'Surplus' of Resources in External Sector

��

‘Surplus’ of Resourcesin External Sector

The latest balance of payments data show that the current account was in small deficit in 2006-07, as it was in the previous two years. However, if gold and silver imports are excluded, then the deficit turns into a surplus over the past three years. This along with the large capital inflows indicates that India’s socio-economic development is constrained not by an inadequacy of resources but for want of organisational and institutional structures that can productively utilise the available resources for expansion of the

output base of the real economy.

EPW RESEARCH FOUNDATION

IIIII

Current Account in Surplus?Current Account in Surplus?Current Account in Surplus?Current Account in Surplus?Current Account in Surplus?

he release of the full year balance of payments (BoP) data for 2006-07 provides increasing evidence of a growing comfort level on the external sector front. In the period of past five years 2002-03 to 2006-07, merchandise exports have risen nearly threefold from $ 44.70 billion in 2001-02 to $ 127.09 billion. No doubt, imports have grown even more, and as a result, the trade deficit at $ 64.91 billion has been 5.6 times the deficit of $ 11.57 billion in 2001-02.

Even then, 2006-07 has ended with an overall BoP surplus of as much as $ 36.61 billion, the highest ever. In the previous five years this surplus had ranged between $ 11.78 billion and $ 19.63 billion. Apart from private transfers and software export receipts under invisibles, which have been contributing to the distinct improvement in the BoP situation during the past few years, it is the improvement in capital flows during the latest year that stands out. The capital account on BoP has shown a surplus of $ 44.94 billion, that is, nearly double the size in the previous year of $ 23.40 billion. Amongst the capital items, a conspicuous rise is seen in external commercial borrowings (ECBs), from $ 8.27 billion (including $ 5.5 billion of IMD) in 2005-06 to $ 16.08 billion in 2006-07 (Table 1) due to liberal policies introduced on ECBs and competition amongst corporates to borrow from abroad because of interest rate considerations. FDI gross inflows ($ 19.44 billion as against $ 7.67 billion in 2005-06) have been the other major component, but there has also been a noticeable jump in FDI outflows in the form of investment abroad due to Indian companies resorting to large overseas acquisitions ($ 10.89 billion as against $ 2.93 billion in 2005-06). During the past two years, portfolio investments too have been sizeable (Table 1).

Under invisible receipts, software export receipts and private transfers have continued to grow (Table 2), but a more noteworthy development during 2006-07 has been the galloping of what are called “business services” receipts and payments. The RBI seeks to explain these flows as mainly driven by “trade-related services, business and management consultancy services, architectural and engineering services and other technical services, and office maintenance services”. These are said to reflect the underlying momentum in trade of professional and technologyrelated services. Doubling of both receipts and payments under this head within a year – from $ 12.86 billion to $ 23.46 billion and from $ 10.50 billion to $ 20.20 billion (Table 3) – may nevertheless cast doubt on the quality of data in this respect.

From the point of view of macroeconomic implications, what is important is the extent to which the external flows are deployed for expanding the economy’s investment base. In this respect, the overall picture can only be described as disappointing. Of the large capital account surplus of about $ 45 billion, less than $ 10 billion has gone to finance the “current account deficit”, which is the counterpart of “capital inflow from abroad” that supplements domestic savings to finance aggregate domestic investment. Thus, only a little over one-fifth of the “net capital inflow” has been deployed for investment purposes during 2006-07; the balance has been added to foreign currency reserves.

Table 2: Invisible – Net ReceiptsTable 2: Invisible – Net ReceiptsTable 2: Invisible – Net ReceiptsTable 2: Invisible – Net ReceiptsTable 2: Invisible – Net Receipts

($ mn)

Total Transfers Miscella-Misc of which neous of which Software

2001-02 14974 15856 4264 6884 2002-03 17035 16838 4324 8863 2003-04 27801 22162 7746 12324 2004-05 31232 20785 13727 16900 2005-06 42655 24284 24217 22262 2006-07 55296 27415 30912 28798

($ mn)

Non-Software Misc Business Services Receipts Payment Receipts Payment

2001-02 3480 6100 2002-03 4653 9192 2003-04 5165 9743 2004-05 12929 16102 5167 7318 2005-06 22301 20346 12858 10496 2006-07 31065 28951 23459 20200

Table 1: Net Capital Flows – Total and Key ItemsTable 1: Net Capital Flows – Total and Key ItemsTable 1: Net Capital Flows – Total and Key ItemsTable 1: Net Capital Flows – Total and Key ItemsTable 1: Net Capital Flows – Total and Key Items

($ mn)

Net Capital Flow (Total)	Foreign Direct Investment in India Abroad	Portfolio Investment	External CommercialBorrowing
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07	8551 10840 16736 28022 23400 44944	6125 5036 4322 5987 7661 19442	-1460 -1854 -1934 -2298 -2931 -10889	2021 979 11356 9311 12494 7062*	-1585 -1692 -2925 5194 2723 16084

* Includes Rs 58 crore portfolio investment abroad.

available resources for rapid expansion of

physical infrastructure as well as the output

CBLO Rates and Call MoneyCBLO Rates and Call MoneyCBLO Rates and Call MoneyCBLO Rates and Call MoneyCBLO Rates and Call Money
50.0

base of the real economy. The sorry spec-

Borrowing – June 2007Borrowing – June 2007Borrowing – June 2007Borrowing – June 2007Borrowing – June 2007

25.5

tacle of the authorities’ inability to achieve anything worthwhile in their attempt to

48.0

deploy foreign exchange resources for infra

20.5

Weighted Average (Per Cent)

(Rupees Thousand Crore)Rupees per US dollar

structure development for about a decade

now, speaks volumes for this organisational

46.0

15.5

and institutional unpreparedness.

10.5

44.0

Money, Gilt-Edged and ForexMoney, Gilt-Edged and ForexMoney, Gilt-Edged and ForexMoney, Gilt-Edged and ForexMoney, Gilt-Edged and Forex

MarketsMarketsMarketsMarketsMarkets

5.5

42.0

In June, the short-term financial markets

0.5

June 2007

witnessed a few unusual developments.

ll l

Call Money Volume (Rs Cr)

-i

Repo Rates – Outside the RBI

40.0

ll

CBLO Rates

Call Rates

First, following the acquisition by the

Such build-up of foreign currency assets from out of generally expensive capital flow has been rapidly growing in recent years.

In fact, for three years, 2001-02 to 2003-04, even the current account was in surplus implying that domestic investment was less than domestic savings and that parts of domestic savings were also invested abroad. During the past three years, the official data suggest that BoP’s current account has been in deficit. But, there is a catch: the reported current account deficit is inclusive of gold and silver imports, which do not contribute to the processes of production and investment in the domestic economy (except for a small quantity involved in re-exports). Interestingly, such imports of precious metals, which have grown in recent years, have also far exceeded the current account deficit. If such imports are excluded, the current account deficit is in surplus (Table 4), implying that not only are capital inflows in net terms not being absorbed in domestic investment, but even a part of domestic savings is being remitted abroad.

The above review reinforces the basic fact that the Indian economy’s socioeconomic development is constrained not by an inadequacy of resources but for want of organisational and institutional structures that can productively utilise the

US $ million		Per Cent of GDP
	Current Account	Imports of	Current Account	Current Account	Current Account
	Balance with	Gold and	Balance Excluding	Balance with	Balance Excluding
	Gold and Silver	Silver	Gold and	Gold and	Gold and
	Imports		Silver Imports	Silver Imports	Silver Imports
2001-02	3400	4170	7570	0.7	1.6
2002-03	6345	3845	10190	1.2	2.0
2003-04	14083	6856	20939	2.3	3.5
2004-05	-2470	11150	8680	-0.4	1.2
2005-06	-9186	11189	2003	-1.1	0.2
2006-07	-9609	14000	4391	-1.1	0.4

government of India of the entire RBI shareholding in State Bank of India for a consideration of Rs 35,531 crore effective from June 29, 2007, the gilt-edged market faced the largest unscheduled and scheduled but enhanced government borrowings with a view to financing the share transfer. For this purpose, the government has also exhaustively used the ways and means advances from the RBI with such borrowings touching an unprecedented level of Rs 31,949 crore on July 6. Obviously, these liabilities incurred by the government are for a temporary period to buy the SBI shares in cash from the RBI, which, in turn, will reimburse the government the entire account as dividend after the central bank books are closed for the accounting year 2006-07. Thus, the transactions have been so done as to make them budget neutral.

Second, despite large government borrowings and quarterly advance tax payments, the size of reverse repo bids tendered in the RBI’s LAF were at unprecedented levels. Third, the month saw an unusual spectacle of the call money rates ruling at abysmally low levels of less than

Average June 2007 Average May 2007 Items for Five for Four

Weeks 29 22(RF) 15 8(RF) 1 Weeks 25(RF) 18 11(RF)

No of working days 30 6 6 6 6 6 22 6 6 64 Call MoneyWeighted average of call rates:

per cent (weekly range) per annum 0.23-8.58 2.30-8.58 0.23-3.09 2.63-3.27 0.26-0.55 0.47-7.80 2.45-9.12 7.40-8.05 7.01-9.08 2.45-7.41 7.53-9.12 Daily averages (Rupees crore) (0.34) (0.26) (7.40) (2.45)

Total call market borrowings 7743 9727 6073 11033 4841 7043 9251 9517 9254 9831 7979

(570) (377) (166) (1282) Notice MoneyWeighted average of notice money rates:

per cent (weekly range) per annum 0.28-8.30 1.50-8.30 0.29-7.15 1.50-3.64 0.28-0.50 0.62-7.72 3.18-9.93 5.50-7.97 5.50-8.16 3.18-7.25 6.50-9.93 Daily averages (Rupees crore) (0.29) (0.28) (7.80) (3.18)Total notice market borrowings 1804 2107 1497 2387 1349 1682 2249 1822 2461 2466 3478 (10919) (9709) Turnover in term money market 242 160 283 301 120 161 219 137 61 247 496 (borrowings) (Rs crore) $$ (105) (75) (45) (215)

* 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 July 21, 2007

rate dipped to 0.26 per cent as demand

remained subdued and supply expanded

Averages of Call Rates for June 2007Averages of Call Rates for June 2007Averages of Call Rates for June 2007Averages of Call Rates for June 2007Averages of Call Rates for June 2007
due to increased government spending.

9

However, with the approaching advance

10.0

tax outflows and dated security auction, the overnight rate firmed up and ruled in a

8.0 8.5

Yield (per cent per annum)

range of 2.63-3.27 per cent until June 15. But as liquidity remained comfortable, the

Per cent per annum

6.0

overnight rate dipped to 0.23 per cent on

8

June 21 and on the second reporting Friday,

June 22, it rose marginally to 0.34 per cent.

4.0

As absorptions through treasury bills in

7.5

creased ahead of the scheduled transfer of

2.0

SBI shares, the call rates ruled firm overshooting the repo rate. The overnight rate

0.0 7

3 4 5 6 7 8 9 10111213141516171819212231

rose from 3.22 per cent on June 26 to 6.58

Years to Maturity per cent on June 27 and further to 7.95 per cent on June 28; in fact the rate peaked

Working Days

1 per cent barring a few days towards the end of the month. Large loan redemptions (worth Rs 20,000 crore), increased government spending and RBI’s sterilisation activities accompanied by robust growth in deposits and subdued credit growth, contributed to the liquidity overhang. Finally, on account of two major public equity offerings and a buoyancy in domestic stock markets, the portfolio inflows increased thereby exerting upward pressure on the rupee-dollar exchange rate, which warranted RBI’s intervention with a view to arresting its sharp movements. Moreover, with the domestic inflation easing, the market expected that the RBI would intervene in the forex market. Incidentally, the Dubai Gold and Commodity Exchange (DGCX) started trading in Indian rupee futures for the first time. Also, the European Central Bank (ECB) raised the minimum bid rate on its main refinancing operations by 25 basis points.

Call Money Market

Though the money market forms the first and foremost link in the transmission of monetary policy impulses to the real economy, the recent volatility in money market rates emphasises the challenges for liquidity management and maintenance of stable conditions. The informal interest rate corridor of reverse repo and repo under the LAF has lost sanctity for the past few months after some structural changes were ushered in under the modified MSS arrangement wherein the reverse repo absorptions have been restricted to Rs 3,000 crore under LAF, thus permitting only a small leeway for managing very shortterm liquidity mismatches. Thus, in June also, the call money rates ruled at abys-at 8.58 per cent on June 29, but dipped mally low levels barring a few days in the sharply to 2.87 per cent on June 30 (Table 5) last week of the month resulting in higher (Graph A). volatility in June as compared with May Despite the short-term rates ruling at (Table 6). extremely low levels, the volumes remained

Due to redemption inflows towards the higher in June than that in May. Among end of May, the weighted call rates dipped the three short-term segments, the sharply from 1 per cent on May 31 to 0.47 collateralised borrowing and lending obliper cent on June 1. Despite the consecutive gation (CBLO) segment saw the highest auction outflows, the rate ruled at 0.46 per volumes at relatively lower rates followed cent on June 5 and 0.39 per cent on June by the overnight call rates and then the

6. On the first reporting Friday, June 8, the market repo (Table 7).

Month/Week Simple Standard Coefficient Simple Standard Coefficient Mean* Deviation of Variation Mean* Deviation of Variation (Percentages)$ (Percentages)$

May 2007All four weeks 7.23 1.86 25.78 6.17 2.63 42.67 25 (RF)* 7.72 0.22 2.88 7.26 0.91 12.52

18 8.22 0.90 10.91 6.85 1.12 16.39 11 (RF)* 4.91 2.05 41.75 2.95 2.72 92.29

4 8.53 0.70 8.20 8.37 1.50 17.90

June 2007 All five weeks 2.85 2.52 88.32 3.21 2.93 91.15

29 5.16 2.88 55.74 5.20 2.83 54.37 22 (RF)* 1.55 1.26 81.25 2.65 3.90 147.41

15 3.09 0.24 7.70 2.45 1.11 45.40 8 (RF)* 0.41 0.10 24.85 0.42 0.10 24.90

1 4.05 3.08 76.02 5.22 3.16 60.56

** Separate reportings began on March 15, 2005.

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

Table 7:Table 7:Table 7:Table 7:Table 7:

Comparison of Call, Overnight CBLO and Repo RatesComparison of Call, Overnight CBLO and Repo RatesComparison of Call, Overnight CBLO and Repo RatesComparison of Call, Overnight CBLO and Repo RatesComparison of Call, Overnight CBLO and Repo Rates

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

4-May-07 8.61 7.20 7.51 11457 13248 6511 11-May-07 4.67 2.74 3.60 11476 19022 9435 18-May-07 8.58 7.65 7.81 11714 18825 7883 25-May-07 7.79 7.48 7.57 11339 22702 9476 1-Jun-07 3.46 2.07 2.86 8724 24113 8889 8-Jun-07 0.40 0.02 0.21 6190 12591 6733 15-Jun-07 3.15 0.38 0.85 13420 29323 13909 22-Jun-07 1.42 0.07 0.39 7570 20687 11364 29-Jun-07 5.36 4.63 4.56 11834 22839 9444

Source:The Clearing Corporation of India Ltd (CCIL).

Forex Market strengthening of the rupee had a positive the opportunity to hedge and trade their

impact on inflation control – a point made rupee risks on a transparent and fair basis.

Despite the huge inflow of foreign by C Rangarajan. Until now, the rupee risk was hedged on currency assets, the rupee-dollar exchange As referred to above, the DGCX Indian non-deliverable forward (NDF) inter-bank rate in June depreciated for the first time rupee contract for the first time in history market but that was not accessible to since February 2007, due to the RBI’s enabled individuals and companies to have everyone. The recent strengthening of the efforts to modulate the currency move-

ments against the backdrop of the fears of (Amount in Rs crore)loss of export competitiveness. The foreign

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amountcurrency inflows during the month stood Auction Amount Devolved Price Yield Outstandingat $ 5,112 million against an inflow of No Face Value No Face Value on PDs (Rupees) Rate on the Date

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

$ 4,125 million in May. As exporters have

been suffering from twin factors of strength-2006

May 31 1500.00 47 4182.50 24 1500.00 0.00 97.01 6.18 10590.79ening of the rupee and firmness in interest (3) (513.43) (3) (513.43) [97.03] [6.12]

June 14 1500.00 35 2642.00 27 1500.00 0.00 96.86 6.50 10590.79

rates, the government extended some sops

(0) (0.00) (0) (0.00) [96.87] [6.46]to address their grievances. With the June 28 1500.00 39 1417.50 15 600.00 0.00 96.73 6.78 11581.56

(1) (500.00) (1) (500.00) [96.74] [6.74]

domestic inflation easing, the market

2007 began expecting that the RBI would arrest May 30 1500.00 66 4295.00 43 1500.00 0.00 96.34 7.62 18711.44

(1) (235.95) (1) (235.95) [96.39] [7.51]

the sharp appreciation of the rupee. As June 11 2000.00 113 7145.00 56 2000.00 0.00 96.25 7.81 20711.00 per the BOP data released for 2006-07, (0) (0.00) (0) (0.00) [96.28] [7.75]

June 13 2500.00 114 9925.00 15 2500.00 0.00 96.25 7.81 21711.00

the exports growth declined to 20.9 per (0) (0.00) (0) (0.00) [96.26] [7.79cent as compared with 23.4 per cent in June 27 2500.00 120 11687.00 33 2500.00 0.00 96.32 7.66 23701.00

(0) (0.00) (0) (0.00) [96.34] [7.62]

the previous year. There has been

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

recognition in official circles that the

represent numbers and amounts of non-competitive bids which are not included in the total.

Table 8: Details of Central Government Market BorrowingTable 8: Details of Central Government Market BorrowingTable 8: Details of Central Government Market BorrowingTable 8: Details of Central Government Market BorrowingTable 8: Details of Central Government Market Borrowing

(Amount in Rs crore)

Date of Auction Nomenclature of Type of Notified Competitive Bids Competitive Bids Indicative YTM at Devolvement on Loan Auction Amount Received Accepted Cut-off Price Primary Dealers Number Amount Number Amount (in Per Cent) (Rs Crore)

5-Jun-07 7.49 per cent 2017 Normal 6000 331 14983 139 5994 8.18 per cent (Rs 95.40) NA 5-Jun-07 8.33 per cent 2036 Normal 3000 199 7266 84 2992 8.52 per cent (Rs 97.96) NA 6-Jun-07 6.65 per cent 2009 MSS 5000 210 12105 96 5000 7.96 per cent (Rs 97.80) NA 12-Jun-07 7.49 per cent 2017 Normal 5000 405 16505 88 4993 8.44 per cent (Rs 93.72) NA 15-Jun-07 7.49 per cent 2017 Normal 6000 410 28577 31 5977 8.35 per cent (Rs 94.27) NA

Source:RBI Press Releases.

(Amount in Rs crore)

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Outstanding Auction Amount Devolved Price Yield Rate 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)

2006 May 31 2000.00 52 4056.10 10 856.10 0.00 98.59 5.74 24404.05 0.00 24404.05

(3) (770.00) (3) (770.00) [98.59] [5.72]June 7 2000.00 58 6325.37 18 2000.00 0.00 98.59 5.74 26239.06 0.00 26239.06

(2) (800.00) (2) (800.00) [98.60] [5.68]June 14 2000.00 56 2213.34 50 2000.00 0.00 98.48 6.19 26791.36 0.00 26791.36

(2) (257.30) (2) (257.30) [98.49] [6.13]June 21 2000.00 55 2314.36 10 581.86 0.00 98.45 6.31 27605.38 0.00 27605.38

(2) (1100.00) (2) (1100.00) [98.45] [6.30]June 28 2000.00 53 2215.00 8 575.00 0.00 98.44 6.36 22680.12 0.00 22680.12

(1) (500.00) (1) (500.00) [98.45] [6.30]

2007 May 30 2000.00 99 6333.30 56 2000.00 0.00 98.19 7.39 43435.00 0.00 43435.00

(4) (1350.00) (4) (1350.00) [98.22] [7.27]June 6 3500.00 143 9986.80 29 3500.00 0.00 98.23 7.23 50928.00 0.00 50928.00

(5) (5993.08) (5) (5993.08) [98.25] [7.14]June 11 3000.00 119 6492.00 88 3000.00 0.00 98.11 7.73 53928.00 0.00 53928.00

(0) (0.00) (0) (0.00) [98.15] [7.56]June 13 3500.00 117 9997.75 45 3500.00 0.00 98.10 7.77 52028.00 0.00 52028.00

(2) (1600.00) (2) (1600.00) [98.11] [7.73]June 20 3500.00 164 13942.63 23 3500.00 0.00 98.24 7.19 64356.00 0.00 64356.00

(6) (11450.00) (6) (11450.00) [98.25] [7.14]June 25 5000.00 190 18850.00 32 5000.00 0.00 98.25 7.14 69356.00 0.00 69356.00

(0) (0.00) (0) (0.00) [98.26] [7.10]June 27 3500.00 140 11682.00 49 3500.00 0.00 98.19 7.39 65956.00 0.00 65956.00

(3) (1100.00) (3) (1100.00) [98.2] [7.25]

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 July 21, 2007 rupee has led to the DGCX introducing an rupee rose to Rs 40.73 on June 12, but easily accessible to all, risk management again the RBI intervened and brought the tool. rupee to Rs 40.93 on June 13, and further

The rupee depreciated from the high to Rs 40.97 on June 15. For a brief spell, touched at Rs 40.45 on May 29 to Rs 40.54 the rupee firmed up to Rs 40.71 on June per US dollar on June 1 and further to 22, but as month-end demand for dollars Rs 40.98 on June 8 given the RBI inter-increased, the rupee dipped to Rs 41.01 ventions and weaknesses in domestic stock on June 27, but finally rose to Rs 40.75 markets. However, as inflows surged, the on June 29 (Graph B).

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

2006 June 7 2000.00 59 3855.00 36 2000.00 0.00 93.93 6.48 42354

(4) (1666.78) (4) (1666.78) [93.95] [6.44] June 21 2000.00 95 4580.00 39 2000.00 0.00 93.43 7.05 43268

(4) (915.83) (4) (915.83) [93.45] [7.01]

2007 June 6 3000.00 119 10936.40 27 3000.00 0.00 92.88 7.69 55744

(1) (118.54) (1) (118.54) [92.91] [7.65]June 20 3000.00 128 12910.00 44 3000.00 0.00 92.91 7.65 56325

(3) (495.96) (3) (495.96) [92.96] [7.59]

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.

Sl Issuing Company/Rating Nature of Coupon in Per Cent Per Annum Amount in No Instrument and Tenor Rs Crore

As shown in Graph B, the appreciation of the rupee in effective terms, which began in March 2007 both in terms of 36currency and 6-currency indices has persisted thereafter. Despite the attempts made by the authorities to arrest the appreciation in June, the rupee stands upvalued by about 7 per cent in REER terms.

With the easing of domestic overnight rates, forward premia declined. Importers began booking forwards which resulted in some firmness in the premia but exporters refrained from holding positions as they expected the rupee to weaken following the easing of the domestic inflation rate. As a result, the six-month forward premia dipped from 2.61 per cent on June 1 to

2.51 per cent on June 5 but as importers began booking forward contracts, the premia ruled firm and rose to a high of 3.27 per cent on June 13. But again, as overnight rates eased, the premia dipped to a lower range. Towards the month-end, as the demand for dollars increased from importers along with some firmness in overnight rate, the premia peaked at 3.41 per cent on June 27 and then dipped to 2.55 per cent on June 29. (Graph C).

FIs/BanksFIs/BanksFIs/BanksFIs/BanksFIs/Banks

1 State Bank of India Upper Tier II Bonds 10.20 per cent for 15 years with call option at

AAA by Crisil & Icra the end of 10th year 750 2 United Bank of India Upper Tier II Bonds 10.65 per cent for 10 years 500

AA-by Icra, Care 3 Housing Developement

Dated Securities

Finance Corp Ltd AAA by Crisil, Icra Bonds 10.35 per cent for 10 years 250

The government mobilised Rs 21,000

Central UndertakingCentral UndertakingCentral UndertakingCentral UndertakingCentral Undertaking

1 Food Corp of India Special Bonds 8.15 per cent for 15 years 240 crore instead of the scheduled Rs 15,000 2 Power Grid Corpn NCD 9.85 per cent t- 10.15 per cent book buliding crore through three issuances in June. InAAA by Crisil, Icra for 16 years 150(75)

the first instance, the government reissued

3 IRFC Bonds 9.86-9.95 per cent for 15 years 650 AAA 7.49 per cent 2017 and 8.33 per cent 20364 IRFC Bonds 10.04 per cent for 20 years 320

for notified amounts of Rs 6,000 crore andAAA Rs 3,000 crore through price-based auc-

Total 3990*

tions using a multiple price auction method

Total for June-06 (a year ago): Rs 3,102 crore. Total for May-07 (a month ago): Rs 3,239 crore.

on June 5 (Table 8). For the 10-year paper,

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

* Total includes eight more issues for Rs 200 crore or less (4 bank’s issues, 1 NBFC and 3 central PSUs)the yield set at 8.18 per cent was much Source: Various Media Sources. lower than that set in May at 8.31 per cent

Table 13:Table 13:Table 13:Table 13:Table 13:

Operations of RBI’s Liquidity Adjustment FacilityOperations of RBI’s Liquidity Adjustment FacilityOperations of RBI’s Liquidity Adjustment FacilityOperations of RBI’s Liquidity Adjustment FacilityOperations of RBI’s Liquidity Adjustment Facility**

(Amount in Rs crore)

Range of Repo (Injection)* Reverse Repo (Absorption)*# Net Injection Net For the Week Repo/RR Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding (May-June 2007) Period Number Amount Number Amount Number Amount Number Amount Daily Average Absorption (-) Amount

Days of Bids of Liquidity at the Accepted Week-End@

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

30 Apr -04 May 07 1-3 67 25525 67 25525 8 1180 8 1180 393 24345 -815 07 May -11 May 07 1-3 2 180 2 180 144 131030 144 14997 2999 -14817 2999 14 May -18 May 07 1-3 180 106445 180 106445 6 95 6 95 19 106350 -19670 21 May -25 May 07 1-3 67 34830 67 34830 9 745 9 745 149 34085 -4690 28 May - 01 Jun 07 1-3 0 0 0 0 247 254010 247 14977 2995 -14977 2996 04 Jun -08 Jun 07 1-3 0 0 0 0 389 511845 389 14984 2997 -14984 2989 11 Jun -15 Jun 07 1-3 0 0 0 0 282 323505 282 14990 2998 -14990 2998 18 Jun -22 Jun 07 1-3 0 0 0 0 321 382935 321 14993 2999 -14993 2997 25 Jun - 29 Jun 07 1-4 34 19370 34 19370 139 132625 139 7016 1403 12354 -8895

Notes: * With effect from March 31, 2007 the Repo Rate is 7.75 per cent and Reverse Repo Rate 6.00 per cent. ** Includes Second LAF Auctions under Repoand Reverse Repo. # With effect from March 05 2007, daily reverse repo absorptions under LAF is limited to Rs 3,000 crore each day comprising Rs 2,000crore in the first and Rs 1,000 cr in the second LAF. @ Net of Repo and Reverse Repo Outstandings.

and for the 29-year paper it was 8.52 per with the yield set at the earlier auction. Rs 3,842.129 crore through a yield-based cent against 8.64 per cent offered in May. Yet again on June 15, the same 10-year auction using a multiple price auction

The government reissued the above-security was reissued for a notified amount method on June 19 of which Rs 3,565.88 mentioned 10-year security again on of Rs 6,000 crore employing the same crore were accepted as the issue of Assam June 12 for a notified amount of Rs 5,000 method at a relatively lower yield of 8.35 was undersubscribed by about Rs 40 crore crore through a price-based auction using per cent. and the government of Madhya Pradesh the multiple price method at a higher cut-Nine state governments sold 10-year retained the oversubscription to the extent off yield of 8.44 per cent as compared loans for an aggregate amount of of Rs 125 crore. The cut-off yield ranged

Appendix Table: Secondary Market Operations in Government Papers – NDS and NDS-OM DealsAppendix Table: Secondary Market Operations in Government Papers – NDS and NDS-OM DealsAppendix Table: Secondary Market Operations in Government Papers – NDS and NDS-OM DealsAppendix Table: Secondary Market Operations in Government Papers – NDS and NDS-OM DealsAppendix Table: Secondary Market Operations in Government Papers – NDS and NDS-OM Deals

(Amount in rupees crore)

Descriptions		Week Ending June 2007: Yield to Maturity on Actual Trading			Total for the Month
	29	22	15	8		1	of June 2007
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	1981.90 1063.29	7.11 7.50	3523.58 727.57	6.46 7.31	3156.54 713.12	7.54 7.73	1747.97 701.54	6.47 7.11	3825.65 993.65	6.68 7.31	14235.64 4199.17	6.85 7.40
C 364-Day Bills 2 GOI Dated Securities	889.32	7.38	1616.83	6.63	183.18	7.06	1251.16	6.87	1325.40	7.23	5265.89	6.98
A Regular (Per Cent: Year) 10.80 , 2008	-	-	-	50.40	7.90	10.49	-	-	-	-	-	-	-	-	-	50.40	7.90	10.49
11.50 , 2008	-	-	-	100.00	7.88	11.15	-	-	-	-	-	-	-	-	-	100.00	7.88	11.15
12.00 , 2008	-	-	-	50.00	7.65	11.59	15.00	7.90	11.60	-	-	-	20.02	7.67	11.56	85.02	7.70	11.58
6.65 , 2009	2795.22	7.79	6.78	3197.69	7.87	6.79	1450.00	7.99	6.80	1875.75	7.89	6.79	1845.00	7.88	6.79	11163.66	7.87	6.79
6.96 , 2009OMC SB	100.00	8.14	7.10	50.00	8.22	7.11	-	-	-	-	-	-	-	-	-	150.00	8.17	7.10
7.00 , 2009	-	-	-	10.00	7.84	7.11	0.03	8.41	7.18	-	-	-	10.00	7.89	7.11	20.03	7.87	7.11
7.07 , 2009OMC SB	115.00	8.19	7.20	-	-	-	-	-	-	-	-	-	-	-	-	115.00	8.19	7.20
7.33 , 2009
OIL MKT BONDS	225.00	8.13	7.42	-	-	-	-	-	-	-	-	-	150.00	8.27	7.44	375.00	8.18	7.43
7.33 , 2009OMC SB	110.00	8.15	7.43	-	-	-	-	-	-	-	-	-	-	-	-	110.00	8.15	7.43
11.99 , 2009	-	-	-	-	-	-	-	-	-	-	-	-	140.00	7.98	11.23	140.00	7.98	11.23
6.20 , 2010UTI SB	-	-	-	-	-	-	-	-	-	-	-	-	25.00	8.41	6.54	25.00	8.41	6.54
6.65 , 2010	-	-	-	-	-	-	-	-	-	-	-	-	660.00	7.85	6.79	660.00	7.85	6.79
7.37 , 2010	-	-	-	-	-	-	-	-	-	-	-	-	65.00	8.10	7.66	65.00	8.10	7.66
7.55 , 2010	140.63	7.85	7.61	90.72	7.93	7.62	32.13	8.01	7.64	240.20	7.79	7.60	985.00	7.88	7.62	1488.68	7.87	7.61
11.30 , 2010	-	-	-	0.02	11.29	11.30	1.00	8.34	10.48	25.00	7.85	10.33	-	-	-	26.02	7.87	10.33
12.29 , 2010	5.00	7.85	11.15	25.00	7.88	11.15	-	-	-	125.00	7.89	11.14	200.00	7.95	11.15	355.00	7.92	11.15
9.39 , 2011	513.52	7.90	8.94	553.27	7.94	8.95	120.30	8.09	8.99	395.05	7.90	8.94	255.20	7.95	8.99	1837.34	7.93	8.95
12.32 , 2011	25.00	8.00	10.88	-	-	-	-	-	-	0.14	8.60	11.06	-	-	-	25.14	8.00	10.88
7.00 , 2012	-	-	-	-	-	-	-	-	-	10.00	7.93	7.15	-	-	-	10.00	7.93	7.15
7.40 , 2012	65.00	7.96	7.57	325.50	8.00	7.58	122.10	8.15	7.63	116.15	7.96	7.57	0.55	8.13	7.62	629.30	8.02	7.59
7.44 , 2012OMC SB	-	-	-	20.00	8.40	7.73	-	-	-	10.00	8.42	7.73	30.00	8.43	7.74	60.00	8.42	7.73
7.27 , 2013	-	-	-	-	-	-	50.00	8.24	7.62	10.00	8.11	7.58	50.00	8.09	7.57	110.00	8.16	7.60
7.37 , 2014	305.10	8.14	7.68	340.50	8.15	7.68	805.00	8.29	7.74	110.00	8.08	7.65	384.04	8.11	7.66	1944.64	8.20	7.70
11.83 , 2014	65.00	8.25	9.90	-	-	-	15.00	8.30	9.92	10.00	8.22	9.88	25.00	8.21	9.87	115.00	8.25	9.90
7.38 , 2015	1661.30	8.15	7.73	1630.44	8.17	7.74	1922.60	8.27	7.79	1775.27	8.15	7.73	4900.67	8.11	7.71	11890.28	8.15	7.74
7.59 , 2015OMC SB	-	-	-	10.00	8.53	8.01	-	-	-	105.00	8.56	8.03	40.00	8.51	8.00	155.00	8.55	8.02
7.61 , 2015OIL MKT BONDS -	-	-	-	-	-	-	-	-	70.00	8.60	8.06	-	-	-	70.00	8.60	8.06
7.61 , 2015OMC SB	-	-	-	-	-	-	-	-	-	-	-	-	20.00	8.51	8.01	20.00	8.51	8.01
7.59 , 2016	0.05	8.25	7.91	-	-	-	170.00	8.30	7.94	135.30	8.16	7.87	571.03	8.13	7.86	876.38	8.17	7.88
7.83 , 2016FRB	-	-	-	75.00	8.21	8.02	-	-	-	-	-	-	-	-	-	75.00	8.21	8.02
8.59 , 2016	-	-	-	100.00	8.24	8.95	-	-	-	-	-	-	-	-	-	100.00	8.24	8.95
7.49 , 2017	15192.58	8.19	7.86 17514.84	8.22	7.87 12817.12	8.35	7.95	9948.60	8.18	7.85	4940.22	8.11	7.81	60413.36	8.22	7.88
8.07 , 2017	391.55	8.15	8.11	650.00	8.12	8.10	1402.00	8.23	8.16	1780.60	8.13	8.10	3702.60	8.08	8.08	7926.75	8.13	8.10
6.25 , 2018	6.26	7.92	7.08	2.06	8.37	7.32	3.00	8.39	7.33	7.50	8.35	7.31	10.53	8.32	7.30	29.35	8.25	7.26
6.05 , 2019	0.92	8.35	7.31	2.95	8.27	7.26	25.00	8.35	7.31	12.25	8.37	7.32	2.50	8.25	7.25	43.62	8.34	7.30
6.35 , 2020	5.00	8.45	7.56	0.75	8.29	7.46	0.75	8.28	7.46	1.50	8.44	7.56	-	-	-	8.00	8.42	7.54
10.70 , 2020	6.00	8.46	9.12	16.50	8.65	9.25	3.00	8.93	9.44	-	-	-	-	-	-	25.50	8.64	9.24
7.94 , 2021	3.08	8.34	8.21	0.60	8.15	8.08	-	-	-	135.21	8.36	8.22	42.85	8.21	8.12	181.74	8.32	8.20
10.25 , 2021	-	-	-	-	-	-	0.33	8.29	8.83	-	-	-	65.00	8.31	8.85	65.33	8.31	8.85
8.15 , 2022FCI SB	55.00	8.70	8.55	-	-	-	10.00	8.70	8.55	547.00	8.70	8.55	-	-	-	612.00	8.70	8.55
8.35 , 2022	10.00	8.33	8.34	80.52	8.34	8.34	340.06	8.46	8.43	120.00	8.32	8.33	866.28	8.27	8.29	1416.86	8.32	8.33
6.17 , 2023	1.50	7.77	7.22	-	-	-	2.04	8.29	7.58	1.44	8.47	7.71	20.58	8.39	7.66	25.56	8.35	7.63
6.30 , 2023	-	-	-	-	-	-	-	-	-	6.00	8.35	7.67	-	-	-	6.00	8.35	7.67
8.03 , 2024FCI SB	200.69	8.74	8.57	10.14	8.70	8.54	1.05	8.66	8.51	1055.00	8.74	8.57	-	-	-	1266.88	8.74	8.57
8.40 , 2026OMC SB	0.04	8.61	8.57	16.05	8.67	8.62	6.57	8.68	8.62	4.93	8.64	8.59	106.60	8.62	8.57	134.19	8.63	8.58
8.23 , 2027FCI SB	1.72	8.66	8.58	7.16	8.71	8.61	5.11	8.74	8.64	1.95	8.68	8.59	29.10	8.71	8.62	45.04	8.71	8.62
6.01 , 2028	2.50	8.50	7.92	3.00	8.40	7.84	4.00	8.54	7.95	-	-	-	9.00	8.50	7.92	18.50	8.50	7.92
6.13 , 2028	4.46	8.55	8.01	-	-	-	1.70	8.36	7.85	-	-	-	10.60	8.48	7.95	16.76	8.49	7.96
8.23 , 2036	10.95	8.53	8.41	-	-	-	-	-	-	-	-	-	-	-	-	10.95	8.53	8.41
8.33 , 2036	936.50	8.53	8.51	811.10	8.51	8.50	1544.50	8.64	8.62	2073.70	8.52	8.50	1872.15	8.44	8.43	7237.95	8.52	8.51
Sub-total	22958.35	8.15	7.77 25752.99	8.17	7.81 20874.66	8.33	7.92 20711.06	8.21	7.93 22080.87	8.10	7.86 112377.93	8.19	7.85
B RBI’s OMO: Sales	14.00	-	-	1.00	-	-	-	-	-	30	-	-	222	-	-	267.00	-	-
(A+B) 3 Market Repo	22972.35 59163.57	8.15	7.77 25753.99 65071.43	8.17	7.81 20874.66 81476.02	8.33	7.92 20741.06 41381.37	8.21	7.93 22302.87 55384.78	8.10	7.86 112644.93 302477.17	8.19	7.85
4 State Govt Securities	194.10	8.31	9.42	457.45	8.44	8.58	139.51	8.32	10.11	170.81	8.25	9.75	135.91	8.28	8.49	1097.78	8.35	9.09
Grand total (1 to 4)	86264.53			97150.85			106543.03			65993.91			83968.26			439920.58

(-) 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. OMC SB = Oil marketing companies special bonds. NDS = Negotiated dealing system. OM = Order matching segment. Securities with small-size transactions (Rs 5 crore or less) have been dropped from the above list but included in the respective totals. Notes: (1) Yields are weighted yields, weighted by the amounts of each transaction. (2) Current yield has not been worked out for treasury bills. (3) For Floating Rate Bonds (FRB’s) Current yields are based on the latest half-year yield determined in the auction.

Economic and Political Weekly July 21, 2007 between 8.45 and 8.57 per cent, which was higher than that set in previous months papers.

Under the modified MSS arrangement, RBI mopped up Rs 5,000 crore through the issuance of 6.65 per cent 2009 through price based auction using multiple price method at a cut-off yield of 7.96 per cent.

Treasury Bills

In June, the RBI raised a huge sum of Rs 35,000 crore as against Rs 18,500 crore in the previous month through the issuance of T-bills. Of the amount raised in June, Rs 22,000 crore was through 91-dayT-bills, Rs 7,000 crore through 182-day T-bills and Rs 6,000 crore through 364-day T-bills. Only Rs 2,500 crore was under MSS in June while the rest was under regular borrowing, which was in deviation of the scheduled calendar of T-bill issuances. The yields on 182-day and 364-day T-bills fell while that on 91-day bills fluctuated over the month. The yield on 182-day bill eased from 7.81 per cent on June 11 to 7.66 per cent on June 27 and that on 364-day bill eased from 7.69 per cent on June 6 to 7.65 per cent on June 20. Unlike them, the yield on 91-day bill rose from 7.23 per cent on June 6 to 7.73 per cent on June 11 and further to 7.77 per cent on June 13 and then dipped to 7.19 per cent on June 20 and to 7.14 per cent on June 25 and finally, closed at 7.39 per cent on June 27. Despite such huge mobilisations along with dated securities and advance tax outflows, all the bonds were oversubscribed (Tables 9 to 10).

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

1 232634.70 0.01-7.90 (1.81) 2 6748.89 0.10-7.25 (1.09) 3 52475.48 0.20-7.75 (0.37) 4 9991.74 0.08-9.25 (7.40)

5 85.00 6.00-8.10 (6.49)

7 6.40 7.75 (7.75) 15 10.00 8.50 (8.50)

45 5.00 9.00 (9.00) 50 10.00 9.00 (9.00)

79 3.00 8.90 (8.90)

90 2.00 9.00 (9.00) 120 260.00 8.50 (8.50) 125 245.00 8.50 (8.50)

All Issues 1-125 302477.21 0.01-9.25 (1.74) [1-96] [191154.24] [0.10-9.00] [9.40]

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

Corporate Bonds Market

During the first quarter of 2007-08, corporate bond mobilisations at Rs 8,783 crore were lower than those mobilised in the corresponding quarter of the previous year at Rs 13,479 crore. Though banks and financial institutions were dominant borrowers in both the periods, four public sector units tapped the market to mobilise funds in the first quarter of 2007-08, as compared with only one in April-June 2006. In June 2007, 12 issuers mobilised an amount of Rs 3,990 crore, somewhat higher than that mobilised in previous month at Rs 3,293 crore and also higher than that in June 2006 at Rs 3,102 crore (Table 12).

Among the banks, the highest amount was mobilised by SBI through an issue of upper tier-II bonds offering 10.20 per cent for 15 years while for the same paper in October 2006, SBI had offered only 8.88 per cent with a step-up of 50 basis points if call is not exercised at the end of 10 years.

NABARD has asked the government to remove the floor of Rs 10 lakh on its zero coupon bonds with a tenure of 10 years, especially on the Bhavisya Nirman bonds in order to attract retail investors, especially in view of the huge mobilisation targets set for agricultural financing.

IVIVIVIVIV

Secondary MarketSecondary MarketSecondary MarketSecondary MarketSecondary Market

Despite huge absorptions through auctions and advance tax outflows, the weekly average secondary market turnover for giltedged securities in June ruled at an elevated range of Rs 20,060 crore to Rs 26,187 crore as against a range of Rs 7,857 crore

– Rs 21,217 crore in May. Yet the market participants remained apprehensive of the possible RBI measures to further absorb liquidity from the system.

Though inflation remained easy throughout the month, the yields jumped across maturities responding to auctions and advance tax outflows in the second week ending June 15, but as liquidity remained positive, the yields eased only to rise again in the last week as huge mobilisations through the treasury bills warranted by the SBI’s share transfer impinged on the underlying liquidity scenario. The yield on

7.49 per cent 2017 jumped from 8.18 per cent in the week ending June 8 to 8.35 per cent on June 15 but eased to 8.19 per cent on June 29. The yield curve over the month shifted from an upward sloping curve to a somewhat flatter yield curve as the medium- and long-term yields remained range-bound, while the short-term yields firmed up (Graph D) (see also Appendix Table).

RBI Reverse Repos, OMOsandMSS

The extent of liquidity overhang in the system manifested itself through the unprecedented reverse repo bids being tendered throughout the month except for a few days towards month-end when the size of bids dipped sharply. The extremely volatile nature of liquidity was evident from daily bids tendered which fluctuated between a trough of Rs 10 crore on June 27 and 28 and a peak of Rs 1,09,990 crore on June 7. In the first week ending June 8, the aggregate reverse repo bids tendered totalled Rs 511,845 crore, with an unprecedented level of daily average of Rs 1,02,369 crore; of them, however, RBI accepted bids worth Rs 14,984 crore. Due to auctions and advance tax outflows, the size of aggregate reverse repo bids tendered dipped marginally to Rs 3,23,505 crore, of which only Rs 14,990 crore were accepted. In the last week, RBI had to inject liquidity to the extent of Rs 19,370 crore on June 28 and 29 when reverse repo bids tendered fell to Rs 1,32,625 crore, of which only Rs 7,016 crore were accepted as the market remained apprehensive of pressure on liquidity emanating from huge borrowings through treasury bills (Table 13).

In sync with the secondary market turnover for gilt-edged securities, the turnover in repo outside RBI increased from Rs 1,91,154 crore in May to Rs 3,02,477 crore but at a lower average rate of 1.74 per cent as compared with 9.40 per cent in May (Table 14).

Commercial Bonds

The daily average secondary market turnover for corporate debt securities traded on the NSE remained steady at Rs 54 crore in June as in May. With the increased interest rate uncertainty, the trading in floating rate bonds fell from Rs 365 crore in May to Rs 25 crore. However, the trade reporting portals of BSE and NSE together recorded an aggregate trading of Rs 4,793 crore, that is an average daily turnover of about Rs 228 crore.

[The note has been prepared by Piyusha Hukeri and the accompanying statistical tables have been collated by V P Prasanth.]