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Priorities of the Central Bank

An approach to implementing public policies that allows some distance between policy outcomes and public aspirations has prevented the Reserve Bank of India from playing an effective role in the process of development. Experience suggests that when credit expansion is restrained due to reasons of inflation and stabilisation objectives, the worst to suffer are the vulnerable sections of society. But when policy distortions take place, social compulsions make the governments in power adopt unhealthy policy stances such as doubling of bank credit for agriculture within three years, loan waivers and granting of loans at subsidised rates of interest for agriculture and other small borrowers. This is interference in central bank autonomy, but such governmental actions arise as a reaction to the apathy shown by the monetary authorities and the banking system to the aspirations and developmental needs of the larger community.

MONEY MARKET REVIEW

Priorities of the Central Bank
size of the country and the risk-bearing capacity of our own society”. He was stating these in the context of the role of derivatives and such other financial instruments, EPW Research Foundation but their broad thrust is valid in respect of

An approach to implementing public policies that allows some distance between policy outcomes and public aspirations has prevented the Reserve Bank of India from playing an effective role in the process of development. Experience suggests that when credit expansion is restrained due to reasons of inflation and stabilisation objectives, the worst to suffer are the vulnerable sections of society. But when policy distortions take place, social compulsions make the governments in power adopt unhealthy policy stances such as doubling of bank credit for agriculture within three years, loan waivers and granting of loans at subsidised rates of interest for agriculture and other small borrowers. This is interference in central bank autonomy, but such governmental actions arise as a reaction to the apathy shown by the monetary authorities and the banking system to the aspirations and developmental needs of the larger community.

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

A
recent occasion in Mumbai for release of the former Reserve Bank of India (RBI) governor Y V Reddy’s book, India and the Global Financial Crisis (Orient BlackSwan) was a treat for the ears and eyes of those students of India’s financial sector present on the occasion. It brought together on the same platform the former governor as well as the present RBI governor Duvvuri Subbarao, amongst others. There was so much that transpired at the meeting with speaker after speaker lauding Reddy’s pivotal contributions to the country’s external sector management, holding a tight grip on inflation and above all pursuing rigorous and dynamic regulations of the financial system which had earned for him possibly the ultimate encomium from Joseph E Stiglitz: “....if America had a central bank chief like Y V Reddy, the US economy would not have been in such a mess”.

However, what dominated the book inauguration function, from the view point of the current policy perspective, were the observations of the present RBI governor which deserve to be closely examined, for they represent, in our view, the quintessential aspects of the new governor’s perspectives and thinking on the management of the macro-economy in general and on the conduct of banking and monetary policies in particular. In this context, some contrasting picture emerges between the perspectives of the two governors, the present and the previous one. Y V Reddy neatly summed up the essence of his thinking thus: “The old model has collapsed – you cannot proceed with a model that has failed universally and still say that’s what I want to reform. It’s dangerous.” He also enunciated the fundamental principle that all macroeconomic policies have to be guided by in these words: “We cannot afford to leave the market to correct itself – we don’t have social security and our fiscal deficit is large.... we have to take into account the many an aspect of macro-economic management. Juxtaposing them against the observations of the present governor raises some subtle, but fundamental issues.

1 Case for Interest Rate Reduction

Governor Subbarao made two key observations which call for a closer examination as they provide a clear, though subtle, criticism of those who ask for some rethinking by the authorities on existing monetary and banking policies as well as the strategy of macroeconomic management. What comes out from his observations is that he wishes to be a cautious player in the current drive for providing stimulus packages for resolving the prevalent economic crisis. The central bank is falling in line because there is public pressure. As we will show shortly, it is such an approach to implementing public policies that allows some distance between policy outcomes and public aspirations, which has prevented the RBI from playing an effective role in the process of development. In other words, the apparently dynamic role assigned to bank credit in the development process in India has essentially come about because of social pressures and are not based on the RBI’s innate intellectual faith in it derived from such a policy perspective.

Reverting to Governor Subbarao’s crucial observations, first, he commented on people seeking cuts in “interest rates”. The job of the RBI governor was simple: just cut interest rates, he said. “My prayer is, Lord make me like Dr Reddy but not yet. I still have business to do to cut interest rates.” Though said in jest, there was an obvious disapproval of the suggestions for interest rate cuts. It is Subbarao’s second observation that speaks for his institution’s reluctant participation in expansionary policies for fighting the crisis. The end to the crisis is not yet in sight and there will be many more devices to be put in place, so as to mitigate the suffering of the vast number of informal sector enterprises

MONEY MARKET REVIEW

and the mass of people dependent on them who are suffering from collateral damages out of the existing macroeconomic crisis. This second observation relates to Subbarao’s concern about the need for policymakers to think about combating inflationary pressures, once the global financial crisis comes to an end. He said: “We need to think about managing inflation expectations. We need to think about addressing the medium-term consequences of some of the actions taken in response to short-term compulsions.”

It is clear that underlying the above observations is the reiteration of conventional stabilisation and structural adjustment policies which stand largely discredited for developing societies. In the name of inflation control, many things that are required to be done to boost growth are not being done. Take the importance of reducing interest rates. Here, it is worth recalling that the deterioration in industrial growth in India had begun in April 2008, that is, much before the exacerbation of the global financial crisis in September 2008; it is to be traced to the RBI’s knee-jerk and sledgehammer methods of fighting inflation in early 2008. The adverse consequences of such a dear money policy are to be seen concretely in the doubling of interest cost to corporates in the second quarter of 2008-09 and thereafter, and also in the shelving of planned investment projects on a large scale during that year.

Apart from seeking interest rate reductions, the real sectors are craving for correcting the distortions that have crept into the interest rate structure. These distortions have come about because the benchmark prime lending rate (BPLR) system has been allowed to be an opaque and non-transparent arrangement run by banks detrimental to the interest of real sector borrowers. The RBI itself has recognised how about three-fourths of loans are given by banks at sub-BPLR rates of interest largely favouring the richer customers. Data also reveal that commercial banks show no compunction in charging the same weighted average of interest rates for artisans and village industries, smallscale industries and agriculture as those for the total bank loans. As the latest Report of the Committee on Financial Sector Assessment (Vol I, March 2009) has pointed out, banks have made high interest margins and sustained high profitability despite charging sub-BPLR rates on such a large scale. This shows the extent to which there is scope for moderating loan rates by banks that depend entirely on leveraging public funds; the urge for interest rate reductions thus possesses sound economic and social reasoning.

Likewise, when the authorities are fearful of inflationary expectations in the medium term, they become reluctant participants in the application of expansionary fiscal and monetary policies adopted for fighting recessionary tendencies. Absence of any dynamism in the application of these policies in the new situation explains this reluctance. Insofar as monetary and banking policies are concerned, there are two distortions in implementation that stand out. First, despite the release of as much as Rs 4,62,000 crore of liquidity into the system, banks are reluctant to expand their credit base. The authorities’ acquiescence in this respect is to be seen in the fact that even as banks have been restraining credit expansion, they have chosen to park huge funds week after week in the RBI’s reverse repo window. Behind this reluctance to lend lies a much more serious distortion in the banks’ neglect of agriculture, smallscale industries and other small borrowers in credit delivery.

As the Report on Trend and Progress of India for 2006-07 writes: “Out of 28 public sector banks (PSBs), only eight banks could achieve the agricultural lending target of 18%. In the case of lending to weaker sections, only seven PSBs have achieved the sub-target of 10% as on the last reporting Friday of March 2007.” Taking these data into account and on the assumption that the banks have taken care of the possible overlap between agricultural and weaker section loans, we have attempted an estimate of the shortfalls in agricultural and weaker section loans. These shortfalls work out to about Rs 77,500 crore (out of which about Rs 26,200 crore have been allocated by the government to the Rural Infrastructure Development Fund (RIDF) and such other funds) pertaining to only agriculture and weaker section loans. The neglected small and micro enterprises appear to be facing a much larger lack

may 23, 2009

of attention. With a norm of 10% of net bank credit (NBC) recommended by the National Commission for Enterprises in the Unorganised Sector (NCEUS) as against the actual achievement of 4.5% of NBC, the shortfall works out to Rs 1,02,760 crore. These shortfalls together add up to about Rs 1,80,000 crore – roughly 8% of non-food credit outstanding as at the end of March 2008. Just this small amount of bank credit disbursed amongst the informal sector will greatly help to widen the demand base of the economy as such sectors account for the employment and livelihood of over 80% of the country’s population (EPW, 24 January 2009). This can be achieved only if public policies are consciously directed in this direction, and experience suggests that when credit expansion is restrained due to reasons of inflation and stabilisation objectives, the worst to suffer are these vulnerable sections of society.

When such policy distortions take place, social compulsions make the governments in power to adopt much more unhealthy policy stances such as doubling of bank credit for agriculture and small-scale enterprises within three years or so, loan waivers and granting of loans at subsidised rates of interest for agriculture or small borrowers. Such actions tantamount to interference in the process of central banking autonomy but at the same time it is to be realised that such governmental actions arise as a reaction to the apathy shown by the monetary authorities and the banking system to the aspirations and developmental needs of the mass of community at large.

2 Money, Gilt-Edged and Forex Markets

With an eventful financial year 2008-09 behind them, the short-term financial markets carried, after many months, the load of a huge overhang of liquidity in April and the month also saw corrections to many a financial market disturbance experienced in the previous month. March had seen unprecedented levels of government borrowings arising from the fiscal stimulus packages followed by heavy pressure on liquidity, firming up of call money and giltedged yield rates, the rapid depreciation of the rupee vis-à-vis the US dollar leading to the lowest ever rate of Rs 51.06, and in the

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MONEY MARKET REVIEW

5–

4–

3–

2–

1–

0–

stock market the steep fall in equity prices following reports of declining industrial growth and sluggish economic outlook. The fiscal year 2009-10 began with a more than the usual issue of government loans as part of the expanded borrowing programme, but it could be absorbed by the market thanks to easy liquidity conditions following the government’s year-end expenditures from advance tax flows in March resulting in return flow of funds in April.

The impetus to the bulging of liquidity also came from many other sources. There has been a sizeable contraction in bank credit since the beginning of the new year. The RBI has purchased government securities worth Rs 3,350 crore under its open market operations (OMOs). This has formed part of the Rs 80,000 crore OMOs proposed for the first half or Rs 40,000 crore for the first quarter of 2009-10. This, in turn, has been associated with the expected unwinding of market stabilisation scheme (MSS) securities worth Rs 42,000 crore comprising Rs 33,000 crore of dated securities and Rs 9,000 crore of treasury bills (TBs) in the first half; of these, besides the above dated securities of Rs 33,000 crore, TBs worth Rs 4,500 crore, or a total of

Table 1: Money Market Operations (RBI’s Daily Data)
Call Rates Repo Rates – Outside the RBI CBLO Rates

28/3 30/3 01/4 03/4 05/4 07/4 09/4 11/4 13/4 15/4 17/4 19/4 21/4 23/4

unwound in the first quar

ter. The first half of the

year is also expected to see

redemption of government

papers worth Rs 33,089

crore and coupon payments

worth Rs 67,924 crore; of

these, the month of April

would alone get Rs 23,883

crore and Rs 12,718 crore,

respectively.

The positive market sentiments in the month were influenced by certain other factors as well. The foreign institutional investors (FIIs) have made net investments worth Rs 6,508 crore in equities and Rs 2,490 crore in debt instruments, together Rs 8,998 crore. As a result, the depreciation of the rupee has been arrested and equity prices have made a smart recovery in the new financial year. Second, the RBI has also been buying in the range of Rs 700-800 crore worth of oil bonds from the three public sector oil companies (HPCL, BPCL and IOC) on some days of April; it is said to have purchased close to Rs 4,000 crore until April 10. It may be recalled that the government has been issuing oil bonds to these companies to partly compensate them for selling products at below-market prices. It is said that there are bonds worth Rs 1.5 lakh crore in the system and the RBI bought about Rs 40,000 crore in 2008-09 at yields ranging from 7.7% to 7.9%, that is, about 25 to 50 basis points higher than the yields the bonds were issued at.

Yet another important influence came from the much expected reductions in the repo as also the reverse repo rate effected by RBI in its annual policy statement issued ing statements from official sources on the possibility of RBI taking private placements in primary issues of government securities, causing some uncertainty in the market, RBI Deputy Governor Rakesh Mohan’s assertion that there would not be any private placement with RBI settled the issue. However, RBI has announced that OMOs will be used for augmenting liquidity enabling smooth conduct of the borrowing without serious disruption in yield rates. Combined with the abundance of liquidity already in the system, the call money rates fell sharply, the forward rate for the dollar too eased, there arose unprecedented levels of funds parked by banks with the RBI under the reverse repo window, and the government borrowing programmes could be conducted at reduced coupon rates.

2.1 Overnight Money Market

Carrying the weight of liquidity shortages of March-end, April started with the call money rates remaining high in the range of 4.56-4.98% during the week ending 3 April close to the upper unit in the then prevailing policy corridor of 3.50-5.00% and the daily averages of overnight borrowings dipping to Rs 5,060 crore compared with a range of Rs 9,638 crore to Rs 12,913 crore in the four weeks of March (Table 1). The dip in the overnight market turnover in the first week was partly seasonal as the week ending 3 April covered the last few days of March as the money market activities are apt to be subdued in the initial days of the year. To an extent, the overnight borrowings were substituted by notice money borrowings, the daily averages of which increased to Rs 3,562 crore in the first week as against

Average April 2009 Average March 2009
Items for Four Weeks 24(RF) 17 10(RF) $ 3(RF) $ for Four Weeks 27$ 20 13(RF) 6
No of working days 20 6 5 4 5 21 5 6 4 6
Call Money
Weighted average of call rates: 1.87-4.98 2.17-3.48 2.14-3.54 1.87-3.56 4.56-4.98 2.42-4.85 4.15-4.57 4.08-4.85 3.48-3.59 2.42-4.11
per cent (weekly range) per annum (2.88) (2.00) (4.16) (3.48)
Daily averages (Rupees crore) 7,430 9,545 8,412 5,994 5,060 10,742 9,526 12,913 10,663 9,638
Total call market borrowings (21) (13) (317) (177)
Notice Money
Weighted average of notice money rates: 2.40-5.03 2.40-3.24 3.36-3.55 2.56-3.59 3.70-5.03 2.77-4.78 3.00-4.67 3.16-4.78 2.77-3.77 3.28-4.10
per cent (weekly range) per annum (3.24) (3.50) (4.67) (3.77)
Daily averages (Rupees crore) 2,817 2,245 2,294 3,395 3,562 2,903 2,564 2,592 4,534 2,410
Total notice market borrowings (13,096) (13,030) (12,814) (17,843)
Turnover in Term Money Market 96 139 75 64 91 210 343 258 179 72
(borrowings) $$ (75) (50) (0)

Data for reporting Fridays are given within brackets and they are also included in the weekly range/daily averages. $ Thursday data for 2 April and 9 April. RF Reporting Fridays. $$ No of reporting/traded days are fewer than given above.

Economic & Political Weekly

MONEY MARKET REVIEW

Rs 2,564 crore in the last week of March. While call money funds are transacted on an overnight basis, notice money funds are transacted for the period between 2 days and 14 days. The phase of high call money rates was short-lived. In the second week ending 10 April which was a reporting Friday, banks found ample liquidity with themselves with aggregate deposit expansion of Rs 70,726 crore during the same fortnight with a practically fractional rise in bank credit (+Rs 1,429 crore). Effects of loan floatations of the week were to an extent counterbalanced by RBI’s OMO purchases. Weighted averages of call money rates fell to a range of between 1.87% and 3.56% with the reporting Friday rate ruling at 2%. Thus, on many days of the week, the rates remained below the lower end of the interest rate corridor (3.50%). The average call money market borrowings were also relatively low at Rs 5,994 crore during the 10 April week.

The phenomenon of unduly low levels of call money rates became more dominant during the subsequent two weeks of the month. The declining trend in rates was further reinforced by the RBI’s annual monetary policy statement for 2009-10 that was issued on 20 April, which reduced the two benchmark rates by 25 basis points

Table 2: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum: Simple Statistical Characteristics and yield rates fixed
Month/Week Simple Mean * Standard Coefficient of Deviation Variation Simple Mean * Standard Coefficient of Deviation Variation on fresh government
(in %)$ (in %)$ loans, the news of
March 2009 Call Money Notice Money ** inflation behaviour,
All four weeks 4.03 0.54 13.35 2.58 1.73 67.28 share market trends
27(RF) 4.25 0.18 4.21 2.92 1.75 59.91 and the rupee rate
20 4.48 0.30 6.78 3.08 1.61 52.39 behaviour. Contrary
13 (RF)* 3.54 0.06 1.64 2.53 1.74 68.85 statements on private
6 April 2009 All four weeks 3.73 3.22 0.67 1.16 17.87 36.16 1.83 2.24 2.02 1.77 110.48 79.24 placements with RBI and placing a ceiling
24(RF)* 3.08 0.50 16.11 1.93 1.52 78.76 on the reverse repo
17 3.24 0.61 18.94 2.08 1.90 91.34 window of LAF also
10^ 2.72 0.91 33.36 2.41 1.67 69.41 contributed to such
3^ 3.77 2.12 56.08 2.62 2.44 93.04 volatility. As a result,
** Separate reportings began on 15 March 2005. * Including data for reporting Fridays (RF). $ Based on original unrounded figures. ^ Thursday data for 2 April and 9 April. the coefficients of
Source: RBI. vari ations varied from
Table 3: Comparison of Call, Overnight CBLO and Repo Rates 16% to 56% in differ-
Week Ending Weighted Average Rates (in %) Daily Average Volumes (Rs crore) ent weeks of April in
March 2009 6-Mar-09 Call 3.90 Overnight CBLO 3.50 Repo 3.71 Call 12,047 Overnight CBLO Repo 47,239 20,269 contrast to a meagre 2% to 16% in March
13-Mar-09 3.64 3.02 3.35 15,197 44,559 23,984 (Table 2). The short
20-Mar-09 3.61 3.19 3.35 15,504 59,618 20,803 term market volumes
26-Mar-09 4.39 3.47 4.11 12,090 41,887 24,147 have also shifted
April 2009 rather more deci
2-Apr-09 9-Apr-09 17-Apr-09 24-Apr-09 4.62 3.47 3.50 3.33 3.42 0.85 2.24 2.53 4.16 1.45 2.35 2.81 10,777 9,389 10,706 11,790 38,073 41,700 48,311 43,446 13,68323,71817,07921,970 sively in favour of the more transparent and order-driven col-
Source: The Clearing Corporation of India Ltd (CCIL). lateralised borrowing
28 may 23, 2009

– repo rate from 5.00% to 4.75% and reverse repo rate from 3.50% to 3.25%. Even the average borrowings, though higher than those in the first two weeks, remained at moderate levels. Repetitive monetary easing by RBI combined with buyback of government papers as well as some redemptions and coupon payments released huge liquidity into the system. At the same time, banks have contracted their credit base by as much as Rs 24,000 crore during the month ending 24 April. Consequently, the weighted averages of call money rates ruled in the range of 2.14% to 3.54% throughout the second fortnight, when the notice money transactions also dipped to lower levels (Table 1).

While the call rates thus prevailed generally at low levels most of the days in April, there were wider fluctuations within those lower ranges, reflecting divergent sentiments based on reports of banks’ responses to the need for interest rate reduc

tions, loan floatations

51 49 47 45 43 41 39

Graph B: Spot Quotations for the US Dollar in the Domestic Inter-Bank Market

(Daily)
Working
Days April
(Monthly Averages) 2009
(Jan 2001 to March 2009)

and lending obligations (CBLO) market in April, where the highest amount at the lowest rates of interest continued to be borrowed (Table 3 and Graph A, p 27). The bulk of the repo transactions outside the RBI were at the weighted average rates of interest of 2.07% to 2.75%.

2.2 Forex Market

The global forex markets have continued to face the odd situation of the US dollar appreciating by about 15% in effective terms since 15 September 2008 when the huge US-centric financial crisis had broken out. The dollar has appreciated against all major developed country and developing country currencies except the pound sterling on what has been called the perverse effects of “deleveraging” as investors sell assets outside the US and buy dollars. The situation has not changed the least after the G-20 meeting in early April on the eve of which China created a stir by proposing the introduction of a “super-sovereign reserve currency” in place of the dollar. In April, dollar appreciated by 1.7% against the euro and by 3.2% against the Japanese yen.

Apart from the global forex market behaviour which the rupee is expected to toe, India’s present domestic and external economic fundamentals are there for the rupee to remain weak. To an extent, this represents, as the RBI had admitted, a correction to the overvaluation of the rupee which persisted for about two years (October 2006 to September 2008) and with which the authorities acquiesced in the name of fighting inflation. Contraction in India’s exports, large loss of reserves, FII net sellings in the Indian stock markets due to reports of poor industrial growth, have all contributed to the recent depreciation of the rupee. After touching the lowest rupee-dollar rate at Rs 52.06 in early March, the rate improved somewhat but the underlying sentiments have remained one of persistent weakness throughout March

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MONEY MARKET REVIEW

and the most part of April when the rate rupee. The RBI reference rate ruled below ruled above Rs 50-mark. There was a brief Rs 50 for this period (Graph B, p 28), but respite for about 12 days during 9 April to thereafter the rupee value again got weak20 April when reports of more FII inflows ened and touched Rs 50.44 on 28 April. and increases in share prices contributed to The recent pressure on the rupee has the sentiments of some strengthening of the been evident from the persistent increase

Table 4: Auctions of 91-Day Treasury Bills (Amount in rupees crore)

in the outstandings of net forward sales position from $487 million in October 2008 to $2,042 million in March 2009 in contrast to sizeable purchase positions in the first half of the year. Until the end of April, year-on-year, the country has lost foreign currency reserves worth $61 billion, though

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

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

April 2 500.00 47 2,633.08 1 500.00 0.00 98.30 6.94 43,457.00

(2) (4,500.00) (2) (4,500.00) [98.30] [6.94]

April 9 6,000.00 132 8,076.23 110 6,000.00 0.00 98.23 7.23 44,879.00

(3) (2,422.12) (3) (2,422.12) [98.27] [7.06]

April 16 5,500.00 117 7,192.80 56 3,000.00 0.00 98.18 7.44 44,679.00

(0) (0.00) (0) (0.00) [98.20] [7.35]

April 23 2,500.00 105 6,747.10 39 2,500.00 0.00 98.18 7.44 42,090.00

(1) (500) (1) (500) [98.19] [7.39]

April 30 3,000.00 111 7,695.28 52 3,000.00 0.00 98.20 7.35

(0) (0.00) (0) (0.00) [98.21] [7.31]

April 2 500.00 50 1,974.00 16 500.00 0.00 98.89 4.50 80,549.00

(1) (5,000.00) (1) (5,000.00) [98.90] [4.46]

April 8 8,000.00 183 25,567.22 60 8,000.00 0.00 98.99 4.09 80,549.00

(0) (0.00) (0) (0.00) [99.01] [4.01]

April 15 8,000.00 135 22,989.00 53 8,000.00 0.00 99.06 3.81 71,168.00

(0) (0.00) (0) (0.00) [99.07] [3.77]

April 22 8,000.00 137 26,201.45 72 8,000.00 0.00 99.17 3.36 80,548.00

(0) (0.00) (0) (0.00) [99.19] [3.28]

a substantial part of it was due to valuation changes. In trade-weighted real terms, the rupee had stood depreciated as of 26 March by 10.6% since September 2008 based on the six-currency trade-based weights (base: 2006-07=100), but because of some corrections in April, the depreciation got reduced to 6.5% by 17 April.

Also, with the improved capital inflow during April followed by the increases in share prices, further expectations of the fall in the rupee value have been arrested. March had seen steady increases in the six-month annualised forward premia from 1.93% at end-February to 3.37% at end-March but in April, it has declined to 2.9% as on 29 April (Graph C, p 31). Interestingly, this forward rate trend also ties up with the trading data from the newly introduced currency futures. The average

Figures in parenthesis in cols 3 to 6 represent numbers and amounts of non-competitive bids which are not included in the total.

daily notional value of exchange traded

Figures in the square brackets under cols 8 and 9 represent weighted average price and respective yield.

currency futures has fallen from Rs 5,235

Table 5: Auctions of 182-Day Treasury Bills (Amount in rupees crore)

crore in March to Rs 4,828 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

3 Primary Markets

(Amount) (Amount) (Amount) (%) of Issue

April 2 500.00 52 2,095.00 2 500.00 0.00 96.54 7.19 14,785.00

(0) (0.00) (0) (0.00) [96.56] [7.14]

April 16 3,000.00 75 2,663.00 26 500.00 0.00 96.35 7.60 13,785.00

(2) (1,500.00) (2) (1,500.00) [96.38] [7.53]

April 30 1,000.00 83 4,430.25 7 1,000.00 0.00 96.42 7.45 15,035.00

(1) (750.00) (1) (750.00) [96.43] [7.42]

April 2 500.00 34 1,510.00 10 500.00 0.00 97.71 4.70 20,375.00

(1) (375.00) (1) (375.00) [97.72] [4.68]

April 15 2,000.00 85 5,149.00 50 2,000.00 0.00 98.01 4.07 20,375.00

(0) (0.00) (0) (0.00) [98.03] [4.03]

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

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (%) of Issue

Seasonally, the month of April does not attract much of commercial bond issues paving the way for the government to raise funds, which is what has happened in April 2009. Banks, some of which had made a number of issues for supporting tier-II capital in March, almost abstained from the market in April. Reflecting the abundance of liquidity and assurance from the RBI to use OMOs to support a smooth conduct of the government borrowing performance, yield rates of gilt-edged securities have shown distinct declines compared with those in March or even in the few preceding months.

3.1 Dated Securities

April 9 2,000.00 95 4,697.50 44 2,000.00 0.00 93.15 7.37 57,075.00

(0) (0.00) (0) (0.00) [93.18] [7.34] In pursuance of the enhanced borrowing

April 23 2,000.00 102 4,735.00 55 2,000.00 0.00 92.88 7.69 56,775.00 programme, the calendar of issuance of

(0) (0.00) (0) (0.00) [92.92] [7.64]

government of India securities has placed a gross issue of Rs 2,41,000 crore during

April 8 1,000.00 76 5,875.00 4 1,000.00 0.00 95.80 4.40 53,550.00

(0) (0.00) (0) (0.00) [95.82] [4.37]the first half of 2009-10 (April-September);

April 22 1,000.00 60 4,266.00 7 1,000.00 0.00 96.39 3.76 52,550.00 this compares with the amount of Rs 2,49,591

(0) (0.00) (0) (0.00) [96.41] [3.73]

crore issued during the whole of 2008-09.

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. Other aspects relating to the gilt-edged

EPW

MONEY MARKET REVIEW

1 Treasury Bills AMT 24 YTM CY AMT 17 YTM CY AMT 10 YTM CY AMT 3 YTM CY o AMT f April 2009 YTM CY
A 91-Day Bills B 182-Day Bills 793.11 1063.74 3.08 3.52 6268.14 1169.57 3.54 3.63 8998.59 1898.00 3.60 3.79 3272.27 440.00 4.40 4.38 19332.11 4571.31 3.693.74
C 364-Day Bills 2333.77 3.71 1955.10 3.88 3158.26 4.35 1143.22 4.73 8590.35 4.12
2 GOI Dated Securities
A Regular (in % Year)
5.48, 2009 2454.48 3.39 5.47 550.00 3.80 5.47 458.00 4.75 5.47 1349.50 5.25 5.48 4811.98 4.09 5.47
6.65, 2009 152.72 5.75 6.65 152.72 5.75 6.65
5.87, 2010 409.00 4.18 5.80 700.15 4.34 5.81 380.00 4.37 5.81 280.00 5.25 5.84 1769.15 4.45 5.81
6.20, 2010 UTI SB 140.00 4.75 6.14 50.00 4.75 6.13 5.00 5.00 6.14 195.00 4.76 6.14
7.55 , 2010 771.00 4.01 7.29 300.00 4.41 7.31 65.00 4.65 7.33 130.00 5.20 7.36 1266.00 4.26 7.30
11.30, 2010 215.00 4.39 10.42 150.00 4.57 10.44 373.14 4.76 10.45 738.14 4.61 10.44
11.50, 2010 25.00 4.00 10.63 0.93 5.75 10.81 25.93 4.06 10.63
12.25, 2010 205.00 4.25 11.24 784.00 4.81 11.26 110.00 5.12 11.29 1099.00 4.73 11.26
12.29, 2010 600.00 5.11 11.46 600.00 5.11 11.46
6.57, 2011 1.60 4.96 6.39 34.69 5.02 6.40 115.94 5.09 6.40 515.00 5.68 6.47 667.24 5.54 6.45
9.39 , 2011 185.00 4.96 8.61 681.00 5.39 8.67 100.00 5.72 8.73 966.00 5.34 8.66
10.95, 2011 20.00 5.20 9.84 25.00 5.10 9.81 3.30 5.62 9.90 52.00 6.09 9.98 100.30 5.65 9.91
11.50, 2011 160.00 5.24 10.13 10.00 5.96 10.15 170.00 5.28 10.13
12.00, 2011 65.00 5.12 10.35 800.00 5.19 10.36 865.00 5.19 10.36
12.32, 2011 195.00 4.85 10.96 100.00 5.04 10.98 295.00 4.92 10.97
7.40 , 2012 94.09 5.27 6.99 195.00 5.48 7.03 263.00 5.77 7.08 460.00 6.30 7.20 1012.09 5.91 7.12
7.44 , 2012 OMC SB 50.00 6.01 7.17 50.00 6.01 7.17
7.47 , 2012 OMC SB 50.00 6.36 7.26 50.00 6.36 7.26
11.03, 2012 225.00 5.69 9.54 50.30 5.61 9.51 275.30 5.68 9.53
7.27 , 2013 2496.40 5.82 6.89 1681.20 6.03 6.94 2747.37 6.28 7.01 1138.00 6.61 7.09 8062.97 6.13 6.97
12.40, 2013 175.00 6.09 10.03 120.00 6.40 10.13 205.00 6.63 10.20 570.00 7.29 10.43 1070.00 6.86 10.29
6.72, 2014 270.00 6.03 6.53 518.18 6.27 6.60 775.91 6.55 6.67 170.00 6.70 6.72 1734.09 6.40 6.63
7.37 , 2014 187.70 5.98 6.96 195.85 6.26 7.04 3.42 6.58 7.13 125.00 6.80 7.20 511.97 6.29 7.05
7.56 , 2014 16993.14 5.98 7.04 8911.19 6.25 7.13 5989.00 6.59 7.24 2392.50 6.79 7.30 34285.82 6.21 7.12
11.83, 2014 15.50 6.31 9.43 15.50 6.31 9.43
7.38 , 2015 402.00 6.20 6.96 20.50 6.35 7.01 158.00 6.97 7.23 265.52 6.80 7.17 846.02 6.54 7.08
7.59 , 2016 1369.40 6.40 7.12 1664.78 6.66 7.22 830.55 6.86 7.30 412.54 7.14 7.41 4277.27 6.66 7.22
10.71, 2016 50.00 6.65 8.75 0.02 9.00 9.85 50.02 6.65 8.75
7.46 , 2017 1563.50 6.38 6.98 2076.75 6.67 7.10 1113.00 6.96 7.23 1825.00 7.17 7.33 6578.25 6.79 7.16
7.49 , 2017 11.00 6.44 7.03 0.28 6.62 7.11 155.00 6.91 7.23 216.03 7.22 7.37 382.31 7.07 7.31
7.99 , 2017 741.00 6.43 7.28 212.00 6.67 7.38 170.00 6.84 7.46 150.65 7.19 7.62 1273.65 6.62 7.36
8.07, 2017 540.00 6.64 7.44 347.00 7.07 7.62 765.51 7.19 7.67 1652.51 6.99 7.59
6.25, 2018 8.00 6.64 6.41 5.75 7.11 6.62 0.10 7.03 6.58 13.85 6.84 6.50
8.24, 2018 176.00 6.64 7.44 66.00 6.90 7.57 16.00 7.09 7.66 258.00 6.73 7.49
6.05, 2019 40679.85 6.19 6.11 36953.85 6.53 6.26 12498.39 6.85 6.41 8750.86 7.00 6.48 98882.95 6.47 6.24
7.94 , 2021 1951.00 6.73 7.23 1272.45 7.06 7.41 2073.63 7.46 7.65 442.37 7.60 7.74 5739.45 7.13 7.46
6.20, 2022 FERT SB 25.00 7.85 7.18 25.00 7.85 7.18
7.00, 2022 FERT BONDS 15.00 7.58 7.36 10.00 7.91 7.57 25.00 7.71 7.45
7.00, 2022 FERT SB 20.15 7.62 7.39 20.15 7.62 7.39
8.15 , 2022 FCI SB 6.36 7.41 7.67 1.20 7.81 7.93 2.65 7.84 7.95 10.21 7.57 7.77
8.20, 2022 150.00 6.99 7.45 110.00 7.23 7.60 160.00 7.43 7.71 805.08 7.60 7.82 1225.08 7.47 7.74
8.35, 2022 151.08 6.86 7.41 143.88 7.30 7.68 145.00 7.49 7.80 735.00 7.63 7.89 1174.95 7.47 7.79
6.17 , 2023 7.00 7.05 6.69 4.00 7.28 6.83 2.00 7.45 6.94 6.30 7.48 6.96 19.30 7.28 6.84
6.30, 2023 21.00 6.83 6.61 21.00 6.83 6.61
6.65, 2023 FERT SB 226.69 7.55 7.20 15.00 7.72 7.31 20.00 7.79 7.35 261.69 7.57 7.21
8.01, 2023 OMC SB 345.00 7.95 7.97 345.00 7.95 7.97
8.20, 2023 OIL MKT BONDS 590.00 8.11 8.14 590.00 8.11 8.14
8.20, 2023 OMC SB 370.00 7.42 7.67 900.00 7.91 8.00 800.00 8.14 8.16 840.00 8.11 8.14 2910.00 7.97 8.04
8.30 , 2023 FERT BONDS 50.00 7.35 7.66 50.00 7.35 7.66
8.30, 2023 FERT SB 60.00 7.36 7.66 19.50 7.76 7.93 28.00 7.75 7.93 9.19 7.90 8.02 116.69 7.56 7.80
6.35, 2024 OIL MKT BONDS 3250.00 7.68 7.22 3890.00 7.91 7.37 1100.80 8.10 7.51 710.00 8.14 7.54 8950.80 7.87 7.34
8.03, 2024 FCI SB 3.20 7.43 7.61 4.40 7.79 7.86 5.10 7.85 7.91 33.66 7.96 7.98 46.36 7.89 7.93
8.35 , 2024 SBI RT SB 15.10 7.60 7.83 0.65 7.90 8.04 15.75 7.61 7.84
7.95 , 2025 OMC SB 210.00 7.82 7.86 740.00 7.96 7.96 484.15 8.13 8.08 1434.15 8.00 7.99
7.95 , 2026 FERT SB 98.57 7.51 7.63 31.55 7.79 7.83 47.75 7.88 7.90 28.40 7.91 7.92 206.27 7.69 7.76
8.24, 2027 3948.57 7.26 7.51 971.51 7.47 7.67 144.40 7.62 7.77 171.50 7.78 7.90 5235.98 7.33 7.56
6.01, 2028 17.80 7.20 6.84 10.85 7.51 7.06 12.90 7.58 7.11 1.91 7.74 7.25 43.46 7.41 6.99
6.13 , 2028 5.60 7.04 6.77 10.00 7.50 7.12 2.00 7.79 7.33 0.10 7.78 7.33 17.70 7.39 7.03
7.95 , 2032 1147.64 7.33 7.44 965.00 7.63 7.68 605.02 7.67 7.72 337.00 7.80 7.83 3054.66 7.54 7.61
8.28, 2032 271.40 7.28 7.46 41.70 7.79 7.87 43.29 7.95 8.01 356.39 7.42 7.57
7.50 , 2034 3408.21 7.35 7.38 2884.50 7.67 7.65 960.90 7.72 7.69 195.00 7.78 7.74 7448.61 7.53 7.53
7.40 , 2035 5.50 7.29 7.31 2.00 8.00 7.92 27.90 7.70 7.66 120.50 7.78 7.73 155.90 7.75 7.70
8.33, 2036 343.35 7.27 7.41 67.00 7.51 7.61 165.16 7.67 8.93 416.00 7.85 7.91 991.51 7.60 7.88
6.83, 2039 3531.86 7.28 7.23 341.68 7.60 7.51 209.59 7.82 7.71 4083.12 7.34 7.28
Sub-total 89117.10 6.26 6.67 67963.93 6.59 6.77 35455.97 6.76 7.17 27102.00 6.99 7.24 219638.99 6.54 6.85
B RBI’s OMO: Sales 302.00 106.00 200.00 536 1144.00
Purchase 8557.00 2149.00 7734.00 2996 21436.00
Sub-total 8859.00 2255.00 7934.00 3532.00 22580.00
(A+B) 97976.10 6.26 6.67 70218.93 6.59 6.77 43389.97 6.76 7.17 30634.00 6.99 7.24 242218.99 6.54 6.85
3 Market Repo: Govt Securities 85803.58 82747.02 84996.28 46546.94 300093.82
Sub–total 85803.58 82747.02 84996.28 46546.94 300093.82
4 State Govt Securities 2071.60 7.25 7.66 1685.17 7.50 7.82 1488.67 7.73 7.95 1802.51 7.90 8.15 7047.95 7.58 7.88
Grand total (1 to 4) 190041.90 164043.93 143929.77 83838.94 581854.53

(-) 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 10 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.

may 23, 2009 vol XLIV No 21

MONEY MARKET REVIEW

1 month 6 month Weighted Averages of Call Rates (Right axis)

6– 5– 4– 3– 2– 1– –

0

– 0

30/3 2/4 5/4 8/4 11/4 14/4 17/4

primary market activities such as the MSS unwinding, RBI’s purchases under OMOs and redemptions as well as coupon payments due, have been explained earlier.

During April, the central government’s primary mobilisations have aggregated Rs 47,363 crore in four issues involving eight securities. These were supported by OMO purchases by RBI worth Rs 3,350 crore involving five securities. In the primary issues with aggregate notified amounts of Rs 48,000 crore, the total subscriptions have been copious and have touched near threefold at Rs 1,26,498 crore, while the bids accepted have been Rs 47,363 crore as cited above. Even in the OMO repurchases, there have been copious offers – Rs 8,858 crore for the notified amount of Rs 6,000 crore.

As cited above, it is the distinct easing of primary rates of interest that stands out. For instance, the 7.56% 2014 security, which was issued in October 2008, had YTM of 6.24% and 6.80% when it was reissued on 19 March and 2 April this year, respectively. It was reissued again on 17 April when its YTM dipped to 6.10%. Similarly, the benchmark security 6.05% 2019, which was a new security issued in March at an YTM of 6.50% or 6.59% on reissue in the same month, fetched 6.75% on 9 April but the yield fell to 6.13% on the 24 April reissue.

In April, six state governments raised 10-year state development loans (SDLs) worth Rs 4,677 crore at indicative YTMs ranging from 7.54% to 7.77%. In March the SDLs had attracted higher YTMs ranging from 8.13% to 8.89%.

3.2 Treasury Bills

In all the three sets of treasury bill issues, what has stood out has been the declines in yield rates not only as compared with those in the previous periods but also those within the month of April

– 6

(Tables 4, 5 and 6, p 29).

  • 5 The cut-off yield for the 91-day bill was 4.50% on 2
  • 4 April, which steadily fell to
  • 3 3.36% on 22 April. For the 182-day bill, the yield was
  • 2 4.70% on the first issue on 2 April which fell to 4.07%
  • – 1

    for the second issue on 15

    April. Likewise, for the 364

    20/4 23/4

    day TB, the yield rates for the two successive issues were 4.40% and 3.76%.

    3.3 Corporate Bonds Market

    As stated earlier, April was a seasonally dull month for corporate bond issues. Total issues aggregated just Rs 6,386 crore as against the estimated Rs 14,189 crore for March. Also, unlike in the previous month, all issues have been small-size issues. Even the two reasonably big-size issues have been just for Rs 1,811 crore by Indian Railway Finance Corporation and Rs 1,500 crore by ICICI Bank for lower tier-II capital. It is interesting that while Bank of Baroda, which issued lower tier-II bonds for 10 years (triple A by Crisil) at a coupon rate 8.95% in March, ICICI Bank had to pay 9.30% for the same duration with the same triple-A rating by Crisil. Overall it can be said that the primary interest rates on commercial bonds have not shown any easing.

    4 Secondary Market

    With the proliferation of liquidity from the recent monetary stimulus packages, April experienced phenomenal increases in outright transactions in dated government of India securities after the initial part of the month. To begin with, they aggregated Rs 32,244 crore in the week ended 3 April and Rs 29,632 crore in the week ended 10 April as compared with the Rs 26,039 crore in the last week of March. But, the subsequent two weeks ending 17 April and 24 April saw quantum jumps in these outright secondary transactions induced by profit-booking; they aggregated Rs 62,103 crore and Rs 95,689 crore, respectively.

    The surfeit of liquidity has also resulted in sharp and steady declines in the market yield rates of dated securities. For four

    Averages for the First and Last Week of April 2009

    8.5

    Yield (% per annum) 5.5 6 6.5 7 7.5 8 Week ending 3 April Week ending 24 April

    5 123456789 1011131415161719202426272831

    Years to Maturity

    weeks of March, the weighted averages of YTMs for all government of India securities had worked out to 7.25% but, for the month of April it has worked out lower at 6.54%. For the successive four weeks of April, the weighted averages of gilt-edged rates fell from 6.99% to 6.76%, to 6.59% and finally to 6.26% (Appendix Table, p 30).

    The fall in the secondary yield rates is better reflected in the behaviour of yields for the most widely traded benchmark security 6.05% 2019; its YTM fell from 7.0% in the first week of April to 6.19% in the last week. There is also a slight increase in the spread between yields on securities maturing in one year and ten years, from 1.75 percentage points in the first week to 2.01 percentage points in the final week. The levels of these spreads themselves have been relatively high implying (a) that the shape of the yield curves has been steeply upward sloping, and (b) that the curve has become more upward sloping in the last week of the month than in the first week (Graph D).

    As explained earlier, the unwinding of MSS and RBI’s operations under the OMOs have been sizeable and this has arisen out of a change in the government’s fiscal stance. What should be worrying to the authorities is the increasingly high stock of liquidity lying idle with the RBI in the form of unprecedented levels of outstandings under the RBI’s liquidity adjustment facility (LAF); it was Rs 64,815 crore in the beginning of April but by the month end, it has shot up to a staggering Rs 1,08,430 crore.

    The secondary market transactions in commercial bonds were much higher in April as compared with those in the previous two months. The daily average of trading shot up from Rs 350 crore in March to Rs 835 crore in April, reflecting the floating of large liquidity in the system.

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