of the end-use of bank credit and necessary credit appraisal and follow-up to be undertaken by bankers, was ingrained in the liberalised set-up. The objectives of financial discipline, to be enforced on an ongoing basis, cannot be attained just by obtaining a certificate from borrowers that the funds have been used for the purpose for which they same were obtained. It is a long-standing principle, for instance, that a borrower indebted to a bank cannot use funds for short-term investments in the capital market.

The second major deregulation, which has been implemented by banks in a distorted way, concerns interest rates on their deposits and lendings. With increases in deposit rates, the level of spread has remained high. The RBI had allowed banks “to freely price their loan products below or above their BPLR and offering floating rate products by using market benchmarks in a

Table 1: Estimated Flow of Liquidity into the Financial System during April 2006

(Rupees crore)

Week-Ended
28 (RF) 21 14(RF)$ 7 Items Inflow Outflow Net Inflow Outflow Net Inflow Outflow Net Inflow Outflow Net

Autonomous liquidity flows (Total) 15413 142175 -126762 41740 1000 40740 42786 9631 33155 26287 1071 25216
91-day T bills 500 182-day T bills -364-day T bills 2000 Government securities auction/redemption -Coupon payments 1858 RBI credit to Govt* (Net of OMO/Repo/Reverse Repo) -RBI credit to others (FIs & non-banks)* -Net foreign assets* 11055 Other deposits with RBI* - 500 0 -0 1000 1000 10300 -10300 -1858 130333 -130333 -0 -11055 42 -42 500 1500 -9529 3687 20337 -6163 24 500 500 ------- 0 1000 0 9529 3687 20337 0 6163 24 500 -2000 7500 1303 17106 -14377 - 500 -1000 8000 ----131 0 0 1000 -500 1303 17106 0 14377 -131 500 1500 --2143 10323 -11821 - 500 500 ------71 0 1000 0 0 2143 10323 0 11821 -71
Discretionary liquidity flows (Total) 142703 43 142660 70 5025 -4955 18 24335 -24317 0 26442 -26442
Open market operations (RBI) Repo/Reverse Repo by RBIRBI liquidity support** -142703 - -0 -142703 43 -43 --70 -5025 - 0 -5025 70 --18 -24335 - 0 -24335 18 --- -25465 977 0 -25465 -977

(RF) means reporting Friday. - means nil. * * Based on RBI’s daily data on liquidity support. * means variation over week. $ Thursday data.

Notes: (i) A negative sign implies net outflow. (ii) This table follows a slightly broader concept of liquidity flow as it covers auctions/redemptions of central government securities because loan floatations are predetermined.

Economic and Political Weekly May 20, 2006 transparent manner” (RBI, Monetary Policy Finally, we now see – after a series of credit for rural households. This is to be Statement, October 2005). It is known how farmers’ suicides, the main causes of which treated as indirect finance for agricultureand the banks have used the competitive en-are found to be indebtedness – all banks are has happened after banks began to reduce vironment to disburse over 60 per cent of being urged to adopt “financial inclusion” the number of their rural branches and bank loans at below the benchmark prime as an operational policy. Under this, the banks drastically reduced loans to small borrowers. lending rates (BPLRs) for rich corporate have been advised to provide a simplified The moral of the story is that deregucustomers, while they have shown reluc-general purpose credit card (GCC) facility lation of banking operations, which can tance to lend to small borrowers because with a revolving credit limit up to Rs 25,000 have a vast impact on the working of the they are compelled to lend to such borrow-based on the cash flow of a household and overall economic system – rich or poor, rural ers at PLRs or below. For the present, the without insistence on collateral for the or urban, agricultural or non-agricultural RBI is content with asking the Indian Banks purpose of enabling hassle-free access to – has to be carefully enforced in a calibrated Association (IBA) to review the BPLR

Table 3: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum:

system; very soon the authorities would be

Simple Statistical Characteristics

compelled to adopt some policy interventions to correct interest rate distortions. Month/Week Simple Standard Coefficient Simple Standard Coefficient

Mean* Deviation of Variation Mean* Deviation of Variation

The harmful economic effects of such

(Percentages)$ (Percentages)$

behaviour on the part of the banks are

Call Money Notice Money**

difficult to measure but they can be quite

March 2006 significant. That this is true in the case of All five weeks 6.57 0.31 4.78 6.60 0.45 6.88 31 (RF)* 6.24 0.28 4.41 6.68 0.89 13.29

banks’ relatively reduced lendings for

24 6.96 0.17 2.42 6.82 0.23 3.37

agriculture, small-scale industries and small 17 (RF)* 6.29 0.26 4.14 6.26 0.24 3.84 borrowers since the process of liberalisation 10 6.71 0.08 1.13 6.78 0.27 3.99

3 (RF)* 6.52 0.11 1.64 6.46 0.22 3.37

began in the 1990s, is self-evident; this has

April 2006happened with concrete priority sector All four weeks 5.62 0.21 3.71 5.56 0.16 2.96 28 (RF)* 5.55 0.02 0.29 5.47 0.14 2.57

norms in vogue. This represents the third

21 5.58 0.10 1.73 5.58 0.23 4.07

important aspect of liberalisation of directed 14 (RF)$$ 5.56 0.02 0.31 5.52 0.04 0.67 credit, with banks allowed to expand credit 7 5.86 0.40 6.87 5.70 0.09 1.52 for inessential service sectors in a surrepti-** Separate reportings began on March 15, 2005.

tious way by achieving “priority sector” * Including data for reporting Fridays (RF). $$ Thursday data. $ Based on original unrounded figures.

targets. It has finally made the authorities Table 4: Comparison of Call, Overnight CBLO and Repo Ratesforce the banks to double advances for

Week-Ending Weighted Average Rates Daily Average Volumes

agriculture within three years and expand

(in Per Cent) (Rs crore)

the credit base for small and medium-scale

Call Overnight Repo Call Overnight Repoenterprises, thus throwing into dustbin the CBLO CBLO

Narasimham Committee’s recommendations

3-Mar-06 6.55 6.22 6.23 9364 18963 8231on directed credit; an apt decision that was 10-Mar-06 6.71 6.45 6.47 10473 17797 7149

enforced not voluntarily but due to societal 17-Mar-06 6.22 5.72 5.89 10376 16293 8425

24-Mar-06 6.90 6.53 6.50 12394 16547 7138pressures. More responsible behaviour on 31-Mar-06 6.27 5.96 6.00 8971 15997 6871 the part of the banks professionally would 7-Apr-06 5.92 5.30 5.49 12893 14081 9909

14-Apr-06 5.53 5.01 5.09 7989 16364 5147

have given them the freedom to operate

21-Apr-06 5.58 5.08 5.04 9427 20626 4911their loan portfolios that were consistent 28-Apr-06 5.54 5.31 5.32 9782 16082 5023

broadly with socio-economic imperatives.

Source: CCIL.

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

Average April 2006 Average March 2006 Items for Four for Five Weeks 28(RF) 21 14(RF)$ 7 Weeks 31(RF)* 24 17(RF)* 10 3(RF)*

No of working days 20 6 6 4 428 5 6 5 6 6 Call Money Weighted average of call rates:

per cent (weekly range)

per annum 5.42-6.33 5.52-5.57 5.45-5.75 5.54-5.58 5.42-6.33 5.95-7.10 5.95-6.48 6.65-7.10 6.02-6.62 6.57-6.77 6.37-6.64 Daily averages (Rupees crore)

Total call market borrowings 7409 7169 8157 5146 8911 8092 6773 9529 6838 8115 7426

(473) (529) (487) Of which: by banks 6117 -7295 4229 7408 6915 5090 8568 5588 7422 6230

(529) (487) Notice MoneyWeighted average of notice money rates:

per cent (weekly range) per annum 5.20-5.81 5.20-5.59 5.23-5.81 5.48-5.56 5.60-5.81 5.90-8.02 5.94-8.02 6.62-7.25 5.90-6.50 6.40-7.16 6.16-6.82 Daily averages (Rupees crore)

Total notice market borrowings 2449 2214 2067 2596 3225 2175 12226 2067 2930 1878 1547 (12999) (10523) (13406) (8918) Of which: by banks 2085 -1838 2222 2783 1766 1628 1724 2274 1680 1293 Turnover in term money market 209 364 222 349 66 504 655 640 499 358 393 (borrowings) $$ (1230) (344) (258) (589)

*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. $ Thursday data.

Economic and Political Weekly May 20, 2006

Graph A: Trends in Weighted AveragesGraph B: Spot Quotations for US Dollarbeen surging rapidly due to the standoffof Call Rates, Repo Rates, CBLO Rates andin Domestic Inter-Bank Market

over Iran’s nuclear programme, which has

Call Money Borrowing – April 2006

fuelled expectations of a firm domestic

20.5

inflation rate. Against the backdrop of the

earlier policy statement where the RBI had

increased the reverse repo rate as a pre

15.5

Rupees per US dollar42.0 44.0 46.0 48.0 50.0 il i il Monthly Averages (Jan 2001 to Mar 2006) (Daily Working Days April 2006) so that the subscriptions under LAF reverse repo touched an unprecendented level of Rs 67,470 crore on a day not seen in the entire fiscal year 2005-06 and at around the levels seen in the first half of 200405. Meanwhile, international oil prices have

Weighted Average (Per Cent)

(Rupees thousand crore)

emptive measure, and the subsequent surge

in non-food credit ahead of the impending

credit policy, the market anticipated a

10.5

probable hike in the benchmark rates and

so began factoring it into security prices.

5.5

But, the RBI’s decision to keep the rates unchanged surprised the market, but has

had a positive impact; the yields fell across

0.5

il

April 2006

maturities so much so that they began

ruling at the levels seen in 2004. The market

l

-i

Call Money Volume (Rs Cr)

Repo Rates – Outside the RBI

ll

Call Rates

CBLO Rates

way so that the egalitarian objectives of development are not jeopardised. The blanket deregulations of the type that have been implemented so far are not socially sustainable; they have to run concurrently with careful interventions for achieving socio-economic goals.

II Money and Forex Markets

The month of April saw the money and government securities markets shed the strains on liquidity with ample reversal of the earlier position it (Table 1). The concerted efforts undertaken by the RBI at the behest of the finance minister to improve underlying liquidity largely through sterilisation of foreign exchange flows towards the end of March have transformed was so overwhelmed by the RBI’s stance that it remained impervious to global oil prices that were soaring to a level above $ 72. Apart from the RBI’s sterilisation activities, underlying liquidity has improved due to redemptions and increased government spending; even the huge

Table 6: Auctions of 182-Day Treasury Bills

(Amount in rupees crore)

Date of Auction NotifiedAmount Bids Tendered No Face Value (Amount) Bids Accepted Subscription Cut-off Cut-off Amount Devolved Price Yield Outstanding No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Per Cent) of Issue
2005 Apr 6 Apr 20 2006 Apr 5 Apr 19 1500.00 1500.00 500.00 500.00 73 60 37 35 6710.00 6744.81 2832.51 2130.00 14 30 6 7 1500.00 1500.00 500.00 500.00 0.00 0.00 0.00 0.00 97.36 [97.36] 97.43 [97.45] 97.03 [97.04]97.28 [97.30] 5.42 [5.42] 5.28 [5.23] 6.14 [6.10]5.61 [5.55] 1500.00 3000.00 8771.37 7771.37

the situation drastically in April, so much Figures in the square brackets represent weighted average price and the respective yield.

Table 5: 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 PDs (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 30 2000.00 44 4223.35 23 2000.00 0.00 98.69 5.31 27916.93 0.00 27916.93

  • (1) (125.00) (1) (125.00) [98.69] [5.31] Apr 6 2000.00 79 7675.50 44 2000.00 0.00 98.70 5.27 28316.93 0.00 28316.93
  • (1) (400.00) (1) (400.00) [98.71] [5.23] Apr 13 2000.00 95 11171.60 18 2000.00 0.00 98.74 5.10 28616.93 0.00 28616.93
  • (1) (300.00) (1) (300.00) [98.73] [5.15] Apr 20 2000.00 63 7020.00 24 2000.00 0.00 98.74 5.10 29016.93 0.00 29016.93
  • (1) (400.00) (1) (400.00) [98.75] [5.06] Apr 27 2000.00 63 6334.00 41 2000.00 0.00 98.74 5.10 28998.99 0.00 28998.99
  • (0) (0.00) (0) (0.00) [98.75] [5.06]

    2006 Mar 29 500.00 45 2730.15 4 500.00 0.00 98.50 6.11 16318.08 0.00 16318.08

  • (2) (5500.26) (2) (5500.26) [98.51] [6.05] Apr 5 500.00 42 3448.00 3 500.00 0.00 98.58 5.78 16318.08 0.00 16318.08
  • (0) (0.00) (0) (0.00) [98.58] [5.78] Apr 12 500.00 46 3117.75 1 500.00 0.00 98.65 5.49 17918.22 0.00 17918.22
  • (5) (1607.62) (5) (1607.62) [98.65] [5.49] Apr 19 500.00 41 2889.75 7 500.00 0.00 98.67 5.41 18168.35 0.00 18168.35
  • (2) (260.29) (2) (260.29) [98.67] [5.41] Apr 26 500.00 33 1685.00 13 500.00 0.00 98.67 5.41 18265.27 0.00 18265.27
  • (1) (250.00) (1) (250.00) [98.68] [5.35

    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.

    Economic and Political Weekly May 20, 2006

    outflows towards central and state loan floatations have not impinged on market sentiments. These positive sentiments have been further propelled following Standard and Poor’s decision to revise its outlook on India’s sovereign credit rating to BB +/B, with the hint of further upgradation to investment grade if the country’s public finances improved.

    Call Money Market

    Unlike in the previous few months, the weighted averages of call rates have ruled not only in the formal reverse repo and repo corridor, but also at times below the reverse repo rate of 5.50 per cent (Table 2). The decline has been sudden and steep as compared with the levels in the previous month. With the improvement in liquidity, overnight rates have eased from 6.33 per cent on April 3 to 5.56 per cent on April 8. In spite of the central loan floatation, the rate has edged fractionally to 5.58 per cent on April 10. As the banks covered their positions ahead of the reporting week and also due to the intermittent holiday, the overnight rate rose to 5.75 per cent on April 15. Except for the dip in the call rate on April 21 to 5.45 per cent, the rates for the rest of the month have ruled in the range of 5.51-5.58 per cent (Graph A). The standard deviation, a measure of volatility, has fallen sharply for both the call as well as notice market from 0.31 and 0.45 in March to 0.21 and 0.16 in April, respectively (Table 3).

    Given the surplus liquidity sloshing about, volumes from all the three shortterm borrowing instruments have fallen in April with the steepest fall being experienced in the repo (see also Table 10). The fall in yield rate also has been the steepest in the repo (Table 4).

    Forex Market

    The month of April has seen the influences of many short-term and longer-term factors operating directly or indirectly on the exchange rate of the rupee. The significant diversification of reserves by central banks in favour of non-dollar currencies; serious worries on the US’ twin deficits; inability of the US to influence any significant change in the Chinese yuan policy combined with the EU’s backing of Chinese gradualism; expectations of a hike in euro zone interest rates; and the US Fed chief’s signal that the two-year interest rate hiking regime was nearly over, have all combined to produce a sharp weakening of the US dollar against major currencies. Even so, the rupee-dollar exchange rate has depreciated by around 36 paise from Rs 44.61 to Rs 44.97 over the surge in the global crude oil price to the month due to strong interventions by $ 70 a barrel fuelled the dollar demand of the RBI to prevent further appreciation of oil companies, and consequently the rupee the rupee, which is said to be overvalued depreciated against the dollar to Rs 44.93 by about 8 per cent in effective terms. The on April 12. Meanwhile, further hardening rupee’s depreciation by just 0.8 per cent of global oil prices to $ 71 a barrel on in April against the US dollar hides the account of the mounting tension between steeper and more widespread depreciation Iran and the western world, coupled with of the rupee by about 4 per cent each volatility in the domestic stock market on against the euro, pound sterling and Japa-account of receding FII inflows, resulted nese yen. The RBI has thus been hard put in the rupee breaching the Rs 45 mark as it to achieve some weakening of the rupee closed at Rs 45.15 per dollar on April 17. vis-à-vis the US dollar, which was itself Irrespective of the RBI’s neutral rate stance loosing ground against major currencies. in its annual credit policy and the decision

    In the immediate context, the rupee-dollar of the global rating agency, Standard and exchange rate has also been influenced by Poor’s, to revise India’s sovereign rating the persistent volatility in international by a notch, the rupee continued to move crude oil prices, which at times moved above in a range of Rs 45.15 and Rs 45.14 against $ 72 a barrel. Overall, the RBI’s interven-the dollar between April 18 and April 20. tions have been to prevent the strengthen-This was due to sustained heavy dollar ing of the rupee vis-a-vis the dollar. demand by the oil companies to cushion

    The month began with the rupee-dollar themselves against spiralling global oil exchange rate ruling at Rs 44.61 on April 3, prices (Graph B). Given the sustained that is, almost flat as compared to Rs 44.61 inflows of foreign currency assets, the rupee on March 31, due to robust FII inflows in appreciated to Rs 44.83 on April 25. The the domestic equity market. However, on rising pressure on China by the G-7 account of public sector banks’ interven-finance officials to induce the yuan to tions at the behest of RBI, the rupee fell strengthen and the subsequent rise by the against the dollar to Rs 44.69 on April 5, Chinese Central Bank’s of its basic lending irrespective of the dollar’s weakness in the rates, by 27 basis points to 5.85 per cent, overseas market following speculations of saw the dollar weakening against other a possible interest rate hike by European currencies. However, the customary month-Central Bank (ECB) in May. Thereafter, end dollar demand by the oil corporates,

    Table 7: 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 PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue

    2005 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] Apr 13 2000.00 85 6195.00 39 2000.00 0.00 94.67 5.63 48212
  • (1) (80.00) (1) (80.00) [94.68] [5.62] Apr 27 2000.00 68 3969.73 34 2000.00 0.00 94.71 5.59 48212
  • (0) (0.00) (0) (0.00) [94.72] [5.57]

    2006 Mar 29 1000.00 41 3996.00 11 1000.00 0.00 93.98 6.41 43017

  • (1) (70.00) (1) (70.00) [93.99] [6.39]Apr 12 1000.00 37 2276.00 3 1000.00 0.00 94.30 6.06 41937
  • (0) (0.00) (0) (0.00) [94.31] [6.03]Apr 26 1000.00 33 1780.00 21 1000.00 0.00 94.44 5.90 41237
  • (2) (300.00) (2) (300.00) [94.56] [5.75]

    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 8: Profile of Major Commercial Bond Issues during April 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 HDFC Bank NCD 8.45 per cent for 10 years 100 AAA by Fitch and Care 2 Oriental Bank of Commerce NCD 8.50 per cent for 10 years 250 (250) AAA by Fitch and Care Total 600

    Total for Apr-05 (a year ago): Rs 550 crore. Total for Mar-06(a month ago): Rs 6890 crore. Note: The amount shown in brackets above denotes the greenshoe option of the issue.

    Economic and Political Weekly May 20, 2006

    Graph C: Annualised Forward Premia in Graph D: Yield Curves for DatedIn the second instance, on April 25, thePercentage for the US Dollar in theSecurities – Weighted Average for

    government reissued 7.40 per cent 2012

    Domestic Inter-Bank Market and WeightedWeeks of April 2006 Averages of Call Rates for April 2006

    of Rs 6,000 crore and Rs 4,000 crore,

    respectively, through price-based auctions

    using the multiple price method. The MUC

    for each PD has been set at Rs 177 crore

    -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 2.0 4.0 6.0 8.0 1 ---i ll i i Weighted Averages of Call Rates (Right Axis) 1-month 3-month 6-month Yield (per cent per annum)5.5 6 6.5 7 7.5 8 1 2 3 4 5 6 7 8 9 1011 1213 1415 16 1718 212327 29 30 1st Week 2nd Week 3rd Week 4th Week

    and 7.95 per cent 2032 for notified amounts

    and Rs 118 crore and ACU at Rs 2,991 crore

    and Rs 1,994 crore has been set for the six

    year and 26-year papers, respectively. The

    RBI has received 224 competitive bids for

    Rs 11,593 crore and 160 bids worth Rs 9,400

    crore for the six-year and 26-year papers,

    respectively. Of these, 126 bids worth

    Rs 5,988 crore and 61 bids for Rs 3,982

    crore have been accepted at cut-off yields

    of 7.06 per cent and 8 per cent for the six

    year and 26-year securities, respectively.

    Working Days Years to Maturity

    The 10-year paper originally floated ingiven volatile global oil prices, continued method and also reissued 7.50 per cent May 2002 was also reissued in June 2002to weigh down rupee movement as it stood 2034 for a notified amount of Rs 3,000 at 7.72 per cent and the 26-year paper wasat Rs 45.06 on April 27. Finally, the rupee crore, through a price-based auction also reissued in April 2005 at 7.79 per cent.edged up to Rs 44.97 on April 28 as the using a multiple price method. Given the On April 27, state government of Kereladollar fell on account of the US Fed chief’s fact that RBI has withdrawn itself from the has issued a 10-year loan for a notifiedsignal that it might pause its policy of primary market with effect from April 1, amount of Rs 300 crore through a yieldmonetary tightening. 2006, the primary dealers have to under-based auction using the multiple priceInterestingly, against the backdrop of

    write the issue under two arrangements:

    Table 10: Repo Transactions in

    the continuing weaknesses of the US dollar minimum underwriting commitmentin global markets, and the rupee’s depre-

    Government Paper@ (Other than with the

    (MUC) and additional competitive under-

    RBI) – April 2006

    ciation due to the RBI’s interventions, the

    writing (ACU). The MUC has been set at

    Repo Period

    forward premia for the rupee have shown

    Amount Range of Interest

    Rs 148 crore and Rs 89 crore and ACU has

    in Number (Rupees (Per Cent
    of Days Crore) Per Annum)
    1 73591.71 4.00-6.50 (5.34)

    a steady fall except for the month end been set at Rs 2,484 crore and Rs 1,487 crore

    (Graph C) implying that the market re-for the new 10-year and 28-year securities,

    mains bullish about the rupee. respectively. For the 10-year security, the

    2 18555.38 4.00-6.50 (5.16) 4.50-6.30 (5.17)

    RBI has received 208 competitive bids 3 19001.63

    4 9701.19 4.10-5.50 (5.22) 4.95-6.40 (5.16)

    worth Rs 11,286 crore, of which 78 bids for

    III

    5 46.17

    Rs 4,972 crore have been accepted at a cut-

    Primary Market

    6 112.00 5.30-5.60 (5.35)

    5.70 (5.70)

    off yield of 7.59 per cent. In case of the 7 2.50

    9 4.00 6.50 (6.50)

    28-year security, the RBI has received 119

    Dated Securities

    5.90 (5.90)

    competitive bids worth Rs 6,410 crore, of 27 10.00 7.60 (7.60) 115 2.00 8.25 (8.25)

    In the first month of the current fiscal which 21 bids for Rs 2,664 crore have been

    120 5.00 8.25 (8.25)

    year 2006-07, the government raised accepted, Rs 11.90 crore have been accepted All Issues Rs 18,000 crore through two issuances. In under non-competitive bids and Rs 324.10 1-120 121061.58 4.00-8.25 (5.28)

    [1-15] [220528.94] [3.00-8.25] [6.23]

    the first instance, on April 10, the govern-crore has been devolved on primary dealers. ment issued a new 10-year security for a The cut-off yield has been set at 7.97 per @ Cover all types of securities.

    Figures in round brackets are weighted average

    notified amount of Rs 5,000 crore through cent. This paper was earlier reissued at

    interest rate; in square bracket, the figure representsa yield-based auction using a multiple price 7.11 per cent in January 2005. the previous month’s turnover/interest rate.

    Table 9: Operations of RBI’s Liquidity Adjustment Facility**

    (Amount in rupees crore)

    14 30.00

    Range of Repo (Injection) Reverse Repo (Absorption) Net Injection Net
    For the Week Repo/RR Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding
    Period Number Amount Number Amount Number Amount Number Amount Absorption (-) Amount
    Days of Liquidity at the
    Week End@
    27 Feb - 03 Mar 06 1-3 83 24505 83 24505 24 3730 24 3730 20775 -6360
    06 Mar - 10 Mar 06 1-3 109 42325 109 42325 13 1395 13 1395 40930 -6980
    13 Mar - 17 Mar 06 1-3 23 8395 23 8395 54 17510 54 17510 -9115 -4150
    20 Mar - 24 Mar 06 1-3 177 107485 177 107485 17 3345 17 3345 104140 -11795
    27 Mar - 31 Mar 06 1-3 28 19030 28 19030 44 15555 44 15555 -7805 7250
    03 Apr - 07 Apr 0610 Apr - 13 Apr 06 17 Apr - 21 Apr 0624 Apr - 28 Apr 06 1-3 1-4 1-3 1-4 6 1 0 0 1190 300 0 0 5 1 0 0 1125 300 0 0 150 207 317 335 94655 156900 271645 310180 150 207 317 335 94655 156900 271645 310180 -93465 -156600 -271645 -310180 32715 57050 62075 47805

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

    Economic and Political Weekly May 20, 2006

    auction method. For this, 72 bids worth been now fixed on a quarterly basis as Treasury BillsRs 1,699.74 crore have been received, of against a half-yearly basis as hitherto. For which 11 bids for Rs 300 crore have been the first quarter (April-June), the amount With the softening of the domestic inaccepted at a cut-off yield of 7.65 per cent. has been set at Rs 20,000 crore, for the flation rate and upsurge in underlying The government has managed to mobilise second quarter it would be Rs 10,000 crore liquidity, the yields on all treasury bills funds at a cheaper rate as compared with and the last two quarters it would be have eased during the month. Moreover,

    7.75 per cent offered in February 2006. Rs 6,000 crore each. The interest rate on the RBI has sought to reintroduce the market

    The RBI’s ways and means advances for WMA will be at the repo rate and that on stabilisation scheme (MSS) absorption the government of India for 2006-07 have overdraft at repo rate plus 2 per cent. from the auctions to be held on May 3. The

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

    (Amount in rupees crore)

    Descriptions Week-ending April 2006: Yield to Maturity on Actual Trading Total for the Month
    28 21 14 7 of April 2006
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury BillsA 91-Day BillsB 182-Day Bills C 364-Day Bills 2 GOI Dated Securities 557.37 309.35 1259.63 5.39 5.52 5.69 447.23 305.67 1680.60 5.41 5.60 5.67 13.96 173.78 3057.94 5.62 5.79 5.97 132.76 289.08 2451.16 5.82 5.83 5.96 1151.32 1077.88 8449.33 5.45 5.67 5.87
    A Regular (Per Cent: Year)4.83 , 2006 250.00 6.75 , 2006 -11.5 , 2006 -11.68 , 2006 -6.75 , 2007 -11.5 , 2007 35.00 11.9 , 2007 -12.5 , 2007 -13.05 , 2007 -9.5 , 2008 -11.4 , 2008 -11.5 , 2008 -12 , 2008 439.00 12.25 , 2008 115.00 5.48 , 2009 25.00 6.65 , 2009 290.00 7 , 2009 115.70 7.33 , 2009 OIL MKT BONDS 30.00 11.99 , 2009 25.00 7.55 , 2010 235.00 11.3 , 2010 0.20 11.5 , 2010 240.53 12.25 , 2010 730.00 12.29 , 2010 275.00 5.87 , 2011 FRB 100.00 9.39 , 2011 791.84 10.95 , 2011 100.00 12.32 , 2011 -5.96 , 2012 FRB 100.00 6.72 , 2012 -6.85 , 2012 30.00 7.4 , 2012 2202.50 7.27 , 2013 0.40 12.4 , 2013 123.90 7.37 , 2014 129.13 10 , 2014 -11.83 , 2014 -6.24 , 2015 FRB II 300.00 7.38 , 2015 5.50 7.61 , 2015 OIL MKT BONDS -11.43 , 2015 5.50 7.59 , 2016 488.55 12.3 , 2016 15.00 7.46 , 2017 152.48 7.49 , 2017 -8.07 , 2017 647.94 6.25 , 2018 62.95 5.64 , 2019 3.69 6.05 , 2019 1.10 11.6 , 2020 48.50 10.25 , 2021 26.30 6.17 , 2023 12.15 6.01 , 2028 5.59 6.13 , 2028 7.00 7.95 , 2032 667.28 7.5 , 2034 5.82 7.4 , 2035 0.36 Sub-total 8854.19 5.53 ----6.22 ------6.39 6.44 6.67 6.65 6.67 7.24 6.71 6.89 6.84 6.94 6.95 6.94 6.09 6.99 7.04 -6.24 -7.03 7.05 7.14 7.30 7.25 --6.12 7.34 -7.29 7.36 7.33 7.43 -7.44 7.57 7.73 7.71 7.64 7.63 7.60 7.86 7.75 7.99 7.98 8.06 7.01 4.84 185.00 --------10.73 ------------1940.64 10.86 395.00 10.89 50.02 5.67 150.00 6.65 -6.94 -7.31 1380.00 10.53 40.00 7.38 345.00 9.73 35.00 9.91 25.00 10.30 25.00 10.47 20.00 5.93 -8.52 2281.03 9.40 --25.22 6.05 --95.00 6.91 45.00 7.28 -7.22 35.05 9.65 1.15 7.32 15.00 -60.00 -15.06 6.19 -7.36 45.00 -60.00 8.96 15.00 7.47 1249.59 9.10 15.00 7.44 63.36 -6.29 7.72 1053.39 6.95 22.70 6.77 12.91 7.00 46.50 8.62 -8.32 30.39 7.14 8.00 7.44 13.10 7.39 1.35 7.98 -7.93 136.71 7.99 46.15 8.06 10000.85 5.58 ----------6.48 6.43 6.39 6.65 --7.37 6.66 6.90 7.05 6.95 7.04 6.95 -7.00 -7.05 -6.61 6.98 -7.17 7.31 7.37 7.47 7.23 -7.37 8.00 7.27 7.39 7.46 7.43 7.48 7.46 7.62 7.70 7.64 -7.68 7.81 7.89 8.13 -7.95 7.83 7.03 4.84 ----------10.48 10.86 10.87 5.67 --7.34 10.51 7.38 9.79 9.91 10.32 10.46 -8.52 -10.18 -6.68 6.89 -7.23 9.65 7.37 8.69 9.17 -7.38 7.80 8.95 7.49 9.17 7.44 7.48 7.73 6.98 6.75 6.96 -8.35 7.29 7.46 7.70 -7.90 7.79 8.43 --------35.00 12.91 22.50 -215.00 25.00 -50.00 ---25.00 ---710.00 -401.00 30.00 -----193.80 --------398.71 -10.50 2.66 228.41 11.04 ---16.30 -1.20 4.69 -154.50 18.45 2567.20 --------6.27 6.51 6.45 -6.44 6.45 -6.68 ---7.02 ---7.03 -7.16 7.20 -----7.35 --------7.55 -7.56 7.52 7.58 7.70 ---7.66 -7.89 7.65 -7.96 7.81 7.20 --------12.24 9.04 10.30 -10.86 10.87 -6.66 ---7.41 ---10.49 -8.57 9.45 -----7.28 --------7.57 -7.51 7.50 7.79 7.03 ---8.33 -7.46 7.31 -7.91 7.76 8.96 65.00 34.90 181.00 25.00 56.00 -1318.10 25.00 ----290.00 25.00 -25.00 -5.00 50.00 5.13 -0.05 --25.00 555.73 -0.02 --27.00 -110.00 0.02 194.70 --75.00 -----0.40 3.83 204.04 --0.50 ---1.05 2.50 -0.27 26.88 3338.33 6.05 5.85 5.76 6.00 6.43 -6.33 6.32 ----6.47 6.51 -6.71 -7.33 6.77 7.10 -7.00 --5.87 7.22 -7.75 --7.27 -7.33 7.86 7.44 --6.22 -----7.39 7.56 7.54 --7.50 ---7.83 7.84 -7.95 7.83 6.65 4.85 6.74 11.45 11.67 6.72 -11.23 11.83 ----10.86 10.88 -6.66 -7.33 10.52 7.43 -9.91 --5.87 8.59 -10.44 --6.99 -7.30 9.92 7.40 --6.23 -----7.42 7.53 7.77 --6.88 ---7.42 7.46 -7.90 7.78 9.68 500.00 34.90 181.00 25.00 56.00 35.00 1318.10 25.00 35.00 12.91 22.50 1940.64 1339.00 215.02 175.00 365.00 115.70 1415.00 115.00 610.13 35.20 265.58 755.00 1005.00 125.00 4029.60 130.00 25.23 100.00 95.00 102.00 2202.50 339.25 125.07 338.83 60.00 15.06 375.00 50.50 60.00 20.50 2136.85 30.00 226.74 12.78 2133.78 96.69 16.60 48.10 48.50 72.99 20.15 20.94 15.54 667.28 297.30 91.84 24760.57 5.62 5.85 5.76 6.00 6.43 6.22 6.33 6.32 6.27 6.51 6.45 6.48 6.43 6.44 6.65 6.66 6.67 7.37 6.72 6.90 7.05 6.94 6.96 7.00 6.05 7.05 7.08 7.06 6.24 6.61 7.07 7.05 7.33 7.30 7.37 7.47 7.23 6.14 7.37 8.00 7.27 7.41 7.40 7.43 7.51 7.48 7.59 7.70 7.64 7.64 7.66 7.69 7.88 7.77 7.99 7.95 7.83 6.99 4.84 6.74 11.45 11.67 6.72 10.73 11.23 11.83 12.24 9.04 10.30 10.48 10.86 10.88 5.67 6.65 6.94 7.34 10.52 7.38 9.79 9.91 10.30 10.48 5.92 8.53 9.41 10.18 6.05 6.68 6.92 7.28 7.28 9.65 7.37 8.69 9.17 6.20 7.38 7.80 8.95 7.50 9.13 7.45 7.50 7.74 6.97 6.76 6.96 8.62 8.34 7.20 7.45 7.40 7.98 7.90 7.78 8.52
    B RBI’s OMO: Sales 358.00 - - 105.00 - - - - - 54.00 - - 517.00
    Purchase 145.00 - - 220.00 - - 40.00 - - - - - 405.00
    Sub-total 503.00 - - 325.00 - - 40.00 - - 54.00 - - 922.00
    (A+B)3 Market Repo4 State Govt Securities 9357.19 31090.05 332.40 7.01 7.34 8.06 10325.85 29749.45 8.82 174.07 7.03 6.86 8.43 10.69 2607.20 19311.14 73.99 7.20 7.81 8.96 3392.33 40910.51 8.14 137.03 6.65 7.82 9.68 25682.57 121061.15 8.18 717.49 6.99 7.36 8.52 9.08
    Grand total (1 to 4) 42905.99 42682.87 25238.01 47312.87 158139.74

    (-) 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 May 20, 2006 1945

    (Rupees in crore)

    Table 11: Operations of National Stock Exchange (NSE) during April 2006 –- Actual Traded Amount

    Descriptions Week-Ending April Total during
    28 21 14 7 Apr 2006 Mar 2006 Feb 2006
    1 Treasury Bills i) 91-day Bills 905.80 57.04 1256.34 - 2752.57 - 1814.73 85.00 6729.44 142.04 5070.47 645.60 3475.41 510.00
    ii) 182-day Bills iii) 364-day Bills 175.00 673.76 130.17 1126.17 60.00 2692.57 127.08 1602.65 492.26 6095.14 849.67 3575.20 622.90 2342.51
    2 iv) Repo Dated Securities -5241.82 -6576.58 -1806.21 -1879.22 0.00 15503.84 0.00 12690.90 0.00 9790.83
    A GOI Securities 5108.79 6561.08 1801.21 1875.00 15346.09 12255.37 9653.03
    i) Converted - - - - 0.00 0.00 0.00
    ii) Regular iii) Zero Coupon 5108.79 - 6561.08 - 1801.21 - 1875.00 - 15346.09 0.00 12255.37 0.00 9653.03 0.00
    iv) Cap Indexed Bonds v) GCB -- -- -- -- 0.00 0.00 0.00 0.00 0.00 0.00
    vi) Repo B State Govts Stocks -133.03 -15.50 -5.00 -4.22 0.00 157.75 0.00 435.53 0.00 137.80
    3 PSU Bonds 30.50 65.70 27.80 68.00 192.00 827.70 113.20
    i) Tax free - - - - 0.00 3.00 10.70
    ii) Taxable 4 Commercial Papers 30.50 - 65.70 - 27.80 - 68.00 - 192.00 0.00 824.70 0.00 102.50 0.00
    5 Certificates of Deposits 6 Debentures -17.50 -145.00 -40.00 -56.80 0.00 259.30 0.00 241.60 0.00 416.70
    7 Floating Rate Bonds 8 Others * 20.00 224.00 10.00 133.20 5.00 25.70 25.00 56.80 60.00 439.70 85.00 250.40 149.00 429.60
    Grand Total (volume) Average per working day 6439.62 8186.82 4657.28 3900.55 23184.27 19166.07 14374.74
    a Government Paper (1+2) b Others (3+4+5+6+7+8) 1229.52 58.40 1566.58 70.78 1519.59 32.83 923.49 51.65 1307.84 55.94 772.23 61.07 698.22 58.34

    -No trading. GCB Government Compensation Bonds. * Includes Non-SLR Institutional Bonds, SLR Institutional Bonds, Bank Bonds, Promissory Notes, Units of UTI, Company Notes and Zero Coupon PSU Bonds and others.

    Economic and Political Weekly May 20, 2006

    IV Secondary Market

    The secondary market turnover in giltedged securities in April was propelled by the abundance of liquidity, with the weekly turnover steadily rising from Rs 6,301 crore during the week ended April 7 to Rs 21,126 crore in the week ended April 21. However, the weekly average turnover fell to Rs 18,545 crore in the last week ended April 28, as the market turned cautious due to an advancing inflation rate, spiralling global oil prices and RBI’s announcement to reintroduce the MSS from May 3, 2006.

    In continuation of the previous month’s trend, the yield curve has turned more steep with the yields on short-term securities easing and those on medium-term and long-term securities firming up. Towards the end of March, the yield on 12 per cent 2008 was 6.70 per cent, which fell to 6.39 per cent towards the end of April. At the other extreme, the

    7.40 per cent 2035 security, which had a yield of 7.78 per cent towards the end of March, has enjoyed a yield rate of 8.06 per cent at the end of April. Hence, the yield curve has become steeply upward sloping (Graph D).

    RBI Reverse Repos, OMOs and MSS

    The underlying surplus liquidity has manifested itself in a sharp increase in the reverse repo bids followed by meagre repo bids being tendered in the month of April. After a gap of three months, there has been a net absorption of liquidity through the RBI’s LAF window and the amounts so absorbed have been in the order of those observed in the first-half of 2004-05. The daily average reverse repo bids tendered and absorbed have been around Rs 49,022 crore, inclusive of both the LAFs, while the aggregate injections through repo have been at Rs 1,490 crore (Table 9). The highest amount has been tendered on April 25 at Rs 67,470 crore despite the outflows on account of the second central loan floatation scheduled for the month.

    Commercial Bonds

    As against the buoyancy in the turnover in secondary gilt-edged securities market, there has been a decline in the corporate debt market turnover from Rs 61 crore in March to Rs 56 crore in April. The decline has been the sharpest in case of PSU bonds to Rs 192 crore in April from Rs 828 crore in March (Table 11).

    m

    [The review has been drafted by Piyusha Hukeriand V P Prasanth has compiled the regular dataset for it.]

    yield on 91-day TBs has eased from 5.78 per cent in the auction held on April 5 to

    5.49 per cent on April 12; and thereafter it has remained steady at 5.41 per cent on both the auctions held on April 19 as well as on April 26 (Table 5). Likewise, the yield on 182-day TBs has fallen from 6.14 per cent on April 5 to 5.61 per cent on April 19 (Table 6). Similarly, the 364-day TBs have seen the yields fall from 6.06 per cent on April 12 to 5.90 per cent on April 26 (Table 7). The weighted averages of yields have declined from 6.51 per cent in March to 5.52 per cent in April and from 6.66 per cent to 5.87 per cent and 6.66 per cent to

    5.98 per cent for 91-day, 182-day and 364day TBs, respectively.

    Corporate Bond Market

    As the first month of the new fiscal year generally coincides with the slack season, private sector borrowers have refrained from tapping the corporate bond market. As a result, borrowings in April have been at a lower level as can be observed from the amounts borrowed in the past: in April 2003 – Rs 895 crore, April 2004 – Rs 1,165 crore, April 2005 – Rs 550 crore and in April 2006 – Rs 600 crore. Though April 2006 borrowings have been slightly better than in April 2005, there were only two banks tapping the market this year. Amongst these two banks, Oriental Bank of Commerce (OBC) has mobilised the bulk of the amount – Rs 250 crore plus Rs 250 crore of greenshoe option – by offering a high coupon rate of 8.50 per cent for its 10-year paper, while HDFC has been able to mobilise Rs 100 crore by offering a coupon rate of 8.45 per cent for the same duration (Table 8) paper. HDFC had offered 8 per cent for a similar maturity paper in February 2006 – a rise of 45 basis points.

    Meanwhile, Dena Bank and United Bank of India are now demanding reversals of the sale of Apple Finance debentures by them and two other public sector banks to Kotak Mahindra. Both of them claim that Bank of Baroda had been given full dues for the debentures from Apple Finance, including the accrued interest, and have opined that if a better settlement is extended to any investor, the same should be provided to the others too. Further, both the banks want Apple Finance to make good the difference between the full value and the discounted amount. In early January 2005, Kotak Mahindra Prime had bought Apple’s debentures for Rs 75-80 crore as against an outstanding of Rs 127 crore on these bonds. This was subsequently contested by Morries Securities, alleging that the banks – Dena Bank, Syndicate Bank, UCO Bank and United Bank of India – were in a position to recover up to Rs 206 crore through the sale of Apple Tower in Bandra Kurla Complex, the property on which the banks had a first charge as holders of the secured debentures.

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