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Curtailing Capability of NABARD

Credit delivery to the farm and informal sectors has deteriorated because the institutional structures have been allowed to weaken. The latest example is the curtailment of the refinancing capabilities of the National Bank for Agriculture and Rural Development. The time has come to reorient such an approach and ensure that NABARD operates as a non-commercial apex institution engaged in refinancing and promoting bank lending activities for the informal sector. For this, a number of steps have to be taken: restarting RBI contributions to the National Rural Credit (Long-term Operations) Fund, continuing the general line of credit limits, allowing market borrowings through priority sector bonds and providing tax exemption on NABARD profits.

Money market

Curtailing Capabilityof NABARD

Credit delivery to the farm and informal sectors has deterioratedbecause the institutional structures have been allowed to weaken. The latest example is the curtailment of the refinancingcapabilities of the National Bank for Agriculture and RuralDevelopment. The time has come to reorient such an approach andensure that NABARD operates as a non-commercial apexinstitution engaged in refinancing and promoting bank lendingactivities for the informal sector. For this, a number of steps haveto be taken: restarting RBI contributions to the National RuralCredit (Long-term Operations) Fund, continuing the general lineof credit limits, allowing market borrowings through prioritysector bonds and providing tax exemption on NABARD profits.

EPW RESEARCH FOUNDATION

I Imperatives of Strengthening NABARD’s Refinancing Capabilities

T
hat the mainstream measures of financial sector reforms are increasingly getting discredited is evident from many a knee-jerk response that the authorities are now forced to adopt in the face of the widespread crisis of persistently poor credit delivery for agriculture, small-scale industries, small borrowers and other informal sectors. The authorities have targeted doubling of bank credit for agriculture and allied activities in three years, and similarly a doubling of credit for small and medium-scale enterprises in five years. What does not seem to have been realised, however, is that the deterioration in credit delivery in the post-reform period has occurred because the institutional and other support structures put in place earlier have been allowed to weaken – or some of them have been even dismantled.

The spread of the branch network in rural areas has been halted; in fact, the number of rural branches has declined by over 2,500. That apart, the latest case of the withdrawal of support arrangements for promoting larger flow of credit in favour of agriculture and other informal sectors, concerns the way the refinancing capabilities of the National Bank for Agriculture and Rural Development (NABARD) are being curtailed. First, the Reserve Bank of India (RBI) has decided that, as from April 1, 2007, the bonds issued by NABARD will not be treated as priority sector bonds for the purpose of qualifying as part of targeted lendings by banks for agriculture and small-scale industries. Interestingly, banks’ subscriptions to the bonds issued by non-banking financial companies (NBFCs) would continue to be recognised as part of priority sector lending if the end-users of funds are the designated priority sectors. Likewise, the subscription to bonds of the Small Industry Development Bank of India (SIDBI) by foreign banks to make up for the shortfall in their priority sector lendings would continue to be allowed.

Secondly, NABARD has been hitherto allowed to operate a general line of credit (GLC) limit with the RBI, with the help of which NABARD has been providing short-term refinancing facilities to banks on their lending for seasonal agricultural operations, weavers’ cooperatives and other informal sector non-agricultural operations. These limits have been of a sizeable amount; it was Rs 6,600 crore in 2000-01 (July-June) but it has been slashed since then. Now, the GLC limit, which was at Rs 5,200 crore for 2004-05, has been reduced to Rs 3,000 crore for 2005

06. The RBI’s latest Annual Report for 2005-06 (p 142) states that the latter limit of Rs 3,000 crore could be used only up to December 31, 2006:

As the limit would not be available after this date, NABARD has been advised to start accessing the markets on a regularbasis for sufficient amounts so that the time frame indicated for withdrawal of GLC is adhered to.

The world over, refinancing is a central banking function, and when NABARD was created, it was perceived that the RBI would continue to contribute to the National Rural Credit (Long-term Operations) Fund, but as part of financial sector reforms, it was discontinued in 1992-93. In the meantime, the agrarian situation, partly attributable to a growing gap in the supply of institutional credit, has deteriorated rather sharply. And now, with the elimination of priority sector status for its bonds and the discontinuance of the general credit line, NABARD is sure to face a serious resource crunch for promoting investment in agriculture and other informal sector areas as it would have to increasingly depend on the market for its refinance activities. As per its latest annual report, NABARD’s outstanding market borrowings were at 16.1 per cent of its total working funds in March 2002 and they have now reached 35.6 per cent as of March 2006.

Also, when the tax exemption facilities were withdrawn for NABARD [along with the National Housing Bank (NHB) and SIDBI] in the central budget for 2001-02, it was declared that NABARD was working on commercial lines. The newer responsibilities thrust on the institution in the form of accelerating credit delivery for agriculture and other informal sectors, are far from those of commercial nature. If NABARD is indeed working on commercial lines, it should be considered as contrary to the goals set out in its statute. It was conceived as a refinancing and promotional institution and that too, in respect of credit for the informal sectors. A time has come to reorient the above thinking and ensure that NABARD operates essentially as a non-commercial apex institution engaged in refinancing and promoting bank lending activities for the informal sector. For this purpose, a num-sustained basis. As a result, the buoyant outflows particularly in the second-half of ber of steps may have to be taken: restart-market sentiments were somewhat ren-the month which manifested themselves in ing of RBI contributions to the National dered subdued for a while. But, with the sharply declining sizes of reverse repo Rural Credit (Long-term Operations) Fund, indicative calendar for dated securities bids, firming up of call rates, and sticky continuance of the GLC limits, market auctions for the second-half of the fiscal short-term gilt-edged yield rates. Despite borrowings through priority sector bonds year being as per market expectations, the these liquidity strains, the market sentiments and tax exemption on NABARD profits. buoyant sentiments were propelled fur-generally remained buoyant, reinforced as In return, NABARD should agree to in-ther. At the same time, there began some they were by the easing of the inflation rate, stitute, once in three years or so, a system pressure on liquidity emanating from huge which in turn resulted in easing of yield of social audit by a team of independent outflows towards advance tax payments in rates at the long-end, thereby turning the and suitably qualified professionals in the the range of about Rs 25,000-Rs 30,000 yield curve somewhat flat amidst buoyant country. crore and to a lesser extent due to auction economic growth. Incidentally, the release

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

II

Simple Statistical CharacteristicsMoney, Gilt-Edged and

Month/Week Simple Standard Coefficient Simple Standard Coefficient

Forex Markets

Mean* Deviation of Variation Mean* Deviation of Variation (Percentages)$ (Percentages)$

There was a significant shift in the outlook

Call Money Notice Money**

for the money and government securities

August 2006market in terms of expectations about All four weeks 6.03 0.10 1.64 5.98 0.16 2.61 interest rates and inflation and also in terms

25 6.04 0.10 1.70 6.03 0.09 1.42 18 (RF)* 6.04 0.08 1.38 6.02 0.12 2.00

of the liquidity situation. The easing of 11 6.03 0.11 1.75 5.89 0.12 2.06 global crude oil prices that began in August 4 (RF)* 5.99 0.12 1.98 5.99 0.24 4.08

September 2006

gathered further momentum in September,

All five weeks 6.23 0.26 4.21 6.07 0.28 4.58 with the prices falling below $ 60 per 29 (RF)* 6.56 0.25 3.85 6.20 0.40 6.51

22 6.41 0.22 3.39 6.16 0.32 5.27

barrel from a peak of $ 78 per barrel in

15 (RF)* 6.11 0.04 0.73 6.02 0.24 4.05mid-July, thereby arresting the expecta-8 6.05 0.08 1.33 6.06 0.20 3.25 1 (RF)* 6.03 0.10 1.69 5.94 0.22 3.77

tions that the oil-induced inflation would

persist. Further, the US Fed’s decision to ** Separate reportings began on March 15, 2005. hold steady its benchmark rates for the * Including data for reporting Fridays (RF). $ Based on original unrounded figures. Source: RBI.

second consecutive time was perceived by market participants that domestic interest Table 3: Comparison of Call, Overnight CBLO and Repo Rates rates would also remain benign. In addition,

Week-Ending Weighted Average Rates Daily Average Volumes

the finance minister’s statement that inter

(in Per Cent) (Rs crore) est rates would soon be moderate buoyed Call Overnight CBLO Repo Call Overnight CBLO Repo the market sentiments. Moreover, the yields 1-Sep-06 6.08 5.86 5.97 11569 13953 10853 set at the domestic dated securities auctions 8-Sep-06 6.09 5.95 5.99 14510 12964 9390 15-Sep-06 6.12 6.02 6.09 13262 12565 10074

were much below market expectations.

22-Sep-06 6.51 6.22 6.40 13914 17167 9079 However, the RBI governor refuted any 29-Sep-06 6.62 6.31 6.50 14497 16399 8999 4-Aug-06 6.07 5.83 5.90 10451 14986 10321

one-to-one relationship with US interest

11-Aug-06 6.08 5.94 5.97 13275 14157 8733rates and also considered that the oil-18-Aug-06 6.10 6.00 6.06 11491 12902 8449 25-Aug-06 6.11 5.98 6.06 11783 14059 11112

induced threat to inflation would be contained only if crude oil prices fell on a Source: The Clearing Corporation of India (CCIL).

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

Average September 2006 Average August 2006 Items for Five for Four Weeks 29(RF) 22 15(RF) 8 1(RF) Weeks 25 18(RF) 11 4(RF)

No of working days 30 6 6 6 6 623 6 5 6 6

Call Money

Weighted average of call rates:

per cent (weekly range) per annum 5.89-7.07 6.43-7.07 6.06-6.64 6.04-6.18 5.89-6.09 6.00-6.09 5.82-6.11 5.84-6.11 5.94-6.10 5.82-6.09 5.83-6.07 Daily averages (Rupees crore) (7.07) (6.18) (5.83) (5.94) (5.83)Total call market borrowings 10778 11915 10845 10539 9821 10958 8460 6970 7625 10350 8755

(175) (602) (119) (132) (155)

Notice Money

Weighted average of notice money rates:

per cent (weekly range) per annum 5.50-6.85 5.80-6.85 5.80-6.59 5.73-6.31 5.83-6.11 5.50-6.11 5.78-6.23 5.92-6.12 5.82-6.10 5.78-5.95 5.58-6.23 Daily averages (Rupees crore) (6.85) (6.17) (6.09) (6.10) (6.07) Total notice market borrowings 2233 50 3069 2723 3073 2260 3301 4813 3866 2925 1696 (16025) (13127) (12698) (9572) Turnover in term money market 352 404 375 408 427 163 374 378 446 256 420 (borrowings) $$ (595) (100) (238) (391)

*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. .. not available.

Economic and Political Weekly October 21, 2006

Graph A: Trends in Weighted AveragesGraph B: Spot Quotations for US Dollaras well as the auction. The overnight ratesof Call Rates, Repo Rates, CBLO Rates andin the Domestic Inter-Bank Market

began firming up given the demand-

Call Money Borrowing – September 2006

supply mismatches arising from the advance tax payments by corporates along with

reporting Friday requirements. It ranged

between 6.04 and 6.12 per cent and jumped

Rupees per US dollarRupees Thousand CroreWeighted Average (Per Cent) 4 4.5 5 5.5 6 6.5 7 7.5 0.5 5.5 10.5 15.5 20.5 September 2006 Call Money Volume (Rs Cr) Call Rates Repo Rates - Outside the RBI CBLO Rates 42.0 44.0 46.0 48.0 50.0 il i (Daily Working Days Sept 2006) Monthly Averages (Jan 2001 to Aug 2006)

to 6.18 per cent on the second reporting

Friday, September 15 (Table 1). Amidst

receding liquidity following the advance

tax outflows, the call rates galloped to 6.30

per cent on September 16, and to 6.61 per

cent on September 19 and further to a peak

of 6.64 per cent on September 20. The

impact was also visible in a precipitous fall

in reverse repo bids. Thereafter, the rate

fell to 6.49 per cent on September 21 and

of the second Tarapore Committee report on capital account convertibility generated a lot of debate during the month, but has had a limited impact on the financial markets. The RBI ushered in structural improvements by introducing the NDS call module for the short-term market.

Call Money Market

The ebb and flow of liquidity began impinging on the call money market unlike for months now when the market faced no liquidity pressures. By the end of September, overnight rates ruled above 7 per cent in the wake of the half-yearly closing of accounts (Graph A). To begin with, the weighted averages of call rates fell to 5.83 per cent on the first reporting Friday of the month, September 1, from 6.08 per cent on August 31. Given the liquidity, the

to 6.06 per cent on the non-reporting Friday, overnight rates ruled in a narrow range of September 22, but ruled in a narrow range 6.07-6.09 per cent until September 7. On of 6.43-6.46 per cent until September 28. the next day, despite the outflows to the On the third reporting Friday, September dated securities auction, the average rate 29, the rate surged to 7.25 per cent – a sixdipped to 5.89 per cent as banks had covered month peak – due to huge demand for their positions ahead of the reporting Friday funds ahead of the half-yearly closing and

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

2005 Sept 6 1500.00 44 3440.00 26 1500.00 0.00 97.40 5.34 16528.50

  • (0) (0.00) [97.41] [5.32] Sept 21 1500.00 29 923.00 17 528.00 0.00 97.38 5.38 17056.50
  • (0) (0.00) [97.39] [5.36] 2006 Sept 6 1500.00 41 2605.00 22 1500.00 0.00 96.75 6.74 18106.56
  • (0) (0.00) [96.76] [6.72]Sept 20 1500.00 44 2807.09 24 1500.00 0.00 96.73 6.78 19706.56
  • (0) (0.00) [96.74] [6.76]

    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 4: Auctions of 91-Day Treasury Bills

    (Amount in rupees crore)

    Date of Auction (1) Notified Amount (2) Bids Tendered No Face Value (Amount) (3) (4) Bids Accepted No Face Value (Amount) (5) (6) Subscription Devolved on PDs (Amount) (7) Cut-off Price (Rupees) (8) Cut-off Yield Rate R ate (Per Cent) (9) Amount Outstanding on the Date of Issue Total With RBI Outside RBI(10) (11) (12)
    2005 August 31 September 6 September 14 September 21 September 28 2006 August 30 September 6 September 13 September 20 September 27 4000.00 4000.00 4000.00 4000.00 4000.00 2000.00 2000.00 2000.00 2000.00 2000.00 7 7 (2) 6 2 (3) 4 8 (0) 3 7 (1) 4 4 (2) 4 3 (1) 4 1 (0) 4 8 (4) 4 4 (1) 4 6 (2) 10663.18 (2863.00)8697.36 (923.67)7936.23 (0.00)5635.55 (269.32)2102.00 (479.59) 2687.00 (100.00)3155.00 (0.00)2873.54 (1165.00)2125.11 (620.00)2645.36 (1200.00) 2 7 (2) 1 9 (3) 4 (0) 2 4 (1) 4 1 (2) 3 1 (1) 2 3 (0) 3 3 (4) 2 4 (1) 4 0 (2) 4000.00 (2863.00)4000.00 (923.67)4000.00 (0.00)4000.00 (269.32)2022.00 (479.59) 2000.00 (100.00)2000.00 (0.00)2000.00 (1165.00)860.11 (620.00)2000.00 (1200.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 98.72 [98.73]98.73 [98.73]98.74 [98.74]98.72 [98.73]98.65 [98.69] 98.42 [98.43]98.42 [98.43]98.41 [98.42]98.40 [98.41]98.40 [98.40] 5.19 [5.15]5.15 [5.15]5.10 [5.10]5.19 [5.15]5.47 [5.31] 6.44 [6.40]6.44 [6.40]6.48 [6.44]6.52 [6.48]6.52 [6.52] 29085.77 31097.73 32990.80 34994.28 34713.60 31029.91 30229.91 31137.61 30935.86 33060.86 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 29085.77 31097.73 32990.80 34994.28 34713.60 31029.91 30229.91 31137.61 30935.86 33060.86

    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.

    also unexpected redemptions from mutual meeting again, there was a call for further which was subsequently denied, that the funds which put enormous pressure on flexibility in exchange rates particularly in Chinese authorities were likely to declare banks’ liquidity. Finally, the average rate respect of China. Also, there was a rumour, a trading range for yuan. Thereafter, the edged lower to 7.07 per cent on September

    Table 6: Auctions of 364-Day Treasury Bills

    30. The measure of volatility, standard

    (Amount in rupees crore)

    deviation, for the call rates increased to

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount

    0.26 in September from 0.10 in August

    Auction Amount Devolved Price Yield Outstanding (Table 2). Notably, call money borrowings No Face Value No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue

    increased during the month even as those

    from notice money declined, reflecting 2005 Aug 31 2000.00 65 4141.00 20 2000.00 0.00 94.69 5.61 49433

    increased demand for overnight money.

    (1) (4.75) (1) (4.75) [94.70] [5.60]The firmness in the interest rates was Sept 14 2000.00 55 3276.00 27 2000.00 0.00 94.71 5.59 49683

    (1) (250.00) (1) (250.00) [94.72] [5.57]

    evident across the short-term markets with

    Sept 28 2000.00 49 3146.00 25 2000.00 0.00 94.54 5.78 49683 rates in CBLO and repo markets ruling at (0) (0.00) (0) (0.00) [94.58] [5.73]

    a higher range and towards the end of the 2006

    Aug 30 2000.00 82 7030.00 27 2000.00 0.00 93.54 6.93 43526 month, they ruled well above the LAF (1) (10.00) (1) (10.00) [93.55] [6.91]

    Sept 13 2000.00 84 4980.00 40 2000.00 0.00 93.54 6.93 43376

    reverse repo rate of 6 per cent (Table 3).

    (1) (100.00) (1) (100.00) [93.56] [6.90]Sept 27 2000.00 85 6679.87 30 2000.00 0.00 93.56 6.90 43976

    (2) (600.00) (2) (600.00) [93.57] [6.89]

    Forex Market

    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.

    September saw the rupee-dollar exchange

    rate gently appreciate despite foreign Table 7: Profile of Major Commercial Bond Issues during September 2006currency outflows; it occurred due to ebbing

    Issuing Company/Rating Nature of Coupon in Per Cent Per Annum Amount in

    of uncertainties as international crude oil Instrument and Tenor Rs Crore

    prices eased significantly resulting in the

    FIs/Banks

    demand for dollars from domestic oil 1 HUDCO PR1+ by Care

    companies remaining subdued and also

    2 IDBI cancellations of contracts in the non-AA+ by Crisil, Icra, Fitch 3 Allahabad Bank

    deliverable forward market (NDF). Also

    AA by Care, AA+ by Crisil.interest rate uncertainties waned with the 4 Bank of Baroda AAA by Crisil, Icra

    US Fed rate being held steady. Simulta

    6 Canara Bank neously, the US dollar weakened against AAA by Crisil

    major currencies on expectations that the

    US Fed would hold steady its benchmark 7 Dena Bank A by Crisil, Fitch

    rates in the wake of perceived weaknesses

    in US economy, thereby narrowing the 9 ICICI Bank AAA by Crisil, Care

    dollar’s advantages against the other cur

    rencies such as the yen and euro. In REER 1 0 Indian Overseas Bank AA+ by Crisil, AA by Fitch

    terms, the rupee has appreciated by about

    1.3 percentage points over August.

    1 3 National Housing Bank

    The month began with the rupee-dollar

    AAA by Crisil, Care

    exchange rate appreciating from Rs 46.53

    1 4 State Bank of Hyderabad

    on September 1 to Rs 46.10 on September 7, AAA by Icra, Carebut following the release of the surpris-1 5 State Bank of India

    AAA by Crisil

    ingly encouraging US employment data, the dollar strengthened and the rupee fell 1 6 State Bank of India

    AAA by Crisil, Care

    to Rs 46.20 on September 8 and further to Rs 46.34 on September 12 as gold-related 1 7 State Bank of India

    AAA by Crisil, Care

    demand for dollars as well as weaknesses in the domestic stock markets placed pres-1 8 State Bank of India

    AAA by Crisil, Care

    sures on the rupee movements. Thereafter, the rupee resumed its appreciating trend Central Undertaking

    1 Konkan Railway CorpnNCD Bonds Lower Tier II Bonds Lower Tier II Bonds Upper Tier II Bonds Lower Tier II Bonds Upper Tier II Bonds

    Perpetual Bond

    Upper Tier II Bonds

    NCD

    Lower Tier II Bonds Upper Tier II Bonds

    Upper Tier II Bonds

    Upper Tier II Bonds

    Upper Tier II Bonds

    as the Bank of Japan refrained from raising AAA(SO), LAAA by Crisil, IcraBonds interest rates but ECB officials preferred

    State Undertaking

    to hike their rates, which resulted in 2 WBIDFC A Ind (SO) by Fitch, NCD

    weakening of the dollar. In addition, the

    A (SO) by Care

    declining international crude oil prices supported the strengthening of the rupee.

    8.2 per cent for 365 days. 500 (200)
    8.95 per cent for 10 years. 200 (100)
    8.85 per cent for 10 years. 600 (300)
    8.95 per cent for 116 months 1000 (500)
    9 per cent 15 years with calloption at the end of 10th year.8.85 per cent for 10 years. 1075

    9.20 per cent for 15 years with a step up of 50bps if call is not exercised at the end of 10th year. 450 (150)

    9.98 per cent for with a step up of 1 per cent if call is not exercised at the end of 10th year. 300

    9.24 per cent for 15 years with a step up of 1 per cent if call is not exercised at the end of 10th year. 500 (100)

    8.10 per cent for 2 years. Zero coupon for 2 years. 500 (300)

    8.80 per cent for 115 months. 550 (50)

    8.85 per cent for 15 years with a step up of 50bps if call is not exercised at the end of 10th year. 500

    8.97 per cent for 15 years with a step up of 50bps if call is not exercised at the end of 10th year. 500

    8.96 per cent for 15 years with a step up of 1 per cent if call is not exercised at the end of 10th year. 600

    8.97-8.98 per cent for 15 years with call optionat the end of 10 years. 2400

    8.90 per cent - 9.00 per cent for 10 yrs with put call option at the end of 5 years. 200 (100)

  • 8.75 per cent for 7 years,
  • 9.0 per cent and 9.10 per cent for 10 years with put call option at the end of 5 years and 7 years, respectively. 1000 (500) Total 11401.5*
  • As a result, exporters were selling dollars Total for September-05 (a year ago): Rs 7,295 crore. Total for August-06 (a month ago): Rs 4002 crore and the buoyancy in stock markets sup-

    Notes: * Total includes seven more issues of less than Rs 250 crore (two NBFCs and five banks).ported these positive sentiments. At the G-7 Amounts shown in brackets above denote greenshoe options.

    Economic and Political Weekly October 21, 2006

    Graph C: Annualised Forward Premia in Graph D: Yield Curves for Datedas against 1.99 paise in August. For thePercentage for the US Dollar in theSecurities – Weighted Average for

    10-year paper, the RBI received 323 com-

    Domestic Inter-Bank Market and WeightedWeeks of September 2006

    petitive bids worth Rs 16,710 crore, of

    9.5

    Averages of Call Rates for September 2006

    8.0

    which 46 bids for Rs 5978.92 crore were

    accepted at a cut-off yield of 7.76 per cent

    9

    as against 8.27 per cent in August and 8.29

    5.0

    4.5

    1st Week 2nd Week 3rd Week 4th Week 5th Week

    1 2 345678 9 10111213141516171823293031

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

    Yield (per cent per annum)

    8.5

    per cent in July. In case of the 28-year

    Per cent per annum

    6.0

    paper, the RBI received 186 competitive

    2.5

    2.0

    8

    bids worth Rs 8,151.50 crore, of which 34

    bids for Rs 2,986.75 crore were accepted

    7.5

    at a cut-off yield of 8.45 per cent (as against

    4.0

    8.73 per cent for a 30-year paper issued

    in August). Besides, both the cut-off yields

    were somewhat lower than those prevail

    ing in the secondary markets.

    7

    6.5

    2.0

    Working Days Years to Maturity

    The government has so far borrowed Rs 89,000 crore through dated securities out of a total budgeted borrowing plan for the year of Rs 1,53,000 crore. Despite the RBI being prevented from participating in the primary issues effectively from April 1, 2006 under the Fiscal Responsibility and Budget Management (FRBM) Act 2003, auctions of government securities have been smooth and in fact, after the initial firmness, the cut-off yields too have eased at least for the present. As per the indicative calendar for issue of government securities, the central bank plans to sell government securities worth Rs 63,000 crore in the second-half of the current fiscal year. This has dispelled the speculation that a large fiscal deficit in the first four months of the fiscal year would prompt the government to borrow more than that had been visualised earlier.

    Treasury Bills

    Following the secondary market yield rates, the yields on short-term (91-day and 182-day) treasury bills firmed up while that on 364-day eased throughout the month, which is in conformity with the market trends. The yield on 91-day bills ruled steady at 6.44 per cent on August 30 and September 6, but thereafter increased

    exchange rate eased continuously to However, with fallout of the month-end

    Rs 46.05 on September 20. Following the US Fed holding the Fed rate steady, the rupee firmed up above the psychologically important benchmark of Rs 46 and then ruled at Rs 45.88 on September 21. There were reports of the RBI intervening in the market, which could not be confirmed, but the available data for the previous months suggested that the RBI was not active in the market. Nevertheless, due to the month end demand for dollars as well as arbitrage opportunities in the NDF market, the rupee depreciated rather sharply, with the rate ranging between Rs 46.86 and Rs 46.97 until September 29. Incidentally, the domestic forex market remained impervious of the negative sentiments in Thailand’s forex market following the military coup as well as the release of domestic balance of payments data for the first quarter of 2006-07 which showed sharp increases in merchandise and current account deficits (Graph B).

    In September, the six-month annualised forward premia by and large tracked the movements in the spot rupee. It eased from

    1.40 per cent on September 1 to 1.17 per cent on September 20 as the prospects of lower interest rates improved with yields on domestic government securities easing and the US fed rate remaining steady.

    pressures, the premia continued to surge and touched 1.31 per cent on September

    29. Significant divergences were observed in case of one-month premia which appear to be of a seasonal nature due to the pressure of half-yearly closing of accounts as well as month-end demand for dollars from corporates (Graph C).

    III Primary Market

    Dated Securities

    As per the calendar for issuances, the government raised Rs 9,000 crore through the issue of 7.59 per cent 2016 (repetitive re-issue) and 7.50 per cent 2034 for notified amounts of Rs 6,000 crore and Rs 3,000 crore, respectively, through pricebased auctions using the multiple price method on September 8. The minimum underwriting commitment (MUC) and additional competitive underwriting (ACU) were set at Rs 177 crore and Rs 2,991 crore for the 10-year security and Rs 89 crore and Rs 1,487 crore for the 28-year paper, respectively. The underwriting commission for the 10-year was set substantially lower at 1.39 paise per Rs 100

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

    (Amount in rupees crore)

    For the Week (July-Sept 2006) Range of Repo/RRPeriod Days Repo (Injection) * Bids Received Bids Accepted Number Amount Number Amount Bids Received Number Amount Reverse Repo (Absorption) * Bids Accepted Number Amount Daily Averages of Bids Accepted Net Injection Net (+)/ Outstanding Absorption (-) Amount of Liquidity at the Week End@
    31 Jul-04 Aug 0607 Aug-11 Aug 0614 Aug-18 Aug 0621 Aug-25 Aug 0628 Aug-01 Sept 0604 Sept-08 Sept 0611 Sept-15 Sept 0618 Sept-22 Sept 0625 Sept-29 Sept 06 1-3 1-3 1-3 1-3 1-3 1-3 1-3 1-3 1-4 0 0 0 0 0 0 1 0 1 4 0 0 0 0 0 0 275 0 5010 0 0 0 0 0 0 1 0 1 4 0 0 0 0 0 0 275 0 5010 331 245 195 190 287 236 228 7 5 108 240710 202955 122185 138810 214565 210725 165215 44345 73490 331 245 195 190 287 236 228 7 5 108 240710 202955 122185 138810 214565 210725 165215 44335 73490 48142 40591 30546 27762 42913 42145 33043 8867 14698 -240710 -202955 -122185 -138810 -214565 -210725 -165215 -44345 -68480 48355 30990 29990 23985 41165 43805 22620 14555 1915

    Notes: * With effect from July 25, 2006 the Repo Rate is 7.00 per cent and Reverse Repo Rate 6.00 per cent. ** Includes Second LAF Auctions under Repo and Reverse Repo. @ Net of Repo and Reverse Repo Outstandings.

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

    (Amount in rupees crore)

    Descriptions Week Ending September 2006: Yield to Maturity on Actual Trading Total for the Month
    29 22 15 8 1 of September 2006
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury Bills A 91-Day Bills B 182-Day Bills C 364-Day Bills 2GOI Dated Securities 159.80 284.10 1755.53 6.40 6.68 6.70 358.18 808.25 1391.68 6.40 5.89 6.64 1121.86 321.42 1564.65 6.36 6.63 6.82 1185.48 1297.16 1076.96 6.36 6.62 6.75 1100.40 499.93 2137.04 6.33 6.45 6.73 3925.72 3210.86 7925.86 6.36 6.42 6.73
    A Regular (Per Cent: Year) 6.30, 2006 FRB - - - 18.00 7.50 6.31 - - - - - - - - - 18.00 7.50 6.31
    11.5, 2007 60.00 6.99 11.02 50.00 6.95 11.01 10.00 6.83 10.99 25.00 7.00 11.00 - - - 145.00 6.97 11.01
    11.90, 2007 275.00 6.70 11.52 40.00 6.82 11.52 150.00 6.84 11.51 75.00 6.91 11.50 240.00 6.96 11.50 780.00 6.83 11.51
    13.05, 2007 - - - - - - - - - 0.01 7.51 12.64 - - - 0.01 7.51 12.64
    9.50, 2008 - - - - - - - - - - - - 10.00 7.13 9.20 10.00 7.13 9.20
    11.40, 2008 - - - 50.00 7.02 10.76 - - - - - - 65.00 7.09 10.57 115.00 7.06 10.65
    12.00, 2008 275.00 6.87 11.15 115.00 7.00 11.17 35.00 7.04 11.16 - - - 5.00 7.18 11.17 430.00 6.93 11.16
    6.65, 2009 - - - 15.00 7.33 6.75 95.00 7.33 6.75 90.00 7.33 6.76 - - - 200.00 7.33 6.76
    7.00, 2009 - - - - - - - - - 0.01 6.99 7.00 - - - 0.01 6.99 7.00
    7.07, 2009 Oil Mkt Bonds 348.00 7.62 7.16 - - - 365.00 7.75 7.18 200.00 7.75 7.18 - - - 913.00 7.70 7.17
    7.33, 2009 Oil Mkt Bonds 25.00 7.71 7.39 300.00 7.78 7.40 - - - - - - - - - 325.00 7.77 7.40
    11.99, 2009 - - - 50.00 7.29 10.83 - - - - - - - - - 50.00 7.29 10.83
    7.55, 2010 125.00 7.25 7.48 - - - 90.06 7.39 7.51 468.16 7.40 7.51 300.05 7.47 7.53 983.27 7.40 7.52
    11.50, 2010 50.00 7.28 10.13 - - - 4.00 7.43 10.17 - - - - - - 54.00 7.29 10.14
    12.25, 2010 0.50 7.58 10.65 - - - 115.00 7.44 10.59 - - - - - - 115.50 7.44 10.59
    12.29, 2010 - - - - - - - - - 80.00 7.48 10.76 - - - 80.00 7.48 10.76
    8.00, 2011 - - - - - - - - - - - - 0.37 7.58 7.87 0.37 7.58 7.87
    9.39, 2011 520.24 7.34 8.69 1640.93 7.48 8.73 820.53 7.51 8.74 1261.41 7.49 8.73 471.30 7.69 8.79 4714.41 7.49 8.73
    10.95, 2011 - - - - - - 10.00 7.53 9.66 25.00 7.55 9.66 - - - 35.00 7.54 9.66
    12.00, 2011 26.06 7.52 10.12 - - - 30.01 7.62 10.15 - - - - - - 56.07 7.58 10.14
    12.32, 2011 295.00 7.45 10.46 250.00 7.54 10.49 185.00 7.58 10.50 125.00 7.55 10.49 - - - 855.00 7.52 10.48
    6.85, 2012 45.50 7.48 7.05 2.02 7.62 7.09 10.00 7.59 7.08 - - - - - - 57.52 7.50 7.06
    7.40, 2012 41.00 7.43 7.41 7.50 7.60 7.47 14.00 7.55 7.45 161.25 7.56 7.45 30.60 7.71 7.51 254.35 7.56 7.45
    7.44, 2012 Oil Mkt Bonds 940.00 8.06 7.65 65.00 8.17 7.68 785.00 8.30 7.73 - - - - - - 1790.00 8.17 7.68
    7.47, 2012 Oil Mkt Bonds - - - - - - 50.00 8.26 7.73 - - - - - - 50.00 8.26 7.73
    11.03, 2012 0.08 8.00 9.69 0.32 7.73 9.57 0.32 7.86 9.62 - - - 0.14 7.45 9.45 0.86 7.76 9.58
    7.27, 2013 25.00 7.50 7.36 60.00 7.61 7.40 205.00 7.61 7.41 0.29 7.74 7.46 - - - 290.29 7.60 7.40
    9.00, 2013 - - - - - - 13.00 7.67 8.42 - - - - - - 13.00 7.67 8.42
    9.81, 2013 5.00 7.65 8.83 5.00 7.86 8.92 - - - - - - - - - 10.00 7.76 8.87
    12.40, 2013 98.13 7.73 9.95 10.00 7.78 9.97 - - - 0.06 7.65 9.90 - - - 108.19 7.73 9.95
    6.72, 2014 - - - - - - - - - - - - 0.64 8.07 7.26 0.64 8.07 7.26
    7.37, 2014 40.10 7.51 7.43 42.31 7.62 7.47 79.53 7.70 7.51 225.00 7.68 7.50 216.00 7.83 7.57 602.94 7.72 7.52
    10.00, 2014 - - - - - - 5.00 7.71 8.84 - - - - - - 5.00 7.71 8.84
    10.50, 2014 - - - - - - 25.00 7.72 9.01 0.05 7.90 9.10 - - - 25.05 7.72 9.01
    11.83, 2014 0.11 7.50 9.39 - - - - - - - - - - - - 0.11 7.50 9.39
    6.83, 2015 FRB - - - - - - - - - - - - 65.00 7.04 6.92 65.00 7.04 6.92
    7.38, 2015 9.24 7.69 7.53 - - - 1.71 7.75 7.56 0.24 7.81 7.59 - - - 11.19 7.70 7.53
    7.59, 2015 Oil Mkt Bonds1335.00 8.27 7.92 135.00 8.44 7.99 505.00 8.54 8.04 - - - - - - 1975.00 8.35 7.95
    10.79, 2015 - - - - - - 25.00 7.76 9.08 25.00 7.79 9.09 - - - 50.00 7.78 9.09
    11.43, 2015 55.00 7.81 9.31 0.35 7.73 9.26 85.85 7.82 9.31 25.00 7.88 9.34 - - - 166.20 7.83 9.31
    11.50, 2015 - - - - - - 113.25 7.76 9.33 4.00 7.76 9.32 - - - 117.25 7.76 9.33
    5.59, 2016 - - - - - - 15.00 7.84 6.59 5.00 7.86 6.60 - - - 20.00 7.85 6.59
    7.59, 2016 1264.75 7.59 7.59 2124.97 7.68 7.64 1617.38 7.75 7.67 2054.94 7.77 7.68 1183.68 7.91 7.75 8245.72 7.73 7.66
    10.71, 2016 - - - 49.20 7.94 9.05 - - - - - - - - - 49.20 7.94 9.05
    7.46, 2017 14.76 7.70 7.59 28.95 7.75 7.61 2.00 7.86 7.68 - - - 11.36 8.02 7.77 57.07 7.80 7.64
    7.49, 2017 6.32 7.71 7.61 - - - 25.56 7.88 7.70 0.02 8.00 7.77 6.50 8.01 7.78 38.40 7.87 7.70
    7.55, 2017 - - - 25.00 7.38 7.51 - - - - - - - - - 25.00 7.38 7.51
    8.07, 2017 334.22 7.65 7.84 854.53 7.72 7.88 772.99 7.79 7.92 925.05 7.82 7.93 939.03 7.96 8.01 3825.82 7.81 7.93
    6.25, 2018 34.96 7.73 7.03 12.45 7.87 7.10 16.25 7.92 7.13 19.20 7.96 7.15 2.02 8.09 7.23 84.88 7.85 7.09
    10.45, 2018 - - - 60.01 8.08 8.89 25.00 8.13 8.91 - - - - - - 85.01 8.10 8.89
    5.64, 2019 5.00 8.05 6.93 5.00 8.05 6.93 4.00 8.32 7.09 1.50 7.95 6.88 0.60 8.10 6.96 16.10 8.11 6.96
    6.05, 2019 0.30 7.84 7.05 24.68 8.06 7.19 4.50 8.29 7.33 - - - 0.19 8.12 7.23 29.67 8.09 7.21
    10.03, 2019 40.00 7.95 8.61 - - - 40.00 8.22 8.78 10.00 8.19 8.76 - - - 90.00 8.10 8.70
    6.35, 2020 5.00 7.95 7.30 1.00 8.39 7.58 3.90 8.01 7.34 3.00 8.02 7.35 0.10 8.21 7.46 13.00 8.02 7.34
    7.46, 2020 - - - - - - - - - - - - 0.51 8.03 7.78 0.51 8.03 7.78
    10.70, 2020 10.00 7.98 8.75 - - - 48.34 8.20 8.90 21.66 8.21 8.91 - - - 80.00 8.18 8.88
    7.94, 2021 202.04 7.90 7.91 103.10 8.02 8.00 137.42 8.11 8.06 22.67 8.11 8.06 26.75 8.23 8.14 491.98 8.01 7.99
    10.25, 2021 6.00 7.91 8.53 8.76 8.14 8.70 10.08 8.14 8.69 11.15 8.18 8.72 62.78 8.31 8.81 98.77 8.24 8.76
    8.35, 2022 0.65 8.08 8.16 - - - 15.71 8.18 8.22 0.06 8.12 8.19 0.10 8.26 8.29 16.52 8.17 8.22
    6.17, 2023 6.50 8.03 7.43 26.00 8.14 7.51 11.00 8.16 7.52 1.00 8.42 7.71 1.00 8.24 7.58 45.50 8.14 7.51
    6.30, 2023 2.00 8.18 7.58 - - - - - - - - - 0.31 8.27 7.65 2.31 8.19 7.59
    10.18, 2026 - - - - - - 5.00 8.31 8.62 - - - - - - 5.00 8.31 8.62
    6.01, 2028 3.75 8.18 7.68 0.75 8.33 7.81 2.75 8.11 7.63 0.75 8.42 7.88 0.25 8.54 7.99 8.25 8.20 7.70
    6.13, 2028 1.51 8.17 7.72 5.50 8.39 7.90 1.00 8.44 7.94 1.00 8.73 8.19 - - - 9.01 8.40 7.91
    6.35, 2034 - - - - - - - - - - - - 1.34 8.21 7.47 1.34 8.21 7.47
    7.50, 2034 480.68 8.25 8.16 212.08 8.36 8.26 287.72 8.43 8.32 280.21 8.41 8.31 195.10 8.60 8.48 1455.79 8.38 8.28
    7.40, 2035 6.00 8.30 8.21 2.90 8.49 8.38 43.68 8.38 8.27 9.22 8.44 8.33 37.50 8.62 8.49 99.30 8.47 8.36
    8.33, 2036 472.71 8.26 8.27 117.74 8.45 8.44 117.84 8.42 8.41 97.35 8.41 8.40 133.18 8.54 8.52 938.82 8.36 8.36
    Sub-total 7491.11 7.78 8.29 6519.05 7.67 8.27 7034.38 7.86 8.17 6254.26 7.70 8.10 4006.40 7.84 8.26 31305.20 7.77 8.22
    B RBI’s OMO: Sales 5.00 - - 1.00 - - - - - 141.00 - - 82.00 - - 229.00
    Purchase 10.00 - - 15.00 - - 10.00 - - - - - 15.00 - - 50.00
    Sub-total 15.00 - - 16.00 - - 10.00 - - 141.00 - - 97.00 - - 279.00
    (A+B) 3 Market Repo 4 State Govt Securities 7506.11 51658.54 185.41 7.78 7.81 8.29 6535.05 56036.40 8.41 363.77 7.67 7.89 8.27 7044.38 57933.62 9.10 84.60 7.86 7.95 8.17 6395.26 57688.22 8.19 140.31 7.70 7.90 8.10 4103.40 67537.98 8.68 144.81 7.84 8.01 8.26 31584.20 290854.76 9.28 918.90 7.77 7.90 8.22 8.84
    Grand total (1 to 4) 61549.49 65493.33 68070.53 67783.39 75523.56 338420.30

    (-) 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 OperationsNotes: (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 October 21, 2006 to 6.48 per cent on September 13 and to

    6.52 per cent on September 20 and further to 6.61 per cent on September 27 (Table 4). Similarly, the yield on 182-day bills increased from 6.72 per cent in August 23 to 6.74 per cent on September 6 and further to 6.78 per cent on September 20 (Table 5). Unlike these, the yield on 364-day bills ruled steady at 6.93 per cent on August 30 and September 13 and then eased to 6.90 per cent on September 27 (Table 6).

    Corporate Bonds Market

    With the banking sector gearing itself up for the Basel-II requirements, the number of banks tapping the market has increased substantially in the recent past. In September, they accounted for 89 per cent of the total funds mobilised. As a result, the total mobilisations touched a peak of Rs 11,402 crore in September as against Rs 7,295 crore in the corresponding month last year (Table 7). Further, the issuances of innovative perpetual debt instruments and the debt capital were boosted with the RBI guidelines allowing the FII investments in these instruments well above the limit specified for FII investments in corporate debt instruments, which is currently capped at US $ 1.5 billion.

    Among the banks and FIs, State Bank of India dominated the market by mobilising around Rs 4,000 crore through four different issuances of upper tier-II bonds by offering coupons in the range of 8.85 –8.98 per cent. Interestingly, ICICI Bank for its perpetual bond issue in August had to pay

    10.10 per cent while in September it offered only 9.98 per cent.

    A union finance ministry official said that the government would resolve all policy issues for developing a vibrant corporate debt market in the country in the next six to eight months. He further added that the corporate debt market has not developed to the desired level due to policy issues such as stamp duty structure, taxrelated arbitrage matters, placement rules for debentures, investment restrictions, among other things. He pointed out that the finance ministry was in “full acceptance” of the R H Patil Committee report on corporate bonds and securitisation. The Patil Committee had recommended that the central government should consider establishing an appropriate institutional process to evolve a consensus across states on the affordable rates and levels of stamp duty on debt assignment, pass-through certificates (PTCs) and security receipts (SRs).

    IV Secondary Market

    With the easing of yield rates on account of a somewhat steady interest rate and inflation expectations, the secondary market trading in gilt-edged securities received a significant boost, so much so that the range of weekly turnover in September touched the highest level in the current fiscal year so far; it ranged between Rs 22,532 crore and Rs 33,971 crore as against Rs 8,277 crore and Rs 33,431 crore in August. The trading was robust despite the usual caution exercised by the market participants ahead of the half-yearly closing as well as in the face of increasing liquidity pressures due to outflows towards advance tax payments. However, an important pointer buoying the sentiments was the yield rates set at the dated securities auction, which were much lower than the prevailing secondary market yields. Though after the RBI governor expressed caution regarding inflation and interest rates expectations, the fall in the yields at the medium and long-end was marginally arrested, but following the announcement of the indicative calendar for issuances, the yields fell significantly over the month.

    Given the relatively stable inflationary expectation, the yields on medium and long-term securities eased during the month but short-term yields generally remained sticky. Though over the month the yield curve appeared to be flattening, it remained a gently upward sloping curve reflecting the buoyancy witnessed in the economy as indicated by the surging GDP growth as well as robust rise in index of industrial production. The yield on 10-year benchmark security 7.59 per cent 2016 which touched a peak of 8.33 per cent in July eased to 7.59 per cent in September, a decline of 74 basis points. The spread between 11.70 per cent 2007 and 7.59 per cent 2016 narrowed from 95 basis points in the week ending September 1 to 89 basis points in the last week due to the sharp fall in yields on 10year security and somewhat less decline in one-year stock. However, the spread between the above-mentioned 10-year security and 7.40 per cent 2035 remained around 71 basis points as the yields on both of them declined to somewhat similar levels (Graph D and Appendix Table).

    RBI Reverse Repos, OMOs and MSS

    LAF repo and reverse repo arrangement, the RBI’s primary instruments of managing day-to-day liquidity, saw the use of both of these instruments during the month as the strain on liquidity increased. The size of reverse repo bids fell precipitously over the past few months and also intra-month. The daily average size of LAF reverse repo bids tendered and accepted declined during the month to Rs 24,689 crore from Rs 37,087 crore in August and Rs 49,134 crore in July. In the first week ending September 8, the average bids tendered ruled at Rs 42,145 crore which fell to Rs 33,043 crore in the following week and after the outflows towards advance tax payments, the bids slipped to Rs 8,869 crore with the RBI injecting funds to the extent of Rs 275 crore on September 22. Thereafter, it edged up to Rs 14,698 crore in the last week of the month. On September 29, ahead of half-yearly closing, RBI absorbed Rs 6,925 crore, but also injected Rs 5,010 crore (Table 8).

    Despite the pressure on liquidity impinging the market operations, the surplus liquidity under market stabilisation scheme (MSS) remained around Rs 40,000 crore on weekly basis in September 2006, though lower than around Rs 65,000 crore in September 2005.

    The RBI’s credit to banks and the commercial sector had remained zero for some months now because of reduced reliance on the standing facilities on account of comfortable liquidity conditions. However, on September 28 and 29 ahead of the halfyearly closing, Rs 570 crore and Rs 1,374 crore were borrowed at 7 per cent under these facilities.

    Unlike the buoyant secondary market, the repo transactions outside RBI declined marginally from Rs 2,97,023 crore in August to Rs 2,90,855 crore in September. Moreover, the trades in September were executed at a higher range of discount rates of 5.30-8.50 per cent as against 5.00-8.25 per cent in previous month.

    Commercial Bonds

    Unlike the buoyant primary corporate debt market, the daily average secondary market turnover in corporate bonds declined to Rs 47 crore from Rs 64 crore, notwithstanding the trading in PSU taxable bonds increasing from Rs 114 crore to 149 crore. Also, with the waning interest rate uncertainty, the trading in floating rate bonds fell from Rs 145 crore to Rs 90 crore.

    EPW

    [While Piyusha Hukeri has prepared the initial draft, the required tabular data have been compiled by V P Prasanth.]

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