Choice between Monetising and Monetary Easing

EPW Research Foundation

easing over the current year, if not monetisation of the deﬁcit.

1 Borrowings and Interest Cost

As the debate relates to the impact of additional government borrowing budgeted for 2009-10 on the yield rates, which in turn will decide the interest cost of borrowing, it will be interesting ﬁrst to note what the budget ﬁgures reﬂect of the trend in the recent past. The total outstanding liabilities of the central government as at the end of 2007-08 is Rs 28,37,425 crore of which the market loans constituted Rs 10,92,467 crore. The interest payments according to the 2008-09 budget estimates (BE) were Rs 1,90,807 crore for total liabilities and Rs 1,03,137 crore for market loans, reﬂecting an implicit interest cost of 6.72% and 9.44%, respectively. Based on the revised estimates (RE) of interest payments for 2008-09, the respective interest costs showed a rise to 6.79% and 9.92%. Similarly, the implied interest cost on the basis of RE of outstanding liabilities for 2008-09 and the BE of interest payments for 2009-10, showed a further rise in implicit cost to 7.19% for total liabilities and to 10.35% on market loans. Overall, the trend in percentage interest cost of additional borrowing is on the rise between 2007-08 and 2008-09, both for total liabilities and for market loans (Table 1). Arresting this trend will perhaps require further monetary easing.

1.1 Gross Borrowings and Yield Rates

Next, let us consider the sheer growth in volume of gross market borrowing and the relative movement in yield rates for the past few years. The increase in gross borrowing of the central government during 2008-09 and 2009-10 is unprecedented. Earlier, during 2005-06, there was a jump in

The market borrowing programme of the government has been hiked to unprecedented levels since September 2008 and it is budgeted to reach gigantic proportions in 2009-10. A preliminary analysis of securities market data and banking trends suggests that a successful completion of the 2009-10 programme of the central government will need considerable monetary easing over the current year, if not monetisation of the deﬁcit, if the increase in yield rates is to be contained within moderate limits. This will crucially depend upon the management of interest rates and liquidity conditions by the RBI using both their monetary and debt management skills. At this critical juncture, any idea of immediate separation of debt management function from the monetary management should be kept under a tight lid.

Team led by K Kanagasabapathy and supported by V P Prasanth, Rema K Nair, Anita B Shetty, Bipin K Deokar, Shruti J Pandey and Sharan P Shetty.

he impact of the global ﬁnancial crisis has led to India implementing extraordinary measures both on the ﬁscal and monetary fronts, to stimulate demand and bring back the economy to the potential growth trajectory of 8 to 9%. As a result, there has been both ﬁscal and monetary easing in parallel. The ﬁscal consolidation norms set earlier under the Fiscal Responsibility and Budget Management (FRBM) Act have been justiﬁably suspended for the time being, with the assurance that the government will revert to it as early as feasible. The borrowing programme of the government has been hiked to unprecedented levels since September 2008. In this critical situation, ﬁscal and monetary policy coordination has been rightly emphasised in the postbudget meeting of the Reserve Bank of India (RBI). This is indeed a challenging task before the central bank that will test their monetary and debt management skills. The ﬁnance minister said that there may not be pressure on interest rates and it will also not crowd out resources for the private sector. RBI Governor D Subbarao said that “the increased ﬁscal deﬁcit had raised the size of government borrowing signiﬁcantly and that the RBI will endeavour to manage this as in the past in as nondisruptive a manner as possible”. A major issue that is being debated in this context is the likely impact of the high levels of government borrowing on the yields of government securities. It is argued here, based on some preliminary analysis of securities market

data and the bank-	Table 1: Outstanding Liabilities and Implicit Interest Cost – Central Government (Rs in crore)
ing trends that a successful completion of	Total Outstanding Liabilities	Of which Market Loans	Total InterestPayments	Of which on Market Loans	ImplicitInterest RateTotal Market Liabilities Loans
the market borrow	2007-08	28,37,425	10,92,467	1,71,030	–	–	–
ing programme of	2008-09 (BE)	–	–	1,90,807	1,03,137	6.72	9.44
the central govern	2008-09 (RE)	31,36,075	13,58,940	1,92,694	1,08,350	6.79	9.92
ment will need con	2009-10(BE)	34,95,452	17,66,897	2,25,511	1,40,697	7.19	10.35
siderable	monetary	BE- Budget Estimate RE- Revised Estimate Source: Compilation by EPWRF from the Budget data 2009-10.
	july 18, 2009	vol XLIV No 29		Economic & Political Weekly

MONEY MARKET REVIEW

Graph A: Gross Borrowings of the Centre and Movements in Yield Rates the 10-year and above

portends the need for considerable monetary easing if the increase in yield rates is to be contained within moderate limits.

1.2 SLR and Flows to Commercial Sector

Yet another way of looking at the same problem is by observing the variations during the current ﬁnancial year, of some banking data, since banks have to support the borrowing programme as the group of major ﬁnal investors. During the ﬁnancial year 2009-10 till 26 June, the aggregate deposits posted a growth of Rs 1,49,273 crore and the statutory liquidity ratio (SLR) investments increased by Rs 1,50,273 crore, reﬂecting an incremental investment of deposits in government securities by more than 100%. Banks have also acquired instruments issued by mutual funds to the extent of Rs 85,766 crore during the period (a part of which would have funded government securities), but their non-SLR investments – resource ﬂows to the commercial sector – declined by Rs 26,274 crore, apart from a decline in non-food bank credit of Rs 7,456 crore, together showing a negative resource ﬂow to the commercial sector by Rs 33,730 crore (Table 3). If the banking system needs to support the growth momentum, this trend needs to be reversed.

Based on a growth projection of 6% for 2009-10, the RBI has projected a growth in aggregate deposits by 18% and a growth in resource ﬂows to the commercial sector by 20%. The additional deposit mobilisation on this basis, for the rest of the year should be of the order of Rs 5,40,185 crore. Similarly, the resource ﬂows to the commercial sector (aggregate of non-food credit and non-SLR investments, excluding instruments of mutual funds and ﬁnancial institutions) should grow by Rs 6,00,552 crore during the rest of the ﬁnancial year, also compensating for the backlog of Rs 33,730 crore till June 2009. It is signiﬁcant to note that the projected deposit growth is much lower than this amount. Under these circumstances, if part of the deposit growth is rationed out to SLR investments, the kitty available to the commercial sector would naturally shrink. This also would call for considerable monetary easing.

(Rupees in 000 crore) 404 – 354 – 304 – 254 – 204 – 154 – 104 – 54 – 4 –

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

gross borrowing by 63%, from Rs 80,350 crore to Rs 1,31,000 crore, but in the previous year 2004-05, the gross borrowing showed a substantial decline by 41%. Thus, this was more of a cyclical adjustment. However, as 2004 also represented the start period of rising policy rate cycle, the 10-year and above maturity yield jumped from 5.88% in 2004 to 7.3% in 2005. The 10-year and above yield rate rose sharply thereafter to reach 8.33% in 2008, despite the huge capital inﬂows during this period. Triggered by cuts in policy rates in quick succession after September 2008,

yield showed a decline to

– 950

8.04% in 2008 and fur

– 850

ther to 7.22% for the peri

– 750

od up to June in 2009.

– 650

While this is so good so

– 550

far, the worrisome fea

– 450

ture is reﬂected in the

– 350

movement of the yield

– 250

spread between 10-year

– 150

and above and one to

– 050

three years. What is strik

– -050

ing in this respect is that

(RE)2008-09 (BE)2009-10

this spread has sharply increased from 0.21 percentage points in 2008 to 2.38 percentage points during January to June 2009. It is broadly observed that the movement in yield spread predicts the 10-year and above yield rate movement with some lag (Table 2 and Graph A).

The current situation is therefore, somewhat precarious. First, there is an increase in gross borrowing by 47% in 2009-10 over 2008-09, on top of the 82% increase in 2008-09, i e, a more than doubling of the gross borrowing within two years. Second, the policy rates seem to have

reached more or less

Table 2: Gross and Net Borrowings of the Centre and Movements in Yield Rate

a neutral or near

Net Market Add Gross Market Yield Rate Yield Rate Yield

Borrowings Repayments Borrowings 10 Year and (Secondary Spread

neutral level and

Above Market) 1-3 Years therefore, any fur

2002-03 97,588 27,412 1,25,000 – – –

ther cuts in rates

2003-04 88,860 47,074 1,35,934 5.87 5.93 -0.10

may be difﬁcult to

(8.70)

sustain for long, giv

2004-05 46,031 34,319 80,350 5.88 5.05 0.83

en the current trends

-(41.60)

2005-06 95,374 35,626 1,31,000 7.30 6.00 1.30 in recovery cycle,

(63.00) both globally and in 2006-07 1,10,446 35,554 1,46,000 7.75 6.97 0.78

India. While the cap

(11.50)

ital inﬂows may turn

2007-08 1,31,768 36,333 1,68,101 8.33 7.70 0.68

around easing the

(15.17)

(RE) 2008-09 2,61,972 44,028 3,06,000 8.04 7.83 0.21 liquidity situation

(82.00) somewhat, they are (BE) 2009-10 3,97,957 53,136 4,51,093 7.22 4.84 2.38

likely to remain sub

(47.40)

dued for some time.

Figures within brackets indicate percentage increase over the previous year. Source: Receipts Budget 2009-10; yield rates compiled by EPWRF based on secondary market trades Given all these, and reported by RBI.

given the rising yield

Table 3: Select Banking Data – Variation in 2009-10 upto 26 June 2009

spread, there is a

Rs Crore Projection as at Balance for the End March 2010 Rest of the Year strong likelihood

Aggregate deposits 1,49,273 68,94,582 5,40,185

that the cost of addi-

SLR investments 1,50,273

tional borrowing by

Non-SLR investments -2,62,741 56,68,223 6,00,552

the government may

}

Non-food credit -7,456

increase and persist,

Investment issued by Mutual Funds 85,766

if the growth

1 Upto 19 June 2009. 2 As per Growth rate of 18% announced in Annual Policy Statement. momentum picks up. 3 As per Growth rate of 20% announced in Annual Policy Statement . Source: RBI’s Weekly Statistical Supplement; Annual Policy Statement, April 2009. This situation also

Economic & Political Weekly

july 18, 2009 vol XLIV No 29

Graph B: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO Yet another possibility

Rates – June 2009

Call Rates

3.5 –

3–

2.5 –

2–

1.5 –

1–

0.5 –

0–

1.3 The Way Ahead

It has already been clariﬁed by the government that there will not be any monetisation of the ﬁscal deﬁcit, relaxing the provisions of the FRBM Act. The RBI has already been using open market operations (OMO) to enable a smooth and nondisruptive conduct of the borrowing programme. If due to large scale purchases of government securities in the OMO, the net RBI credit to government increases, though technically it is not direct monetisation through support to primary issues, it is treated indirectly as monetisation of deﬁcits and such ﬁgures are reported at least post-facto, as one of the signiﬁcant measures of deﬁcit indicators. But, still it remains that OMO is an instrument of monetary policy and not of debt management. In practice, however, this difference gets blurred particularly when a large borrowing programme is to be concluded non-disruptively, with the constraint of the RBI not participating in primary issues. It is therefore expected that OMO will be skilfully used and timed in such a manner that interest rates do not become very volatile, without compromising on the monetary policy stance at any given time.

Table 4: Money Market Operations (RBI’s Daily Data)

is to relax the cash reserve ratio (CRR) further. Given the fact that the prudential requirement of CRR may not be more than 3%, there is scope for RBI reducing the CRR up to at least 2 percentage points, and if so needed, even lower than that, with new powers, and that will be well within the

announced medium term objective of the RBI. But, this should be done carefully in timely instalments depending upon the liquidity conditions and consistent with the monetary policy stance.

Unwinding of market stabilisation scheme (MSS) bonds and releasing cash balances impounded with the RBI for ﬁnancing the government is yet another option, since no ﬂooding of capital ﬂows is expected in the near term.

One option, not very desirable, but a feasible one as a last resort, will be private placement of government bonds with institutions other than the RBI. Such placements do not result in monetisation, but may distort the auction mechanism and price discovery. Most of the corporate bond issues are on private placement basis even currently.

All of the measures above, in one way or the other, result in quantitative easing. The easing of policy rates as mentioned earlier may not be sustainable. Furthermore, such easing in the past does not seem to have helped signiﬁcantly in reducing the long-term bond yields, but only resulting in steepening of the yield curve. Therefore, quantity easing on the monetary side is a better option than easing of policy rates to very low levels.

Overall, the successful completion of borrowing programme this year will crucially depend upon the management of interest rates and liquidity conditions by the RBI using both their monetary and debt management skills. At this critical juncture, any idea of immediate separation of debt management function from the monetary management should be kept under a tight lid.

2 Money, Gilt-Edged and Forex Markets

In the absence of any signiﬁcant policy developments, the money market activity remained by and large ﬂat in June compared to May. Overall, the volumes in overnight call money, notice money, collateralised borrowing and lending obligation (CBLO) segments did not reveal any signiﬁcant or noticeable variations between the two months. The same has been the case with rates also. They remained range bound at the lower end of the policy rates. The market repo transactions however showed a signiﬁcant dip in June.

As far as liquidity ﬂows are concerned, there were signiﬁcant net outﬂows due to government securities auctions, to the extent of about Rs 43,000 crore, but this was more or less compensated by the forex purchases by RBI resulting in net inﬂow of about Rs 41,000 crore. Devoid of any other signiﬁcant outﬂows, the overall liquidity conditions remained very easy during the month, as reﬂected in huge participation in reverse repo window of RBI.

One policy development that may need a mention is that the Securities and Exchange Board of India (SEBI) has

	Average			June 2009		Average			May 2009
Items	for Four Weeks	26	19(RF)	12	5(RF)	for Five Weeks	29	22(RF)	15	8(RF)	1$
No of working days	23	6	6	6	5	26	6	6	5	6	3
Call Money
Weighted average of call rates:	3.07-3.27	3.20-3.27	3.07-3.26	3.15-3.24	3.18-3.24	2.59-3.24	2.90-3.24	2.60-3.21	2.59-3.22	2.99-3.23	2.78-3.24
per cent (weekly range) per annum		(3.16)	(0.00)		(2.60)	(3.15)
Daily averages (Rupees crore)	9,023	7,945	9,894	7,696	9,051	9,052	7,754	8,644	8,625	11,116	9,046
Total call market borrowings			(221)		(0)			(50)		(12591)
Notice Money
Weighted average of notice money rates:	1.04-3.32	2.49-3.23	1.04-3.32	2.25-3.23	2.24-3.18	2.09-3.28	2.10-3.23	2.25-3.13	2.09-3.21	2.30-3.10	2.30-3.28
per cent (weekly range) per annum			(3.20)		(3.18)			(3.13)		(3.10)
Daily averages (Rupees crore)	4,653	1,645	1,805	1,688	13,476	2,078	2,128	1,049	2,756	164	6,734
Total notice market borrowings			(10,667)		(80,832)			(6,292)		(772)
Turnover in term money market	99	116	80	64	135	131	45	125	107	150	319
(borrowings) $$		(11)	(0)		(25)	(50)

Data for reporting Fridays are given within brackets and they are also included in the weekly range/daily averages. $ Data for April 29. (RF) Reporting Fridays. $$ No of reporting/traded days is fewer than given above.

july 18, 2009 vol XLIV No 29

MONEY MARKET REVIEW

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

imposed a ceiling of 30% on investment in money market instruments by Asset Management Companies and as a prudential measure requiring asset diversiﬁcation by such companies, this should be treated as a step in the right direction.

In the gilts market, primary issues were buoyant consistent with the government’s policy of front-loading their borrowing programme. As a result, the secondary market activity in general took a beating, though RBI’s liquidity adjustment facility (LAF) activity showed a further surge. The OMO window also was active, which may gain further momentum in the coming months.

The forex market saw relatively higher volatility and the rupee over the month signiﬁcantly depreciated from Rs 46.99 per dollar in the month beginning to Rs

48.51 per dollar towards end of the month. A rise in oil prices, widening trade deﬁcit, the changing status of the dollar vis-à-vis other major international currencies, the adverse movements in domestic equity prices, subdued foreign institutional investors (FII) investments, all contributed to this volatility.

2.1 Money Market

The daily average volume in the call money market remained ﬂat around Rs 9,000 crore in May and June. The average rate however showed a slight shift but remained range-bound within about 3.25%. The rates in June however depicted higher volatility with standard deviation increasing from 0.19 to 0.66 and the coefﬁcient of variation increasing to 21.35% from 6.09%. The average notice money volume showed a rise from Rs 2,078 crore in May to Rs 4,653 crore in June. The notice money rates however softened in June to a range of 1.04-3.32% from the range of 2.09-3.28% in May. The volatility ratios in notice money rates continued to remain high. In the CBLO segment, the daily average volumes showed some pick up from Rs 53,858 crore on 29 May to Rs 60,844 crore on 26 June and similarly the repo volumes also rose from Rs 21,466 crore to Rs 24,753 crore during the same period (Tables 4 (p 28), 5 and 6). The repo volumes outside RBI saw a signiﬁcant fall from Rs 3,71,976 crore in May to Rs 1,85,570 crore in June (Graph B, p 28).

2.2 Forex Market

The movement in rupee dollar exchange rate was greatly inﬂuenced by the status of US dollar vis-à-vis other major international currencies like euro, and the trend in FIIs investments in the equities market. The rate was also inﬂuenced by the adverse trade data following a rise in international crude prices. The net FII investment increased only marginally by $823 million in June, against the ﬂow of $4.1 billion in the previous

month. The initial euphoria in the equities market faded later with immediate prospects for economic reforms becoming dimmer.

The US dollar rose to a one-week high against the euro on 8 June driven by expectations about the increase in the target lending rate. The dollar posted losses against the euro on 26 June, after the rise in personal income which was prompting movement towards riskier assets. The rupee posted its monthly loss for the ﬁrst time after February 2009, with country’s trade deﬁcit widening to $5.0 billion which further widened to $5.2 billion in May on the impact of rise

Graph D: Annualised Forward Premia in Percentage for the US Dollar in the Domestic Inter-Bank Market and Weighted Averages of Call Rates for June 2009

– 3.28

– 3.26

– 3.24

– 3.22

– 3.20

– 3.18

– 3.16

4–

3.5 – 3–

2.5 – 2–

1.5 – 1–

0.5 – –

– 3.14

1/6 4/6

7/6 10/6 13/6 16/6 19/6 22/6 25/6

in fuel prices. Combined with adverse movements in domestic equities market, this caused the rupee dollar rate to depreciate in June and the rate moved in a wide range of Rs 46.99-48.51. Towards June end, the Fed’s move to keep the interest rates unchanged and some gains in the equities market kept the rupee range bound between Rs 48.39 and 48.91, though the rupee was about to breach the Rs 49 mark towards the last week of the month (Graph C).

Table 5: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum: Simple Statistical Characteristics

Month/Week	Simple	Standard	Coefficient of	Simple	Standard	Coefficient of
	Mean *	Deviation	Variation	Mean *	Deviation	Variation
			(in %)$			(in %)$
		Call Money		Notice Money **
May 2009
All five weeks	3.11	0.19	6.09	2.62	0.48	18.39
29	3.17	0.13	4.19	2.40	0.47	19.52
22(RF)*	3.09	0.24	7.77	2.54	0.51	19.98
15	3.08	0.27	8.90	2.78	0.61	21.76
8(RF)*^	3.10	0.10	3.14	2.80	0.44	15.57
1^	3.09	0.27	8.60	2.79	0.69	24.84
June 2009
All four weeks	3.08	0.66	21.35	2.69	0.64	23.81
26	3.23	0.02	0.75	2.90	0.31	10.56
19(RF)*	3.20	0.07	2.26	2.54	1.05	41.28
12	3.21	0.04	1.27	2.74	0.69	25.29
5(RF)*	2.69	1.32	49.00	2.57	0.53	20.45

** Separate reportings began on 15 March 2005. * Including data for reporting Fridays (RF). $ Based on original unrounded figures. ^ Data for April 2. Source: RBI.

Table 6: Comparison of Call, Overnight CBLO and Repo Rates

Week Ending	Weighted Average Rates (in %)	Daily Average Volumes (Rs crore)
	Call	Overnight CBLO	Repo	Call	Overnight CBLO	Repo
May 2009
29-Apr-09	3.25	2.73	2.90	12,239	37,174	19,411
8-May-09	3.12	1.56	1.83	11,123	43,361	23,168
15-May-09	3.20	2.47	2.59	11,381	56,141	24,693
22-May-09	3.19	2.14	2.32	11,604	58,994	29,493
29-May-09	3.22	2.50	2.64	9,955	53,858	21,466
June 2009
5-Jun-09	3.23	2.50	2.49	10,394	49,468	25,087
12-Jun-09	3.23	2.81	2.91	9,384	58,481	19,952
19-Jun-09	3.23	2.23	2.23	11,700	58,486	24,990
26-Jun-09	3.23	2.83	2.93	11,360	60,844	24,753

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

july 18, 2009 vol XLIV No 29

June had seen a steady decline in the has improved to Rs 6,516 crore in June six-month annualised forward premia from Rs 6,245 crore in May. The National from 3.17% at end-May to 2.72% at end-Stock Exchange (NSE) continued to top June (Graph D, p 29). the currency futures segment with a 53%

Since its inception in the second half of share, the remaining share of 47% record2008, the dollar-rupee futures volumes ed by the MCX-SX. have grown to nearly 50% of merchant transactions in the over the counter (OTC) 3 Primary Market forwards market. The average daily turn-The primary market in government secuover on exchange traded currency futures rities is likely to become the most active

Table 7: Auctions of 91-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 rowing will not be allowed to either crowd
		No	Face Value	No	Face Value	on PDs	(Rupees)	Rate	on the Date
			(Amount)		(Amount)	(Amount)		(%)	of Issue out resources to the private sector or cause
(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10) pressures on rates are bound to raise expec
2008
June 4	3,000.00	76	5,569.37	61	3,000.00	0.00	98.15	7.56	56,679.00 tations in the market about considerable
		(6)	(4,426.94)	(6)	(4,426.94)		[98.17]	[7.48]	monetary easing through OMO as also the
June 11	3,000.00	71	5,211.37	46	3,000.00	0.00	98.12	7.69	60,429.00 use of other instruments. This is likely to
		(4)	(1,450.00)	(4)	(1,450.00)		[98.13]	[7.64]	keep the yield rates contained within a
June 18	3,000.00	78	4,164.30	53	2,000.00	0.00	98.03	8.06	61,944.00
		(2)	(715.38)	(2)	(715.38)		[98.05]	[7.98]	range, though some pressure on yields is
June 25	500.00	58	2,068.80	7	500.00	0.00	97.87	8.73	60,204.00	already evident since the last week of May.
		(2)	(5,300.00)	(2)	(5,300.00)		[97.87]	[8.73]		The huge amount of liquidity already in
2009 June 3	4,500.00	74 (0)	12,343.10 (0.00)	39 (0)	4,500.00 (0.00)	0.00	99.17 [99.17]	3.36 [3.36]	80,000.00	the system, as reﬂected in absorption through the LAF window, combined with
June 10	5,000.00	77	15,594.06	22	5,000.00	0.00	99.17	3.36	80,000.00	OMO purchases by the RBI helped the pri
		(0)	(0.00)	(0)	(0.00)		[99.17]	[3.36]		mary issues in June to sail through some
June 17	5,000.00	81	20,012.75	42	5,000.00	0.00	99.17	3.36	80,000.00	what smoothly, with some strains of
		(0)	(0.00)	(0)	(0.00)		[99.19]	[3.28]
June 24	5,000.00	61	18,082.10	19	5,000.00	0.00	99.18	3.32	80,000.00	devolvement on primary dealers and mar
		(0)	(0.00)	(0)	(0.00)		[99.18]	[3.32]		ginal hikes in cut-off yields. The corporate
Table 8: Auctions of 182-Day Treasury Bills (Amount in rupees crore) Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Figures in parenthesis 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.	Amount	bond market saw several issues, dominated in particular by ﬁnancial institutions (FIs) and banks and also non-banking
Auction	Amount	No	Face Value	No	Face Value	Devolved on PDs	Price (Rupees)	Yield Rate	Outstanding on the Date	ﬁnancial companies (NBFCs).
			(Amount)		(Amount)	(Amount)		(%)	of Issue
2008										3.1 Dated Government Securities
June 11	500.00	51 (1)	1,366.20 (1,125.00)	16 (1)	500.00 (1,125.00)	0.00	96.31 [96.32]	7.68 [7.66]	18,788.00	June witnessed a series of issues by the
June 25	500.00	40	1,393.00	17	500.00	0.00	95.63	9.16	19,788.00	central government, in medium to long
		(1)	(1,000.00)	(1)	(1,000.00)		[95.68]	[9.05]		term maturities taking advantage of con
2009 June 10	500.00	35 (0)	2,645.00 (0.00)	5 (0)	500.00 (0.00)	0.00	98.24 [98.25]	3.59 [3.57]	20,375.00	tinued easy liquidity conditions. This includes two new securities of 5-year and
June 24	500.00	36	3,000.00	2	500.00	0.00	98.27	3.53	20,375.00	15-year maturities. However, the large
		(0)	(0.00)	(0)	(0.00)		[98.27]	[3.53]		supply of Rs 60,000 crore on six different
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.	occasions by the central government in all
Table 9: Auctions of 364-Day Treasury Bills (Amount in rupees crore)	covering issues of 15 securities, combined

in the coming months with the budget for 2009-10 announcing a very massive government borrowing programme of Rs 4,51,093 crore for the year. The state governments are also likely to enter the market more frequently, since they have also been granted some relaxation from the application of FRBM norms, though their ﬁscal positions in general remain stronger than the central government. The assurances from the government and the central bank that the enhanced amount of gross bor-

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
June 4	1,000.00	77	3,695.00	3	1,000.00	0.00	92.95	7.61	58,707.00
		(2)	(1,400.00)	(2)	(1,400.00)		[92.96]	[7.59]

with another issue of state loans for nearly Rs 6,000 crore, brought some pressure on cut-off yield rates. The yield rates of central government issues ranged between 6.49% and 7.90% in June compared with the

June 18 1,000.00 68 1,900.70 54 1,000.00 0.00 92.40 8.25 56,211.00 range of 6.07% and 7.79% in May. That

(0) (0.00) (0) (0.00) [92.53] [8.10]

pressure continued to build up through the month is evident from the higher cut-off for

June 3 1,000.00 39 2,160.50 27 1,000.00 0.00 96.16 4.00 46,500.00

(0) (0.00) (0) (0.00) [96.26] [3.90] similar maturity in the later part of the

June 17 1,000.00 59 3,565.00 18 1,000.00 0.00 96.17 3.99 46,500.00 month compared to the month beginning. It

(0) (0.00) (0) (0.00) [96.20] [3.96]

is signiﬁcant to note that this happened

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. despite four securities devolving on primary

july 18, 2009 vol XLIV No 29

MONEY MARKET REVIEW

dealers for an aggregate amount of nearly	As	many	as	10	state	governments	central loans at 2.25, explains the relative
Rs 11,000 crore or 18% of total issues, and	entered the market on 23 June 2009 and	attractiveness of state loans and a stronger
the RBI conducting OMO auction purtchases	raised an amount of Rs 5,950 crore. As in	preference by the market. This can at least
of about Rs 6,800 crore, representing	the past, the bid cover ratio for state loans	partly be attributed to the stronger ﬁscal
about another 10% of primary issues.	at	3.2, much higher than that of the	position of states, apart from higher yields
Appendix Table: Secondary Market Operations in Government Papers: NDS and NDS-OM Deals (Amount in rupees crore)
Descriptions	Weeks Ending June 2009: Yield to Maturity on Actual Trading	Total for the Month
		26			19			12			5			of June 2009
	AMT	YTM	CY	AMT	YTM	CY	AMT	YTM	CY	AMT	YTM	CY	AMT	YTM	CY
1 Treasury Bills
A	91-Day Bills	5125.71	3.30	1304.38	3.36	1573.92	3.31	4039.63	3.31	12043.64	3.31
B	182-Day Bills	380.00	3.42	900.25	3.30	745.00	3.34	150.00	3.37	2175.25	3.34
C	364-Day Bills	712.22	3.60	2115.63	3.80	1870.55	3.60	1186.75	3.69	5885.15	3.69
2 GOI Dated Securities
A Regular (in % Year)
5.48	, 2009	–	–	–	–	–	–	108.00	7.82	5.48	279.50	3.00	5.48	387.50	4.34	5.48
5.87	, 2010	1268.00	3.99	5.81	2159.01	3.96	5.81	1128.94	3.93	5.81	455.00	3.97	5.81	5010.95	3.96	5.81
6.20	, 2010 UTI SB	100.00	4.20	6.13	100.00	4.40	6.13	–	–	–	90.00	4.42	6.13	290.00	4.34	6.13
7.55	, 2010	135.00	4.18	7.34	790.00	4.09	7.33	0.20	4.05	7.32	–	–	–	925.20	4.10	7.33
11.30 , 2010	900.00	4.18	10.51	521.00	4.18	10.50	145.50	4.05	10.47	838.00	4.18	10.47	2404.50	4.17	10.49
11.50 , 2010	–	–	–	400.00	4.16	10.75	–	–	–	–	–	–	400.00	4.16	10.75
12.25 , 2010	400.00	4.18	11.35	310.00	4.21	11.33	–	–	–	–	–	–	710.00	4.19	11.34
12.29 , 2010	615.00	4.07	11.73	680.00	4.07	11.71	–	–	–	–	–	–	1295.00	4.07	11.72
6.57 , 2011	575.00	5.26	6.44	73.60	5.31	6.44	240.00	4.96	6.40	100.00	5.13	6.42	988.60	5.18	6.43
9.39 , 2011	300.00	5.40	8.73	20.00	5.40	8.73	245.00	5.38	8.72	150.20	5.19	8.68	715.20	5.35	8.72
11.50 , 2011	0.02	10.94	11.39	325.00	5.60	10.30	–	–	–	–	–	–	325.02	5.60	10.30
12.00 , 2011	–	–	–	–	–	–	125.00	5.45	10.49	45.00	5.40	10.48	170.00	5.44	10.49
12.32 , 2011	–	–	–	100.00	5.35	11.13	–	–	–	200.00	4.99	11.05	300.00	5.11	11.08
6.85 , 2012	168.34	5.97	6.70	50.00	5.98	6.70	115.00	5.93	6.69	–	–	–	333.34	5.96	6.70
7.40 , 2012	285.00	5.91	7.13	783.31	5.80	7.10	868.00	5.81	7.10	1062.00	5.68	7.08	2998.31	5.77	7.10
7.27 , 2013	1902.00	6.47	7.07	1108.55	6.46	7.06	795.00	6.35	7.03	517.70	6.19	6.99	4323.25	6.41	7.05
12.40 , 2013	45.00	6.60	10.27	–	–	–	75.00	6.44	10.20	–	–	–	120.00	6.50	10.23
6.07 , 2014	14091.20	6.56	6.20	18314.71	6.62	6.21	6932.50	6.64	6.22	770.00	6.32	6.13	40108.41	6.60	6.21
7.37 , 2014	45.00	6.66	7.16	132.18	6.62	7.15	449.50	6.56	7.14	460.00	6.45	7.10	1086.68	6.53	7.12
7.56 , 2014	520.25	6.71	7.29	630.00	6.71	7.28	225.70	6.59	7.24	915.35	6.46	7.20	2291.30	6.60	7.25
6.49 , 2015	5409.15	6.64	6.54	5046.27	6.66	6.54	7881.00	6.55	6.51	1555.07	6.12	6.49	19891.48	6.57	6.53
6.05 , 2016	–	–	–	–	–	–	–	–	–	156.00	6.67	6.33	156.00	6.67	6.33
7.56 , 2016	–	–	–	70.00	6.88	7.28	–	–	–	–	–	–	70.00	6.88	7.28
7.59 , 2016	2301.21	6.89	7.31	7545.00	6.87	7.31	7963.99	6.93	7.34	23970.03	6.84	7.30	41780.22	6.87	7.31
6.07 , 2017	–	–	–	–	–	–	–	–	–	325.00	6.34	6.14	325.00	6.34	6.14
7.46 , 2017	152.96	7.01	7.26	270.23	7.04	7.27	170.20	7.10	7.29	380.07	6.96	7.23	973.46	7.01	7.26
7.49 , 2017	–	–	–	–	–	–	56.69	7.06	7.30	240.39	6.99	7.27	297.08	7.00	7.28
7.99 , 2017	–	–	–	–	–	–	–	–	–	415.00	7.00	7.54	415.00	7.00	7.54
8.07 , 2017	10.80	7.07	7.63	111.36	7.07	7.63	62.06	7.06	7.62	201.89	6.90	7.55	386.11	6.98	7.59
5.69 , 2018	3.00	7.15	6.30	173.11	6.55	6.05	2.00	7.14	6.30	–	–	–	178.11	6.57	6.05
8.24 , 2018	15.00	7.07	7.66	5.00	7.10	7.68	7.50	6.97	7.61	40.00	6.98	7.61	67.50	7.01	7.63
6.05 , 2019	1118.56	7.00	6.48	491.24	6.90	6.43	3242.25	6.60	6.16	2404.54	6.62	6.30	7256.59	6.69	6.27
7.59 , 2019	–	–	–	–	–	–	1825.00	6.95	7.34	–	–	–	1825.00	6.95	7.34
6.35 , 2020	7061.25	6.85	6.59	3191.00	6.84	6.59	402.58	6.83	6.58	5924.84	6.81	6.58	16579.67	6.83	6.59
6.05 , 2021	395.00	6.99	6.47	–	–	–	–	–	–	–	–	–	395.00	6.99	6.47
7.84 , 2021	–	–	–	695.00	7.32	7.47	–	–	–	–	–	–	695.00	7.32	7.47
7.94 , 2021	2960.17	7.33	7.58	3779.00	7.36	7.59	572.84	7.44	7.64	717.50	7.32	7.57	8029.51	7.35	7.59
10.25 , 2021	10.00	7.49	8.44	30.00	7.73	8.58	20.00	7.83	8.65	–	–	–	60.00	7.73	8.58
8.08 , 2022	150.00	7.49	7.71	85.00	7.50	7.71	–	–	–	–	–	–	235.00	7.49	7.71
8.20 , 2022	1030.00	7.43	7.72	3914.80	7.45	7.73	5395.76	7.44	7.73	2204.17	7.42	7.71	12544.73	7.44	7.73
7.35 , 2024	3379.85	7.40	7.39	656.13	7.35	7.35	–	–	–	–	–	–	4035.98	7.40	7.38
7.95 , 2025 OMC SB	11.39	7.91	7.92	455.89	7.94	7.95	24.00	7.88	7.90	–	–	–	491.28	7.94	7.94
8.40 , 2025 OMC SB	1.92	8.01	8.12	53.74	7.98	8.10	–	–	–	–	–	–	55.66	7.98	8.10
7.95	, 2026 FERT BONDS	65.40	7.92	7.93	–	–	–	–	–	–	–	–	–	65.40	7.92	7.93
8.00	, 2026 OIL SPL	–	–	–	–	–	–	–	–	–	87.26	7.79	7.85	87.26	7.79	7.85
8.00	, 2026 OMC SB	249.30	7.92	7.95	1030.94	7.99	7.99	120.27	7.75	7.82	–	–	–	1400.51	7.96	7.97
8.40	, 2026 OMC SB	4.87	7.98	8.09	102.41	8.00	8.11	–	–	–	–	–	–	107.28	8.00	8.11
8.23	, 2027 FCI SB	35.01	7.96	8.03	67.89	7.93	8.00	32.31	7.85	7.95	–	–	–	135.21	7.92	8.00
8.24	, 2027	1140.28	7.75	7.87	1530.27	7.68	7.83	442.05	7.69	7.83	342.50	7.64	7.79	3455.10	7.70	7.84
7.95	, 2032	1.00	7.78	7.81	–	–	–	35.00	7.81	7.83	310.00	7.63	7.69	346.00	7.65	7.70
7.35	, 2034	388.11	7.42	7.40	–	–	–	–	–	–	–	–	–	388.11	7.42	7.40
7.50	, 2034	215.25	7.80	7.75	706.34	7.77	7.73	450.81	7.75	7.72	806.55	7.68	7.66	2178.95	7.74	7.70
7.40	, 2035	80.33	7.82	7.77	56.00	7.75	7.70	326.50	7.79	7.73	416.01	7.69	7.65	878.84	7.74	7.70
8.23	, 2036	17.00	7.83	7.89	56.20	7.80	7.87	47.00	8.01	8.05	0.20	7.77	7.74	120.40	7.89	7.94
6.83	, 2039	5.00	7.68	7.58	70.00	7.68	7.58	412.94	7.65	7.55	199.25	6.74	7.15	687.19	7.39	7.44
Sub-total		47640.11	6.62	6.91	56753.80	6.64	7.01	41019.13	6.74	6.93	46692.25	6.69	7.18	192105.28	6.67	7.01
B RBI’s OMO: Sales	–	–	–	–	–	–	56.00	–	–	149.00	–	–	205.00	–	–
	Purchase	–	–	–	4620.00	–	–	60.00	–	–	1975.00	–	–	6655.00	–	–
Sub-total		–	–	–	4620.00	–	–	116.00	–	–	2124.00	–	–	6860.00	–	–
(A+B)		47640.11	6.62	6.91	61373.80	6.64	7.01	41135.13	6.74	6.93	48816.25	6.69	7.18	198965.28	6.67	7.01
3 Market Repo: Govt Securities	27536.38			45632.97			49534.35			62866.99			185570.69
Sub-total	27536.38			45632.97			49534.35			62866.99			185570.69
4 State Govt Securities	441.49	7.77	7.94	633.72	7.54	7.95	1712.89	7.55	7.91	807.29	7.50	7.89	3595.39	7.56	7.92
Grand total (1 to 4)	81835.91			111960.75			96571.84			117866.91			408235.40

(–) means no trading. YTM = Yield to maturity in per centage 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. FCI SB= Food Corporation of India Special Bonds. Securities with small-size transactions (Rs 50 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.

july 18, 2009 vol XLIV No 29

offered by these securities in the range of 7.80% and 7.89% which were incidentally higher compared to the May issues that were in the range of 7.10% and 7.50%.

3.2 Treasury Bills

The total issuance under treasury bills (TBs) of all maturities aggregating Rs 22,000 crore in June was signiﬁcantly lower than the total issuance of Rs 42,000 crore in May. This is partly explained by much larger issuance of dated securities during the month. From the demand point of view, there seems to be greater preference as reﬂected in the bid cover of more than three. Flooded with liquidity, the market seems to be looking towards acquiring activity this year is evident, compared to June 2008 when the issues amounted to only Rs 1,900 crore. In contrast to May, when private corporate sector dominated bond issues accounted for 53% share, June saw the dominance of the ﬁnancial sector comprising banks and FIs and the NBFCs. The banks/FIs made 12 issues raising Rs 5,425 crore (55%) and the NBFCs 10 issues for an amount of Rs 2,015 crore (20%). Banks/FIs issued upper tier II or perpetual bonds of uniformly 10-year maturity, except the issue by the National Housing Bank for three-year maturity, at a coupon rate of 6.75%. The 10-year issues carried coupons in the range of 8.38% and 9.15%, most of them incorporating step-up

Years to Maturity

The market repo transactions amounted to Rs 1,85,570 crore in June against a high of Rs 3,71,976 crore in May and the outright transactions showed a dip from Rs 2,70,485 crore to Rs 1,92,105 crore during the same period. The RBI’s OMO window also saw a

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 (May-June 2009) Repo / RR Period Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding 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

04 May - 8 May 09 1-88 1 245 1 245 318 7,45,540 318 7,26,453 1,45,291 -7,26,208 1,45,770

11 May - 15 May 09 1-14 0 0 0 0 221 6,32,335 221 6,32,335 1,26,467 -6,32,335 1,22,970

18 May - 22 May 09 1-90 1 235 1 235 247 6,26,610 247 6,26,610 1,25,322 -6,26,375 1,34,840

25 May - 29 May 09 1-14 0 0 0 0 214 6,34,155 214 6,34,155 1,26,831 -6,34,155 1,10,685

01 June - 05 June 09 1-14 0 0 0 0 257 6,20,655 257 6,20,655 1,24,131 -6,20,655 1,30,810

08 June - 12 June 09 1-14 0 0 0 0 225 5,81,580 225 5,81,580 1,16,316 -5,81,580 1,31,845

15 June - 19 June 09 1-14 1 500 1 500 263 6,49,200 263 6,49,200 1,29,840 -6,48,700 1,34,285

22 June - 26 June 09 1-14 0 0 0 0 257 6,12,115 257 6,12,115 1,22,423 -612,115 1,31,505

The weekly figures reported are cumulative except the net outstanding amount (Col 13).

* with effect from 21 April 2009 the Repo Rate is 4.75% and Reverse Repo Rate 3.25%. # includes special Repo from 14 October 2008. ** Includes Second LAF Auctions under Repo and Reverse Repo (The second

LAF is being conducted on reporting Fridays with effect from 8 May 2009). @ Net of Repo and Reverse Repo Outstandings.

TBs, even for a smaller spread. The cut-off rates rather softened during the course of the month, unlike the dated securities where the rates hardened a bit in the later part of the month. The cut-off yield rates were range-bound, signifying very low short-term money market rates, consequent to abundant liquidity.

The 91-day TBs were issued for Rs 19,500 crore, at cut-off yields ranging from 3.32% to 3.36%. The 182-day TBs were for raising a meagre amount of Rs 1,000 crore, but this maturity attracted a very high bid cover ratio of 4 to 6, and the yield rates at 3.53% and 3.59% in two issues. The issue of 364-day TBs aggregated Rs 2,000 crore, at cut-off yields of around 4% (Tables 7, 8 and 9, p 30).

3.3 Corporate Bonds

The corporate bond issues during June aggregated Rs 9,924 crore in 31 issues, compared to 21 issues for an amount of Rs 15,117 crore in the previous month. The signiﬁcant pick up in corporate bond market options, up to 50 basis points, if call was not exercised at maturity. The issues by NBFCs, mostly in the form of non-convertible debentures (NCDs) were for short-term of two to three year maturity, carrying coupons in the range of 7.5% and 9.1%, with the exception of LIC Housing Finance Co, which raised one and a half to two year bonds at a relatively low coupon of 7.1% and 7.24%.

The state and central undertakings accounted for ﬁve bond issues, with maturities ranging from 10 to 15 years for an aggregate amount of Rs 1,659 crore. The coupons ranged from 8.25% to 9.05%. The private corporate sector came out with four NCD issues for a total amount of Rs 825 crore.

4 Secondary Market

The secondary market activity in all segments of markets remained somewhat subdued except the operations of RBI in the LAF window. The total turnover showed a marked decline from Rs 7,00,680 crore in May to Rs 4,08,235 crore in June.

july 18, 2009

reduced volume of Rs 6,860 crore in June against Rs 17,389 crore in May. The volumes were concentrated in 6.07% 2014, 6.49% 2015 and 7.59% 2016. This overall reduced secondary market volume in June could be partly attributed to heightened activity in the primary market, with large investments taking place in primary issues. Uncertainties about the direction of interest rates could have also contributed to this (Appendix Table, p 31).

The yield curve has shifted upward marginally and showed spikes in benchmark maturities of around 5-year, 10-year and 30-years. The yield rates showed generally an upward movement during the course of the month (Graph E).

The outstanding amount under RBI’s LAF)remained at elevated levels of more than Rs 1,30,000 crore, with daily averages of bids accepted remaining mostly above Rs 1,20,000 crore (Table 10).

The daily average turnover in the bonds segment of trades in NSE witnessed a dip from Rs 487 crore to Rs 348 crore.

vol XLIV No 29

Choice between Monetising and Monetary Easing

Choice between Monetising and Monetary Easing

MONEY MARKET REVIEW

Graph A: Gross Borrowings of the Centre and Movements in Yield Rates the 10-year and above

Table 2: Gross and Net Borrowings of the Centre and Movements in Yield Rate

Table 3: Select Banking Data – Variation in 2009-10 upto 26 June 2009

Rates – June 2009

3.5 –

0.5 –

MONEY MARKET REVIEW

3.5 – 3–

0.5 – –

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

EPW

Term & Policy

Circulation

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