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Where the Banks Have Failed Us

The benchmark prime lending rate, far from being a competitive and transparent mechanism that determines interest rates charged by banks, has instead turned opaque. In order to ensure that the cost of bank credit is not unreasonable for any productive enterprise, it is necessary to limit the spread over BPLR, beyond which the banks should not be allowed to set lending rates. If the economic stimulus has to be truly genuine and effective, a more rational system of interest cost to bank borrowers has to be introduced with the utmost urgency.

MONEY MARKET REVIEW

Where the Banks Have Failed Us

EPW Research Foundation

expansion of 18.6%, close to the 19% growth that has been targeted.

Drastic Shortfall

The RBI, in its latest quarterly credit policy statement of January 2009, had cajoled the banks thus: “to arrest the moderation in economic growth, it is critical that banks expand the flow of credit to productive sectors of the economy and do so at viable rates” (p 35). And now, the data available for the full financial year 2008-09 suggests that there has occurred a drastic shortfall in the targeted bank credit expansion. As cited above, the actual nonfood credit expansion should have been of the order of Rs 5,56,204 crore (growth of 24%), close to the expansion of Rs 4,32,847 crore (23%) during 2007-08 (Table 1). But, in reality the actual expansion has been of the order of Rs 4,06,286 crore (or 17.5%), that is, as much as Rs 1,50,000 crore less. At this level, the incremental credit-deposit ratio has been only 64% in contrast to 74% achieved in the previous year, which is the potential at the current levels of cash and liquidity requirements.

While analysing the banks’ behaviour in regard to credit expansion, a number of demand- and supply-side considerations come into play. In a situation of crisis in the real economy, financial viabilities of projects tend to get questioned and the banks become extremely risk averse. In recent years, questions have been raised

The benchmark prime lending rate, far from being a competitive and transparent mechanism that determines interest rates charged by banks, has instead turned opaque. In order to ensure that the cost of bank credit is not unreasonable for any productive enterprise, it is necessary to limit the spread over BPLR, beyond which the banks should not be allowed to set lending rates. If the economic stimulus has to be truly genuine and effective, a more rational system of interest cost to bank borrowers has to be introduced with the utmost urgency.

The supporting tables and graphs have been jointly compiled by V P Prasanth, Rema K Nair and Anita B Shetty.

Economic & Political Weekly

EPW
april 18, 2009

1 Lending Rates

A
n overwhelmingly large burden of the economic stimulus programme currently under implementation has been willy-nilly cast on the banking and monetary sectors. As the Reserve Bank of India (RBI) has repeatedly claimed, it has released and/or facilitated the augmentation of liquidity on an unprecedented scale in a span of five to six months since September 2008. Since the beginning of February, it has further injected additional liquidity to the tune of Rs 46,000 crore through open market purchases of gilt-edged papers. Simultaneously, within such a short period the repo rate has been reduced from 9.0% to 5.0% and the reverse repo from 6.0% to 3.5%, both of them to historically low levels.

The RBI has also noted that non-bank sources of funds – from the capital market, foreign borrowings and plough-back of profits – have all shrunk. The estimated total availability of funds during the fiscal year so far (up to January 2009) has been Rs 4,85,000 crore, that is, lower than the amount of

Table 1: Deposit, Investment and Credit Expansions: 2008-09 Compared

Rs 4,99,000 crore that was

with 2007-08 (Rs crore)

available in the comparable Outstanding Variation Over period of the previous year.

27 March 2009 31 March 2008 31 March 2007 2008-09 2007-08

Deposits 38,30,322 31,96,939 26,11,933 6,33,383 5,85,006

Instead, there ought to have

(19.8) (22.4)

been a normal increase of

Investments 11,65,746 9,71,715 7,91,516 1,94,031 1,80,199 about 20% or by nearly (20.0) (22.8)

Rs 1,00,000 crore. Given Bank credit 27,70,012 23,61,914 19,31,189 4,08,098 4,30,725

(17.3) (22.3)

these resource constraints

Food credit 46,211 44,399 46,521 1,812 -2,122

faced by the commercial

(4.1) -(4.6)

sector, the RBI has raised its

Non-food credit 27,23,801 23,17,515 18,84,668 4,06,286 4,32,847 indicative projection of (17.5) (23.0)

total credit flow from the Figures in brackets denote percentage variation. Source: RBI's Weekly Statistical Supplement.

banking sector to 24% (roughly Rs 5,56,204 crore) from the earlier estimate of 20% (Rs 4,63,503 crore). Among other things, to facilitate a conducive liquidity environment, the RBI has already ensured a money supply (M3)

vol XLIV No 16

in regard to increased operational costs and higher non-performing assets (NPAs) of banks in the context of social banking: expansion of rural and semi-urban bank branches and directed credit. On the other

MONEY MARKET REVIEW

hand, misgivings have been expressed regarding the sincerity of banks in fulfilling social obligations, the various devices they employ in bypassing them.

The above is a much larger question requiring a more detailed exposition. In the context of the banks’ failure in the delivery of productive credit as ordained by the central bank in the year that has just ended, an issue that stands neglected in policy discourses is the effective interest cost the banks charge and the role it plays in the financial operations of productive enterprises. This cost of credit is largely determined by the way the system of benchmark prime lending rate (BPLR) is operated by the banks. The BPLR system was expected to be a competitive, transparent system taking into account each bank’s (i) actual cost of funds, (ii) operating expenses, and (iii) a minimum margin to cover the regulatory requirement of provisioning/capital charge and profit margin. But, in reality, the BPLR has remained an opaque arrangement run by banks largely detrimental to the interest of borrowers. In the past the RBI governors have repeatedly pointed out the unhealthy features of preponderantly large proportions of loans being at sub-BPLR rates favouring the generally richer customers. We now have a more pointed reference to this phenomenon which suggests that the banks’ BPLR system can be termed as exploitative of the customers instead of being a fair and competitive arrangement. To quote the relevant section from the latest Report of the Committee on Financial Sector Assessment: Executive Summary (Volume I, March 2009).

There has also been growth in sub-BPLR loans. The BPLR should be the rate which is

Table 2: Scheduled Commercial Banks Interest Income, Interest Expended and Interest Margin as Percentage of Assets

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Scheduled Commercial Banks Interest income 8.26 8.28 7.31 6.61 6.65 6.7 7.16 Interest expended 5.7 5.51 4.44 3.78 3.85 4.12 4.81 Interest margin 2.57 2.77 2.88 2.83 2.81 2.58 2.35

Public Sector Banks Interest income 8.72 8.34 7.45 6.79 6.84 6.73 7.08 Interest expended 5.99 5.43 4.47 3.88 4 4.18 4.93 Interest margin 2.73 2.91 2.98 2.91 2.85 2.55 2.15

Nationalised Banks Interest income 8.78 8.39 7.44 6.91 6.74 6.82 7.21 Interest expended 6.03 5.39 4.38 3.89 3.84 4.16 4.98 Interest margin 2.74 3.00 3.06 3.02 2.89 2.66 2.23

charged by the banks to the most creditworthy customers. It is, therefore, expected that ideally all bank loans should be disbursed at a rate either equal to or higher than the BPLR. However, the experience of Indian banks reveals that the increased credit off take was accompanied by higher growth in sub-BPLR loans which comprised 27.7% of total loans in March 2002 and stood at 76% as at end-March 2008. Despite the increase in sub-BPLR loans, there has been no perceptible decline in the interest margins of banks, though, some decline is observed in 2007-08. Thus, if banks are able to lend at sub-BPLR and also maintain the same interest margins, it suggests that there are unresolved issues relating to computation of BPLR and, hence, of transparency in banking operations (p 21).

Data presented in Table 2 justify the observations made by the Financial Sector Assessment Committee. What is more, one is not sure if fairness and transparency in the banks’ operations of the BPLR system alone are enough. In order to ensure that the cost of credit is not unreasonable on any productive enterprise, it is necessary to limit the spread over BPLR beyond which the banks should not be allowed to charge the interest rate. What these revelations suggest is that the BPLR system has truly hindered the growth process, and if the economic stimulus has to be truly gen-

State Bank Group Interest income 8.62 8.26 7.46 7.02 7.13 6.64 6.96 Interest expended 5.91 5.5 4.62 3.96 4.05 4.05 4.73 Interest margin 2.71 2.76 2.83 3.06 3.07 2.59 2.24

Private Sector Banks Interest income 6.18 8.26 6.99 6.14 6.16 6.65 7.57 Interest expended 4.6 6.29 4.77 3.8 3.76 4.41 5.16 Interest margin 1.58 1.97 2.21 2.34 2.40 2.24 2.41

uine and effective, a more rational system of interest cost to bank borrowers has to be introduced with utmost urgency.

2 Short-term Financial Markets

Old Private Sector Banks Interest income 9.36 8.5 7.56 6.95 6.92 7.15 7.55During March 2009, the domestic financial Interest expended 6.97 6.03 4.96 4.25 4.17 4.39 5.12

markets were overwhelmed by the enormous

Interest margin 2.39 2.47 2.60 2.70 2.75 2.75 2.43

number of developments which introduced

New Private Sector Banks Interest income 4.48 8.13 6.71 5.77 5.89 6.51 7.57 Interest expended 3.33 6.43 4.68 3.6 3.62 4.41 5.17 all-round uncertainties and ups and downs Interest margin 1.15 1.70 2.03 2.17 2.27 2.10 2.40

in gilt prices, rates of interest and the

Foreign Banks Interest income 8.56 7.68 6.74 5.97 6.17 6.53 6.71

exchange rate for the rupee. First, follow

Interest expended 5.34 4.33 3.15 2.63 2.58 2.77 2.91

ing the central government’s interim budget

Interest margin 3.22 3.35 3.59 3.34 3.58 3.76 3.79 Source: RBI (2008), Report on Trend and Progress of Banking in India 2007-08, 17 December. which formalised the fiscal stimulus and

Table 3: Money Market Operations (RBI’s Daily Data)

Average March 2009 Average February 2009 Items for Four Weeks 26$ 20 13(RF) 6 for Four Weeks 27(RF) 19$ 13(RF)

No of working days 21 5 6 4 6 22 5 5 6 6

Call Money

Weighted average of call rates: 2.42-4.85 4.15-4.57 4.08-4.85 3.48-3.59 2.42-4.11 2.77-4.42 4.07-4.42 3.14-4.16 2.77-4.11 3.12-4.23 per cent (weekly range) per annum (4.16) (3.48) (4.07) (2.77)

Daily averages (Rupees crore) 10,742 9,526 12,913 10,663 9,638 9,524 8,640 10,362 8,791 10,293 Total call market borrowings (317) (177) (982) (31)

Notice Money

Weighted average of notice money rates: 2.77-4.78 3.00-4.67 3.16-4.78 2.77-3.77 3.28-4.10 2.00-4.49 3.00-4.49 2.00-4.33 3.20-4.43 3.30-4.24 per cent (weekly range) per annum (4.67) (3.77) (4.07) (4.09)

Daily averages (Rupees crore) 2,903 2,564 2,592 4,534 2,410 3,170 3,143 4,401 2,795 2,541 Total notice market borrowings (12,814) (17,843) (15,422) (16,637)

Turnover in term money market 210 343 258 179 72 425 652 253 332 (borrowings) $$ (0) (650) (350)

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

april 18, 2009 vol XLIV No 16

MONEY MARKET REVIEW

CBLO Rates Call Rates

Graph A: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO Rs 45,000 crore sterilised Rates – March 2009

in the cash account of

5–

the market stabilisation

4.5 –

scheme (MSS) will be transferred in instalments

4–

to the normal cash balance

3.5 –

of the government before 31 March 2009 and an equivalent amount of gov

3–

2.5 –

Repo Rates – Outside the RBI ernment papers issued 2–

under the MSS would form

28/2 02/3 04/3 06/3 08/3 10/3 12/3 14/3 16/3 18/3 20/3 22/3 24/3 26/3

part of the government’s raised the net market borrowing size near normal borrowing programmes. Third, threefold from Rs 99,000 crore as per for facilitating the smooth borrowing budget to Rs 2,66,539 crore for 2008-09, operations, the RBI has conducted purthe markets were flooded with govern-chase of government securities under its ment securities with considerable pres-open market operations (OMOs) involving sures on their prices to fall and yield rates six blocks of OMOs with 17 securities. to firm up. Attempts made by the RBI and These, along with unusually high normal the government to contain these pressures borrowings for the month of March with helped to some extent but overall the mar-practically no foreign currency flow but at kets remained unstable. Second, as part of the same time facing sizeable liquidity the enhanced borrowing programme, the outflow in the form of advance tax payold memorandum of understanding (MoU) ments, entailed a repetitive tightrope walk was amended on 26 February 2009 by on the part of the RBI to stem the pressures which it was agreed that an amount of on gilt-edged prices and yields. On occa

sions, it had to play

Table 4: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum:

tough by rejecting

Simple Statistical Characteristics

Month/Week Simple Standard Coefficient of Simple Standard Coefficient of bids or reducing the Mean * Deviation Variation Mean * Deviation Variation

bids accepted.

(in %)$ (in %)$

The above set of

February 2009 measures directly All four weeks 3.98 0.41 10.21 3.03 1.57 51.84

Call Money Notice Money **

concerned the sup

27 (RF)* 4.14 0.15 3.73 3.83 0.57 14.95

ply pressures on the

19 13 (RF)* 6 3.93 3.87 3.99 0.44 0.54 0.43 11.22 13.94 10.74 2.75 2.50 3.12 1.79 1.99 1.58 65.0779.7050.56 gilt-edged market. These measures were
March 2009 accompanied by yet
All four weeks 4.03 0.54 13.35 2.58 1.73 67.28 another set of mone
  • 26 4.25 0.18 4.21 2.92 1.75 59.91tary stimulus by the
  • 20 4.48 0.30 6.78 3.08 1.61 52.39
  • RBI in the form of 50

    13 (RF)* 3.54 0.06 1.64 2.53 1.74 68.85

    basis points reduc

    6 3.73 0.67 17.87 1.83 2.02 110.48

    tions each in repo

    ** Separate reportings began on 15 March 2005. * Including data for reporting Fridays (RF). $ Based on original unrounded figures. and reverse repo Source: RBI.

    rates (to 5.0% and

    Table 5: Comparison of Call, Overnight CBLO and Repo Rates 3.5%, respectively),

    Week Ending Weighted Average Rates (in %) Daily Average Volumes (Rs crore)

    but these interest

    Call Overnight CBLO Repo Call Overnight CBLO Repo

    rate reductions were

    February 2009 6-Feb-09 4.15 3.70 3.99 12,834 36,008 19,356already discounted

    13-Feb-09 4.10 3.76 3.97 11,586 36,768 21,778by the market, and

    19-Feb-09 4.18 3.98 4.11 14,764 43,759 16,686also when it was

    27-Feb-09 4.09 3.57 3.93 11,784 37,660 21,655

    announced on 4

    March 2009

    March, there were

    6-Mar-09 3.90 3.50 3.71 12,047 47,239 20,269

    repetitive government

    13-Mar-09 3.64 3.02 3.35 15,197 44,559 23,984

    security floatations

    20-Mar-09 3.61 3.19 3.35 15,504 59,618 20,803

    on practically alter

    26-Mar-09 4.39 3.47 4.11 12,090 41,887 24,147 Source: The Clearing Corporation of India Ltd (CCIL). native days thereafter

    Economic & Political Weekly april 18, 2009 vol XLIV No 16

    EPW

    which influenced the market sentiments quite distinctly.

    An equally overbearing influence on the financial market sentiment emanated from the developments on the external sector front. Immediately after Standard and Poor’s (S&P) cut the country’s long-term sovereign credit rating from stable to negative (BBB-, the lowest investment grade) on 24 February citing a widening of the budget deficit, there began a downward trend in the rupee’s exchange rate which got accentuated in the first half of March due to a number of factors: withdrawal of funds by foreign institutional investors (FIIs) and poor export performance accompanied by a situation of continued strengthening of the dollar against other major currencies. As per the RBI’s reference rate, the rupee touched the lowest level of Rs 52.06 per dollar on 5 March and generally ruled low below Rs 51.50 throughout thereafter until 18 March. This situation got a sudden jerk on 18 March when the dollar fell sharply following the extraordinary decision taken by the US Federal Reserve to buy back $300 billion worth of long-term treasury securities and also to purchase an additional $750 billion of agency mortgage-backed securities taking the total of the latter purchases to $1.25 trillion during 2009. Following this the rupee regained its strength reaching Rs 50.54 on 26 March, but the uncertainty on the exchange rate front remained.

    2.1 Call Money Market

    Despite reductions in the repo and reverse repo rates by the RBI, the conditions in the overnight money market remained in a delicate balance throughout the month, conditioned as they were by the repetitive government borrowings. In the first half of the month, markets were flush with funds as the banks’ commercial credit operations were on a low key, but in the second half of the month, a large outgo on account of government security auctions combined with advanced tax outflows resulted in considerable liquidity strain. However, with greater focus on the short-term market in such a situation to manage the ebb and flow of liquidity, daily averages of call money market borrowings were higher during March

    25

    MONEY MARKET REVIEW

    (Rs 10,742 crore) as compared with those value, which had begun to slip after the persistent withdrawals of foreign funds in February (Rs 9,524 crore). reports of global financial crisis and weak from the Indian stock markets. While in

    The month began with an overnight economic fundamentals appeared on the February the withdrawals were to the rate of 4.0 to 4.10% which was close to the surface around August 2008, dipped further extent of $604 million under equity investthen prevailing reverse repo rate of 4% but in the last week of February when S&P ments, in March such net withdrawals to after the policy rate was dropped to 3.5% downgraded India’s sovereign rating. In the extent of $1,591 million have been on 4 March, the overnight rates also February, reports of poor export perform-under debt instruments following the large slipped to a range of 3.55 to 3.70%, which ance had begun to adversely affect the issuances of gilt-edged securities and posprevailed up to 13 March. But, thereafter rupee rate. And since then there have been sible uncertainties in their prices and yields. the government’s borrowing programmes

    Table 6: Auctions of 91-Day Treasury Bills (Amount in rupees crore)

    got intensified and also banks faced con-

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount siderable pressures to expand their com-Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on PDs (Rupees) Rate on the Date

    mercial credit base; besides advance tax (Amount) (Amount) (Amount) (%) of Issue

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

    outflows began, all of which placed pressures on the money rates (Graph A, p 25). 2008

    5 March 500.00 63 2,417.51 29 500.00 0.00 98.19 7.39 42,067.00 On 16 March, there was a large govern-(2) (2,200.00) (2) (2,200.00) [98.2] [7.35]

    ment borrowing and the money rates shot up to a range of 4.10 to 4.25% following which they steadily increased to a range of

    4.70 to 4.90% on 19 March. In the subsequent part of the month, the rates ruled

    12 March 500.00 63 (1) 2,120.72 (200.00) 22 (1) 500.00 (200.00) 0.00 98.19 [98.20] 7.39 [7.35] 40,467.00
    19 March 500.00 53 (2) 1,573.75 (700.00) 12 (2) 500.00 (700.00) 0.00 98.21 [98.22] 7.31 [7.27] 16,785.00
    26 March 500.00 59 3 1,833.15 7,040.00 6 3 500.00 7,040.00 0.00 98.23 [98.23] 7.23 [7.23] 39,957.00

    considerably above 4.10 to 4.20% – much 2009 4 March 4,500.00 110 16,008.35 40 4,500.00 0.00 98.85 4.67 77,375.00

    above the reverse repo rate of 3.50%.

    (1) (0.30) (1) (0.30) [98.86] [4.63]

    With diverse forces operating their

    12 March 5,000.00 99 8,467.05 66 5,000.00 0.00 98.87 4.58 72,100.00

    influence on the call money market includ

    (0) (0.00) (0) (0.00) [98.90] [4.46]

    ing the depreciation of the rupee, the month began with very volatile money rates even though the averages of the rates were relatively low (Table 3, p 24). Thereafter, the average call rates ruled higher but there were less fluctuations as reflected by lower levels of coefficients of variation in all the subsequent three weeks (Table 4, p 25). All the three segments of the overnight market saw further increases in daily average volumes during March, with the order-driven and more transparent collateralised borrowing and lending obligations (CBLO) continuing to attract the highest amount at the lowest discount rates. It is then followed by the repo transactions outside the RBI, while the traditional overnight market faces the highest rates of interest and the smallest volume

    18 March 5,000.00 136 12,741.75 58 5,000.00 0.00 98.80 4.87 71,168.00

    (0) (0.00) (0) (0.00) [98.82] [4.79]

    25 March 5,000.00 122 13,051.57 49 5,000.00 0.00 98.78 4.95 75,549.00

    (1) (0.15) (1) (0.15) [98.80] [4.87]

    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.

    Table 7: 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) (%) of Issue

    2008 5 March 500.00 56 1,827.50 33 500.00 0.00 96.38 7.53 17,585.00

    (1) (855.00) (1) (855.00) [96.41] [7.47]

    19 March 500.00 41 2,340.00 5 500.00 0.00 96.46 7.36 16,785.00

    (1) (1,200.00) (1) (1,200.00) [96.47] [7.34]

    2009 4 March 1,500.00 51 4,925.00 16 1,500.00 0.00 97.75 4.62 19,175.00

    (0) (0.00) (0) (0.00) [97.76] [4.60]

    18 March 3,000.00 99 6,166.00 59 3,000.00 0.00 97.52 5.10 20,175.00

    (0) (0.00) (0) (0.00) [97.55] [5.04]

    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: Auctions of 364-Day Treasury Bills (Amount in rupees crore)

    (Table 5, p 25 and Graph A).

    2.2 Forex Market

    “The rupee hit a new low as foreign funds pull out” sums up the domestic forex market situation during most part of February and March. But, it should be admitted that the situation has been more complex than that, what with the peculiar strength of

    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) (%) of Issue

    2008 12 March 1,000.00 83 5,816.82 3 1,000.00 0.00 93.09 7.44 59,755.00

    (2) (272.65) (2) (272.65) [93.09] [7.44]

    26 March 1,000.00 79 5,573.36 5 1,000.00 0.00 93.17 7.35 57,205.00

    (0) (0.00) (0) (0.00) [93.18] [7.34]

    2009 12 March 3,000.00 57 3,985.00 49 3,000.00 0.00 95.26 4.99 52,526.00

    (1) (250.00) (1) (250.00) [95.59] [4.63]

    the dollar dominating the global forex 25 March 3,000.00 87 4,645.00 77 3,000.00 0.00 94.80 5.50 54,550.00

    (1) (23.85) (1) (23.85) [95.07] [5.20]

    markets even as the US economy was fac-

    Figures in the square brackets represent weighted average price and the respective yield. ing all-round downward trends. The rupee Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.

    april 18, 2009 vol XLIV No 16

    MONEY MARKET REVIEW

    Weekly changes in foreign currency pump in over $1 trillion on 18 March as Graph B: Spot Quotations for the US Dollar in the Domestic Inter-Bank Market

    assets fluctuated during March. After a referred to earlier.

    51

    $181 million loss in February, foreign cur-The rupee-dollar rate continued to rule rency assets were depleted by $1,988 mil-low at Rs 51.75 on 2 March, and experi

    49

    lion in the week ending 6 March followed enced, as stated earlier, a precipitate fall 47 by net accretions of $1,430 million and to the lowest level of Rs 52.06 on 5 March. 45 $5,081 million in the weeks ending Thereafter, it remained weak in the range 43 13 March and 20 March, respectively. The of Rs 51.24 to Rs 51.80 for 12 days until 41 latter sizeable inflows were associated 18 March. During this period, the RBI’s 39

    (Daily)
    Working
    Days Mar
    (Monthly Averages) 2009
    (Jan 2001 to Feb 2009)

    with a sudden and deep depreciation of interventions in the forex market was the US currency after the Fed’s decision to muted as the fall in the rupee value was not worrying as inflation was getting under control and the export perform-Table 9: Profile of Major Commercial Bond Issues for the Month of March 2009 ance had to be incentivised. However,

    Sr Issuing Company/Rating Nature of Instrument Coupon in % Per Annum and Tenor Amount in the outlook for the rupee generated con-No Rs Crore

    siderable speculation overseas where

    Banks/FIs

    arbitraging in the non-deliverable for

    1 Corporation Bank AAA Lower Tier II Bonds 8.85% for 122 months 400 by Crisil, Care (100) ward market became rampant. In mid2 IDBI Bank Ltd AA+ by March the rupee was being quoted one Crisil, Fitch Bonds 9.25% for 5 years 500

    month forward at Rs 52.28 per dollar

    3 ICICI Bank Ltd AAA by Crisil Upper Tier II Bonds 9.95% with the step up of 50 bps if call is not

    overseas whereas in the domestic market

    exercised at the end of 10th year 1,200

    it was quoted at Rs 51.47 or thereabout.

    4 Allahabad Bank AA by Crisil, Upper Tier II Bonds 9.28% with a step up of 50 bps if call is not Care exercised at the end of 10th year 500 After the decisive step taken by the US 5 HDFC Bank Ltd AAA by Crisil, Upper Tier II Bonds 9.10% with the step up of 50 bps if call is not

    Federal Reserve on 18 March on over $1

    Care exercised at the end of 10th year 797

    trillion of injection, the dollar experienced

    6 State Bank of India AAA by Upper Tier II Bonds 9.15% for 15 years with a step up of 50 bps if call

    a sudden fall against all major currencies.

    Crisil is not exercised at the end of 10th year 1,500

    For instance, it depreciated against the Euro

    7 State Bank of India AAA by Upper Tier II Bonds 9.15% for 15 years with a step up of 50 bps if call 1,000 Crisil is not exercised at the end of 10th year. (1,000) by about 5% in a day or so from 0.7728 per 8 State Bank of India AAA by Lower Tier II Bonds 8.95% for 15 years 1,000dollar on 17 March to 0.7315 per dollar on Crisil (1,000)

    19 March. Consequently, the rupee too appre

    9 Bank of Baroda AAA by

    ciated against the dollar from Rs 51.35 on

    Crisil, Care Lower Tier II Bonds 8.95% for 10 years 500

    18 March to Rs 50.77 on 19 March follow

    10 Bank of Baroda AAA by Lower Tier II Bonds 9.15% for 15 years, with a step up of 50 bps if call Crisil, Care is not exercised at the end of 10th year 1,000ing which the rupee value remained rela

    Central Undertakings tively high in the range of Rs 50.14 to 1 Power Grid Corp of India Ltd

    50.83 per dollar till the end of the month.

    AAA by Crisil, Icra, Care Bonds 9.20% for 15 years 1,298

    While the spot rate for the dollar thus sta

    Corporates 1 Steel Authority of India Ltd bilised in the second half of the month AAA by Fitch, Care Bonds 8.90% for 10 years and call after six year onwards 1,000

    (Graph B), the annualised forward premia

    2 Reliance Infrastructure Ltd

    in the domestic market for the dollar

    AA by Fitch Bonds 11.55% for 10 years 850

    showed divergent trends. While the one

    Total 14,189 The amount shown in brackets above denotes the greenshoe option of the issue. (2,400) month premia fell towards the end of the

    Total for Mar-08 (a year ago): Rs 6,165 crore. Total for February-09 (a month ago): Rs 10,905 crore. month, the six-month premia firmed up *: Total includes 15 more issues for less than Rs 500 crore (9 FIs/Banks,1 NBFC, 3 State undertakings, 1 Central undertaking and 1 corporate). Source: Various media sources. (Graph C, p 29).

    Table 10: Operations of RBI’s Liquidity Adjustment Facility ** (Amount in rupees crore)

    For the Week Range of Repo (Injection) *# Reverse Repo (Absorption) * Net Injection Net (February-Repo/RR Period Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding March 2009) Days Number Amount Number Amount Number Amount Number Amount Daily Absorption (-) Amount

    Averages of of Liquidity at the Bids Accepted Weekend@ 1 2 3 4 5 6 7 8 9 10 11 12 13

    02 Feb-06 Feb 09 1-14 3 1,625 3 1,625 173 3,04,185 173 3,04,185 60,837 -3,02,560 2,92,875

    09 Feb-13 Feb 09 1-15 4 1,170 4 1,170 169 2,42,935 169 2,42,935 48,587 -2,41,765 2,31,200

    16 Feb-19 Feb 09^$ 1-90 2 1,285 2 1,285 109 1,68,235 109 1,68,235 42,059 -1,66,950 1,59,480

    21 Feb-27 Feb 09$ 1-16 1 1,200 1 1,200 213 2,83,820 213 2,83,820 56,764 -2,82,620 3,03,185

    02 Mar-06 Mar 09 1-14 0 0 0 0 187 3,05,905 187 3,05,905 61,181 -3,05,905 2,99,255

    09 Mar-13 Mar 09 1-17 7 3,020 7 3,020 120 1,45,660 120 1,45,660 48,553 -1,42,640 1,37,710

    16 Mar-20 Mar 09 1-17 5 780 5 780 35 91,220 35 91,220 18,244 -90,440 75,130

    23 Mar-26 Mar 09 1-15 10 6,600 10 6,600 92 1,16,470 92 1,16,470 29,118 -1,09,870 97,730

    $ includes additional LAF. * with effect from 5 March 2009 the Repo Rate is 5.50% and Reverse Repo Rate 3.50%. # includes special Repo from 14 October 2008. ^ includes repo under forex swap facility. ** Includes Second LAF Auctions under Repo and Reverse Repo. @ Net of Repo and Reverse Repo Outstandings.

    Economic & Political Weekly

    EPW
    april 18, 2009 vol XLIV No 16

    MONEY MARKET REVIEW

    Appendix Table: Secondary Market Operations in Government Papers: NDS and NDS-OM Deals (Amount in rupees crore)
    Descriptions Weeks Ending March 2009: Yield to Maturity on Actual Trading Total for the Month
    26$ 20 13 6 of March 2009
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury Bills
    A 91-Day Bills 2667.15 4.93 4093.80 4.76 3298.11 4.39 4299.94 4.35 14358.99 4.58
    B 182-Day Bills 349.75 4.92 812.11 4.96 301.54 4.38 1187.12 4.43 2650.52 4.65
    C 364-Day Bills 1448.50 5.12 1496.02 5.02 1316.54 4.54 823.00 4.46 5084.06 4.83
    2 GOI Dated Securities
    A Regular (in % Year)
    5.48, 2009 1277.50 5.27 5.48 2391.94 5.37 5.48 664.00 5.05 5.48 521.00 5.06 5.48 4854.44 5.27 5.48
    6.65, 2009 2348.64 6.08 6.65 1408.61 5.42 6.65 1220.44 4.98 6.64 418.62 4.78 6.64 5396.30 5.56 6.65
    7.07 , 2009 OMC SB - - - 639.00 4.39 7.07 - - - - - - 639.00 4.39 7.07
    5.87 , 2010 252.00 5.05 5.83 1215.30 4.99 5.83 185.00 5.01 5.83 20.00 4.64 5.81 1672.30 5.00 5.83
    6.00 , 2010 UTI SB - - - 90.00 5.49 5.97 - - - - - - 90.00 5.49 5.97
    6.20, 2010 UTI SB - - - - - - - - - 95.00 5.08 6.14 95.00 5.08 6.14
    11.30 , 2010 180.00 5.15 10.48 422.11 5.22 10.48 185.00 5.16 10.46 845.40 4.93 10.42 1632.51 5.05 10.45
    12.25 , 2010 158.00 5.06 11.27 - - - 18.00 4.74 11.21 190.00 4.86 11.20 366.00 4.94 11.23
    6.57, 2011 100.00 5.64 6.46 357.00 5.51 6.45 380.00 5.61 6.46 125.00 4.95 6.38 962.00 5.49 6.44
    9.39 , 2011 318.00 5.60 8.70 920.30 5.50 8.67 829.47 5.60 8.69 1470.40 5.12 8.60 3538.17 5.37 8.65
    10.95 , 2011 100.00 6.05 9.97 125.00 5.90 9.94 - 100.00 5.00 9.74 325.00 5.67 9.89
    11.50 , 2011 5.01 6.25 10.21 25.00 5.90 10.25 - - - 100.00 5.10 9.91 130.01 5.30 9.99
    12.32 , 2011 - - - 120.00 5.91 11.09 - - - 50.00 5.07 10.90 170.00 5.66 11.04
    6.85, 2012 50.00 6.33 6.76 97.00 6.25 6.74 - - - 703.00 5.73 6.64 850.00 5.83 6.66
    7.40 , 2012 106.76 6.24 7.17 940.00 6.15 7.15 400.00 6.25 7.17 251.25 5.99 7.13 1698.01 6.15 7.15
    7.47 , 2012 OIL MKT BONDS 50.00 7.00 7.38 185.00 6.99 7.38 - - - - - - 235.00 6.99 7.38
    11.03 , 2012 2.69 6.09 9.63 391.40 6.12 9.63 302.00 5.90 9.56 1480.30 5.63 9.48 2176.39 5.76 9.52
    7.27 , 2013 1895.85 6.72 7.12 1804.00 6.40 7.05 1648.00 6.55 7.07 680.00 5.99 6.93 6027.85 6.49 7.06
    12.40 , 2013 190.12 7.11 10.36 25.12 6.58 10.16 0.12 6.70 10.20 - - - 215.36 7.05 10.34
    6.72, 2014 593.19 6.66 6.70 606.83 6.60 6.69 - - - - - - 1200.02 6.63 6.70
    7.37 , 2014 45.00 6.72 7.17 609.56 6.47 7.10 717.50 6.64 7.15 829.00 6.32 7.05 2201.06 6.48 7.10
    7.56 , 2014 150.00 6.60 7.24 840.70 6.45 7.19 405.00 6.60 7.24 481.50 5.96 7.03 1877.20 6.37 7.16
    10.00 , 2014 0.40 7.10 8.90 135.00 6.78 8.78 25.00 6.75 8.77 0.00 8.48 9.41 160.40 6.78 8.78
    11.83 , 2014 - - - 398.90 6.77 9.59 20.00 6.74 9.57 - - - 418.90 6.77 9.59
    7.38 , 2015 758.00 6.79 7.16 1071.00 6.84 7.18 225.00 7.03 7.25 839.00 6.38 7.01 2893.00 6.71 7.13
    7.61 , 2015 OIL MKT BONDS - - - 140.00 7.55 7.59 - - - - - - 140.00 7.55 7.59
    7.59 , 2016 1210.54 7.08 7.39 1283.61 7.04 7.37 86.08 7.47 7.54 521.08 6.68 7.22 3101.31 7.01 7.36
    12.30 , 2016 - - - - - - 5.07 7.21 9.57 73.60 6.83 9.38 78.67 6.85 9.39
    7.46 , 2017 561.50 7.04 7.27 2389.84 6.69 7.11 1264.75 7.51 7.48 4632.38 6.60 7.07 8848.47 6.78 7.15
    7.49 , 2017 252.71 7.00 7.28 883.00 6.81 7.19 12.84 7.24 7.38 155.15 6.76 7.17 1303.70 6.85 7.21
    7.99 , 2017 322.35 7.09 7.57 1610.88 7.12 7.58 70.50 7.22 7.63 2219.14 6.75 7.41 4222.87 6.92 7.49
    8.07, 2017 775.04 7.18 7.67 1804.55 6.95 7.57 15.00 7.18 7.66 5.49 7.02 7.60 2600.08 7.02 7.60
    5.69, 2018 246.00 7.09 6.29 0.60 6.55 6.06 6.00 6.95 6.23 50.00 6.61 6.08 302.60 7.00 6.25
    8.24, 2018 1921.50 6.67 7.45 2648.08 6.58 7.41 3414.00 6.94 7.58 14318.85 6.36 7.30 22302.43 6.50 7.37
    12.60 , 2018 ON TAP 410.10 7.37 9.29 55.00 7.42 9.31 - - - - - - 465.10 7.37 9.29
    6.05, 2019 6973.43 6.80 6.39 9315.20 6.45 6.23 3528.89 6.72 6.35 2814.60 6.33 6.18 22632.11 6.59 6.29
    6.35, 2020 100.00 6.80 6.57 110.00 7.37 6.87 5.00 7.52 6.94 - - - 215.00 7.11 6.73
    7.94 , 2021 5.00 7.43 7.63 575.58 7.51 7.68 70.15 7.60 7.73 46.00 7.03 7.40 696.73 7.49 7.67
    8.13 , 2021 OMC SB 610.00 7.95 8.02 - - - - - - - - - 610.00 7.95 8.02
    7.00, 2022 - - - - - - - - - 100.00 4.77 6.99 100.00 4.77 6.99
    7.00 , 2022 FERT BONDS 0.10 7.89 7.56 105.00 7.86 7.54 225.00 8.05 7.66 300.00 7.66 7.41 630.10 7.83 7.52
    8.15 , 2022 FCI SB 28.45 7.89 7.98 253.95 7.94 8.01 16.16 8.04 8.08 37.08 7.84 7.94 335.64 7.93 8.00
    8.20, 2022 840.00 7.60 7.82 480.00 7.55 7.79 216.40 7.87 7.90 175.00 7.31 7.64 1711.40 7.59 7.80
    8.35, 2022 130.00 7.61 7.87 385.10 7.59 7.86 - 721.90 7.26 7.65 1237.00 7.40 7.74
    6.65, 2023 FERT SB 51.00 7.98 7.47 1.00 8.00 7.49 - - - 27.00 7.85 7.39 79.00 7.93 7.45
    8.01, 2023 OMC SB 95.00 7.95 7.97 200.31 8.12 7.96 - - - - - - 295.31 8.07 7.96
    8.20, 2023 OMC SB 890.00 8.19 8.19 - - - 210.00 8.32 8.29 270.00 7.87 7.98 1370.00 8.15 8.17
    8.30, 2023 FERT SB 13.10 7.93 8.05 0.65 7.91 8.03 59.70 8.22 8.25 34.98 7.91 8.03 108.43 8.08 8.15
    6.35 , 2024 OIL MKT BONDS 380.00 8.10 7.51 4100.00 8.27 7.63 4440.00 8.40 7.72 3990.00 7.83 7.33 12910.00 8.18 7.56
    8.03, 2024 FCI SB 118.09 7.97 7.99 6.78 7.99 8.01 2.82 8.01 8.01 100.90 7.70 7.80 228.59 7.85 7.90
    7.95 , 2025 OMC SB 217.40 8.11 8.07 840.50 8.22 8.14 0.25 8.00 7.99 - - - 1058.15 8.20 8.13
    6.90, 2026 OMC SB - - - 39.72 8.00 7.99 230.00 8.69 8.19 210.00 7.80 7.53 479.72 8.24 7.88
    7.95 , 2026 FERT SB 68.17 7.94 7.94 - - - 10.00 8.10 8.06 83.60 7.87 7.89 161.77 7.91 7.92
    8.24, 2027 325.51 7.68 7.82 1199.28 7.86 7.95 626.48 7.81 7.92 413.84 7.65 7.80 2565.11 7.79 7.90
    7.50 , 2032 - - - - - - - - - 155.00 7.56 7.55 155.00 7.56 7.55
    7.95 , 2032 231.00 7.54 7.60 115.00 7.71 7.75 596.00 7.98 7.97 807.00 7.44 7.57 1749.00 7.65 7.72
    8.28, 2032 361.37 7.95 8.00 35.00 7.99 8.04 70.00 7.94 8.00 190.00 7.59 7.70 656.37 7.84 7.92
    7.50 , 2034 336.89 7.76 7.73 311.42 7.75 7.71 225.00 8.18 8.09 461.50 7.58 7.57 1334.81 7.77 7.73
    7.40 , 2035 2.85 7.97 7.89 - - - 26.25 7.31 7.32 181.00 7.47 7.46 210.10 7.46 7.45
    8.33, 2036 490.75 7.76 7.83 327.50 7.85 7.91 45.00 8.16 8.18 480.00 7.63 7.71 1343.25 7.75 7.82
    6.83, 2039 234.00 7.80 7.69 392.49 7.76 7.66 759.67 7.97 7.85 797.17 7.60 7.51 2183.33 7.78 7.67
    Sub-total 27013.20 6.85 7.14 44876.33 6.68 7.13 23522.22 7.05 7.36 43876.42 6.52 7.40 139288.17 6.73 7.25
    B RBI’s OMO: Sales 145.00 - - 52.00 - - - 180 - - 377.00
    Purchase 19127.00 - - 11728.00 - - 128014.00 - - 10247 - - 169116.00
    Sub-total 19272.00 - - 11780.00 - - 128014.00 - - 10427.00 - - 169493.00
    (A+B) 46285.20 6.85 7.14 56656.33 6.68 7.13 151536.22 7.05 7.36 54303.42 6.52 7.40 308781.17 6.73 7.25
    3 Market Repo 92956.12 140161.90 84212.10 118866.80 436196.92
    4 State Govt Securities 5174.88 7.93 8.24 3533.18 8.07 8.35 2478.70 8.36 8.45 1672.40 7.63 7.70 12859.16 8.01 8.24
    Grand total (1 to 4) 148881.59 206753.33 243143.21 181152.68 779930.82

    (-) 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. $ Thursday data. Securities with small size transactions (Rs 75 crore or less) have been dropped from the above list but included in the respective totals.

    (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.

    april 18, 2009 vol XLIV No 16

    MONEY MARKET REVIEW

    Graph C: Annualised Forward Premia in Percentage for the US Dollar in the Domestic The RBI had to reject some Graph D: Yield Curves for Dated Securities – Weighted Inter-Bank Market and Weighted Averages of Call Rates for March 2009 Averages for the First and Last Week of March 2009

    bids in the month because 8.5

    4.5 –6

    – 6 month 1 month

    the prices preferred were 8

    4–

    7.5

    7

    Weighted Averages of Call Rates (Right axis)

    –5 very low and yields high.

    3.5 –

    Apart from the repeti

    tive central government

    3–

    –4

    2.5 –

    2–

    –3 borrowings, the state gov

    ernments entered the mar

    1.5 –

    –2

    ket with their 10-year State

    1–

    –1 Development Loans (SDLs)

    0.5 –

    2019 three times over in

    0– –0

    Week ending 27 March Week ending 6 March

    123456789 10111213141516171819202426272831

    Yield (% per annum)

    6.5

    6

    02/3 05/3 08/3 11/3 14/3 17/3 20/3

    Such fluctuating exchange rate movements and perspectives created considerable uncertainty which, in turn, provided the stimulus for expanded currency futures, particularly against the backdrop of subdued equity markets. The notional value of exchange traded currency futures jumped by 56% from Rs 63,966 crore in February to Rs 99,464 crore in March.

    3 Primary Markets

    As a result of the massive borrowing programme of the government, primary yields offered both in the gilt-edged market as well as the commercial bonds market again firmed up during March. The yield rates would have gone haywire but for the large OMO conducted by the RBI, as explained below.

    3.1 Dated Government Securities

    As part of the enhanced borrowing, the government raised medium and long-term securities worth Rs 29,395 crore during the month under review. In addition, there was a much larger amount of Rs 41,640 crore securities purchased by the RBI through its OMOs so as to smoothen the market for higher government loans. Thirdly, there was also the unwinding of the MSS cash account to the extent of Rs 45,000 crore in favour of the normal market borrowing programme.

    As for yield rates, there were persistent increases in successive issues. For instance, the newly-introduced benchmark security 6.05% 2019 issued on 6 March 2009 at a yield-to-maturity (YTM) of 6.50%, was reissued again at YTMs of 6.59% on 20 March and 6.97% on 26 March. Likewise, the security 8.24% 2018, which was purchased by the RBI in February at an YTM of 6.26%, had to be purchased in March at 6.73%.

    23/3 26/3 March. Together they

    borrowed an aggregate amount of Rs 31,359 crore. The cut-off yield rates and weighted average of yields have differed from state to state and they have ranged from 8.10% to 8.40%.

    3.2 Treasury Bills

    As in the case of dated securities, the treasury bills have also been offered higher yield rates during March (Tables 6, 7 and 8, p 26). All the bills were copiously subscribed for.

    3.3 Corporate Bonds Market

    Though there has been a firming up of coupon rates and large demand from the government for funds, corporates came into the market with higher amounts of primary issues probably indicating the need for larger investible funds in the context of the gentle recovery discernible in infrastructure and other real sectors. The total amount raised during March aggregated Rs 14,189 crore as against a little over Rs 10,000 crore raised in each of the previous two months; the amount raised in December 2008 was much higher at Rs 18,938 crore (Table 9, p 27).

    In the month under review, there were issues by Power Grid Corporation, Steel Authority of India and Reliance Infrastructure, but the bulk of the large-size bonds were issued by 11 banks, all of which attracted funds at competitive rates. State Bank of India’s Lower Tier-II bonds were issued at 8.95% for 15 years, while the same bank’s Upper Tier-II bonds were issued at 9.15%; the latter rate has been applied to similar bonds of a few other banks.

    4 Secondary Market

    As in many aspects of the financial markets recently, because of the dominance of primary issues, the weekly outright dealings

    5.5

    5

    Years to Maturity

    in dated securities again remained moderate like in February. They ranged from Rs 24,666 crore to Rs 44,653 crore, somewhat even lower than the range of Rs 31,443 crore to Rs 52,037 crore in February.

    The yield rates of dated securities in the secondary market in March generally remained high – much higher than those during February. The weighted average of YTMs of all papers together in the four weeks of February had ranged from 6.21% to 7.17% but in the month under review, they ranged from 6.52% to 7.05%. The weighted average for the four weeks together was 6.26% in February and 6.73% in March.

    As for the yield curves for different periods of the month, what stands out is

  • (i) the steady upward slope experienced by yields of successive maturities; and
  • (ii) slope of the curve for the fourth week lying above the first week, implying uniform firming up of rates (Appendix Table, p 28 and Graph D).
  • 4.1 LAF, OMOs and MSS

    The daily averages of reverse repo bids fluctuated rather significantly during March. In February, they had ranged from Rs 42,059 crore to Rs 60,837 crore in successive weeks, whereas in March the average had dipped to as low as Rs 18,244 crore in the third week when advance tax payments were largely made (Table 10, p 27). As explained earlier, operations under the OMOs and MSS were sizeable in March.

    4.2 Commercial Bonds

    The secondary market transactions in commercial bonds were somewhat moderate during March as funds were diverted to trading and operations in the guilt-edged market. The daily average of trading in the National Stock Exchange (NSE) was Rs 358 crore in March as against Rs 408 crore in February and Rs 377 crore in January.

    Economic & Political Weekly

    EPW

    april 18, 2009 vol XLIV No 16

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