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Wanted: A Turf War for Development of Financial Markets

The effectiveness of a regulatory architecture in the financial sector can be gauged by three parameters - (1) the framework and mechanisms in place for clearly defined regulatory jurisdictions of financial markets and institutions; (2) the clarity regarding the developmental role with regard to the promotion and nurturing of the financial institutions and markets in their respective areas of jurisdiction; and (3) the responsibility and accountability for financial stability. Testing the present arrangements in India against these three parameters shows some weaknesses and the need for improvement.

Wanted: A Turf War for Development of Financial Markets

Epw Research Foundation

structure, with multiple presence and varying degrees of stakes. The problems associated with the presence of multiple regulators in the financial sector are well recognised. The classic case is the cooperative financial sector having multiple regulatory/supervisory jurisdictions – the Reserve Bank, the central government and state governments – working often at cross-

The effectiveness of a regulatory architecture in the financial sector can be gauged by three parameters – (1) the framework and mechanisms in place for clearly defined regulatory jurisdictions of financial markets and institutions; (2) the clarity regarding the developmental role with regard to the promotion and nurturing of the financial institutions and markets in their respective areas of jurisdiction; and (3) the responsibility and accountability for financial stability. Testing the present arrangements in India against these three parameters shows some weaknesses and the need for improvement.

Team led by K Kanagasabapathy and supported by V P Prasanth, R Rekha Rao, Rema K Nair, Anita B Shetty and Sharan P Shetty.

series of news items hit the media pages in the last two weeks, all relating to the regulatory architecture of the financial sector in India, suggesting that a turf war was underway. The effectiveness of a regulatory architecture in the financial sector can be gauged by three parameters. First is the framework and mechanisms in place for clearly defined regulatory jurisdictions of financial markets and institutions. Second is the clarity regarding the developmental role with regard to promotion and nurturing of both institutions and markets in their respective areas of jurisdiction. Apart from regulation and development, the third element, which has gained considerable importance in recent years as part of a meaningful financial architecture, has been the responsibility and accountability for financial stability. This is undefined, perhaps in a clear manner under any law, but is most critical for the prevention of a systemic crisis and quick resolution of such crisis when it occurs. Testing the present arrangements in India against these three parameters shows some weaknesses and the need for improvement. The gray areas essentially lie in overlaps and gaps in both regulation and development of financial markets and some institutional structures such as cooperatives and financial conglomerates. And, the present arrangement for inter-regulatory coordination has not been transparent.

1 Financial Market: Regulation, Development and Stability

1.1 Regulatory Structure

The architecture of Indian finance, both in terms of institutions and markets, is complex and hence the regulatory system also has historically developed into a complex

september 19, 2009

purposes. As a result, this sector is the most weakly regulated and worst performing. Unfortunately, the cooperative sector is not an exception. Another neglected area has been bond market development. The main point is that, for effective regulation, as also development of a sector, the jurisdiction must be clear and only then, responsibility and accountability can be properly fixed.

In India, different segments of the financial system are regulated by different regulators. The RBI, the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) are the three major regulatory bodies, and the Pension Funds Regulatory and Development Authority (PFRDA) would be the fourth, once the PFRDA Bill 2005 is passed by the Parliament. While regulatory jurisdictions between these four are demarcated, there are some gaps and areas of overlap. The central government has some overarching powers over the financial system and policies as a whole.

The RBI is fundamentally enjoined with the objective of securing monetary stability. The preamble to the Reserve Bank of India Act asserts the objective of establishing the RBI: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage”. The Act accordingly provided the RBI with an armoury of powers to manage liquidity in the system including to be the lender of last resort. Apart from the responsibility for rural credit and development, the other major regulatory and supervisory powers of the RBI got expanded or clarified by other legislations like the Banking Regulation Act, Foreign Exchange Management Act, Government Securities Act, and some incremental powers gained

vol XLIV No 38


Money, foreign exchange, government securities, gold related securities and related derivatives markets

Payment and Settlement Systems

Chart A: Regulatory Structure

New Pension Scheme++ RBI SEBI IRDA PFRDA

Board for Financial Supervision



Stock Exchanges, Depositories, Credit Rating Agencies, Foreign Institutional Investors, Stock Brokers/Sub-brokers, Share Transfer Agents, Banker/Registrars to an Issue, Trustee of Trust Deeds, Merchant Bankers, Underwriters, Portfolio Managers, Investment Advisers, Custodians of Securities, Venture Capital Funds, Collective Investment Schemes (incl. Mutual Funds), Self Regulatory Organisations (pertaining to Capital Markets) Financial Institutions (IFCI, NABARD+, NHB++, SIDBI***, EXIM Bank), Nonbanking financial companies (AFC/EL/

Corporate, Debit and Equities Markets Life insurers Non-life Insurers Re-insurers Insurance products and markets
and related
Urban Cooperative Banks Regional Rural Banks Rural Cooperatives Banks Non-Banks

Central/state Governments

HP/LC/RNBCs/Chit funds*/Nidhis@) Primary Dealers

* Deposit-taking activities only; controlled by State Governments. *** SIDBI regulates State Finance Corporations. @interest rate ceilings fixed by RBI; controlled by Ministry of Corporate Affairs. ** PERDA Bill 2005 is awaiting Parliamentary approval. + NABARD has supervisory

responsibilities over rural credit institutions-RRBs and cooperatives. Source: RBI (2009), India’s Financial Sector- An Assessment, Vol II.

from amendments to the Reserve Bank of India Act from time to time. An amendment made in 2006 enormously enhanced the RBI’s jurisdiction over the financial system. It reads: “The Bank may, in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time.” The Bank has been given powers to call for information, statements and other particulars, for the purpose of enabling it to regulate and cause inspection of relevant agencies. However, the directions issued by the RBI will not extend to the trades in respect of the transactions on the stock exchanges the jurisdiction over which lies with the SEBI.

While the SEBI has been created as the securities market regulator, it has also been entrusted with the responsibility of development of securities markets. As per the SEBI Act: “it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such

Economic & Political Weekly

september 19, 2009

measures as it thinks fit”. As a matter of fact, the developmental role has been given a priority over the regulatory function.

Likewise, the mandate to the IRDA has been “To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto”.

Similarly, the PFRDA was established, pending a comprehensive legislation, “to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto”. Chart A depicts the regulatory structure over institutions and markets at a glance.

An area of weakness in regulation has been the supervision of financial conglomerates. Usha Thorat, Deputy Governor, RBI unveiled the central bank’s move to a new comprehensive regulatory and supervisory framework for financial conglomerates. Since regulatory responsibilities are fragmented between markets with some gaps, the entities that have presence in more than one market may exploit possibilities of regulatory arbitrage. On the other hand,

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if more than one regulator is having jurisdiction over some market segments or institutions, such areas may tend to be neglected by both or may suffer from conflicting/heterogeneous regulatory/supervisory treatments. Hence, a special disposition is needed for the regulation of financial conglomerates with several arms under different group structures. It would be interesting to watch how this new supervisory framework will evolve.

Another feature has been the divided responsibility between RBI and SEBI in the regulation of financial markets. An issue in this regard pertains to the recommendations of the Raghuram Rajan and Percy Mistry committees suggesting centralisation of regulatory functions relating to all securities markets, including the commodity derivatives markets under the roof of SEBI. The Forward Markets Commission has already expressed dissent with this approach. To what extent the commodity derivatives market belongs to the financial sector as such is another moot point. The RBI governor, D Subbarao also mentioned in a recent speech that this is not a workable solution in the Indian context. Thus, while the division of responsibilities has been inevitable, more effective coordination may be the need of the hour.

1.2 Development of Financial Markets

The regulators themselves have been implicitly or explicitly enjoined with the responsibility of promotion and development of financial markets. The success stories of SEBI in the development of a world-class equity market and the role of RBI in the development of money, foreign exchange and government securities markets are here to stay. But, a serious gap in this regard has been the insufficient efforts in the development of the corporate bond market, much needed in the context of filling the infrastructure financing gap and leveraging the equity market growth for the country’s development. The gap in development has been so glaring vis-a-vis other segments of financial markets; indeed, this entire segment appears to have become the neglected if not the abandoned child of the financial system for a long time. Financial derivative products in money and debt markets also require added focus.

In current discussions following the global crisis, strengthening of regulation and supervision of financial markets have come to the fore. As far as India is concerned, regulation and supervision has not been the major issue. The attention needs to turn to further development of the financial market in all its segments. A turf war in this regard would be a healthy one. But, the government should assume a greater overarching role in the development of markets, according greater independence to regulators on matters of regulation and supervision of institutions and markets.

1.3 Financial Stability

Financial stability is a public good. Given its impreciseness, can anybody hold a monopoly sway over this function? There is no specific regulatory responsibility fixed on any single regulator for financial stability. In the current crisis management, the treasuries have assumed an enormous role in getting back the financial systems to normalcy. The State is the only stakeholder, when all else fails! Even otherwise, while the central bank will have a greater stake in maintaining financial stability, by virtue of its being the lender of last resort and supervisor of banking and payments and settlement systems, financial stability at best is a joint responsibility. If the stock market or insurance or pensions sector are the sources of vulnerability, the respective regulators also chip in. Furthermore, as has been demonstrated in the recent crisis, the contagion spread across the financial system from credit market to money and stock markets and then to insurance and pensions and from the financial sector to the real sector. Financial stability calls for a greater role of the State and constructive and ongoing inter-regulatory coordination arrangements.

1.4 The Way Forward

Given the current multiple regulatory structure, there is a great need for interregulatory coordination on all crosscutting issues. One key recommendation relates to the consideration for creating a formal structure. The Raghuram Rajan Committee proposed a legal Financial Sector Oversight Authority (FsOA). Subbarao has rightly mentioned in this context that while a formal structure will have the merit of enforcing accountability, the flip side is that it may make the forum excessively bureaucratic and detract from its other value adding features. There is a High Level Coordination Committee (HLC) on Financial Markets comprising heads of all the four regulatory agencies and the finance secretary, government of India. The committee at present though created formally, functions more as an informal coordinating mechanism without specifics about the periodicity of meetings and a formal agenda. But, this arrangement is perceived to be functioning effectively insofar as it provides a coordinated response in times of instability and addresses critical vulnerabilities arising in the system that could create the potential conditions of a systemic failure. But the fundamental issue is whether the HLC has a wellidentified role in the regulation of the financial sector, and where there are jurisdictional overlaps or gaps, and whether there are mechanisms to address them appropriately with a common understanding. From this angle, even if there is no statute, a formal memorandum of understanding will be the minimum that may be needed to ensure proper allocation of respon sibility and accountability. Flexibility is good, but beyond a point it could only lead to lack of proactive and constructive policy interventions or protracted responses when joint action is involved.

The development of the financial sector and financial markets, in particular, requires concerted efforts. Apart from the regulators, the State has a significant role, particularly in a country like India, since many of the development measures would require legislative changes and creation of new micro-market structures. Since loosely defined and divided responsibility between regulators leads to neglect of some sectors like the bonds market, again a strong coordinating mechanism is needed. It would therefore be ideal to create a formal agency under the authority of the government. Instead of the FsOA, which could turn bureaucratic and affect the independence of regulators, a Financial Markets Development Agency may be created to fill the void of missing markets and products in the Indian financial system. One example is the separate Ministry of Economic Development in New Zealand

september 19, 2009

which inter alia seeks to develop an environment in the financial sector that supports economic growth and access to reliable information while finding the right balance between managing risk and encouraging innovation in the sector.

2 Money, Forex and Debt Markets

As a sign of high liquidity floating in the system, the money market volume in terms of transactions in call, notice, term money as also the collateralised borrowing and lending obligation (CBLO) and market repo, showed substantial pick-up in August. Despite such buoyancy, the rates have marginally firmed up in sympathy with short-term rates in treasury bill auctions as also in the auctions of dated government securities. The Commercial Paper (Cp) and certificates of deposit (CD) issuances also showed increases till the month of July. The trends in primary auctions belied the expectations that a high amount of liquidity in the system will see the securities actions sail through smoothly, without much pressure on yield rates. The declining interest in SLR investments is evident from the decreasing bid-cover ratio with fresh auctions. The devolvement on primary dealers became a rule rather than an exception, and, quite unusually, the PDs have been extended the benefit of holding their securities in the held-to-maturity portfolio. The widening difference between the cut-off yields and the weighted average throws up concerns of winners’ curse and dampens the potential for secondary market trades. A fear of treasury losses has gripped the market in the wake of clear signals from the central bank that the exit from the accommodative policy stance may happen sooner than later compared to many other countries. The RBI has been highlighting the conflicting situations arising for its monetary management in the context of implementing the huge borrowing programme of the government.

The primary as also the secondary market volumes in both treasury bills and dated government securities remained subdued during August, reflecting concerns about inflationary expectations as also the possibility of a hike in policy rates by the Reserve Bank. Bank credit has yet to show any signs of a significant pick up till

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end-August. The liquidity is substantially absorbed by government securities auctions. The Reserve Bank seems to be purchasing foreign currency from the market, as reflected in the accretion to net foreign exchange assets, reducing the pressure on the rupee to appreciate. Combined with a fall in FII flows during the month, the rupee turned weaker against US dollar.

One encouraging trend is the consistent increase in primary market activity in the corporate bond market segment, the private corporate sector showing a relatively larger presence, though banks and financial institutions and public sector companies are still the dominant issuers.

2.1 Money Market

Overall, money market activity remained very buoyant in August, all segments witnessing an increase in average daily volume. Despite higher volumes, rates in all segments edged up during the month. The aggregate daily volume transacted in the call, notice and term money market together with CBLO and market repo, increasing sharply from Rs 76,058 crore in July to Rs 96,215 crore in August, represented a growth of about 26.5%. August recorded a growth of 5.43% in daily average volume of call money transactions to Rs 6,656 crore in comparison to Rs 6,313 crore in July. Call rates edged up and moved within a range of 3.19 to 3.24%, leaving aside a few instances. The mean call rate was 3.22%, with daily average rates moving in a higher range of 3.02 to 3.35% compared to 2.63 to 3.27% in July. The notice money market saw an increase in daily average volume by 4.3% in August. The volume reported was Rs 1,451 crore compared to Rs 1,391 crore in July. The notice money rates also moved upwards, with daily average rate moving in the range of 2.25 to 3.34% against 2.00 to 3.30% in July. The daily average borrowings in the term

Table 1: Money Market Activity (Volume and Rates)

money market amounted Chart B: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO Rates


Call Rates

– August 2009

to Rs 126 crore in August compared to Rs 193 crore –


in July. 3


In comparison to the – previous month, the


CBLO and repo markets – –

were significantly more 1.5 active. Upward trends in –


volumes have been


exhibited in both the – –

markets. The CBLO vol

1/8 3/8 5/8

ume increased from Rs 47,934 crore to Rs 62,370 crore and the market repo volume increased from Rs 20,227 crore to Rs 25,612 crore. The CBLO rate was in the range of 2.20 to 2.85% in August compared to 2.21% to 2.29% in July. Repo rates were in the range of 2.43 to 2.96%. Repo transactions made outside RBI witnessed a growth of 22.26% (Table 1 and Chart B).

Based on the latest available information, the outstanding CP issues by companies witnessed an increase from Rs 68,721 crore on 30 June to Rs 79,582 crore on 31 July 2009. The interest rates on these instruments varied in the range of

3.04 to 8.90% in July partly reflecting maturity differences. The outstanding cds amounted to Rs 2,35,715 crore in July and the interest rates were in the range of 3.34% to 8.00%. The interest rates in the CP and CD markets in July showed some softening.

Liquidity in the system was further augmented by increased OMO purchases made in the month of August. The RBI made net purchases of securities through its OMO amounting Rs 12,073 crore. But, the excess liquidity absorbed by the central bank on a daily average basis through the LAF window marginally came down from Rs 1,26,740 crore during July to Rs 1,24,488 crore in August 2009 (Table 2).

August 2009 July 2009
Instruments Daily Average Monthly Range of Weighted Daily Average Monthly Weighted Range of Weighted
Volume (Rs Crore) Weighted Average Daily Volume Average Rate (%) Average Daily Rate
Average Rate (%) Rate (%) (Rs Crore) (%)
Call Money 6,656 3.22 3.02-3.35 6,313 3.22 2.63-3.27
Notice Money 1,451 3.22 2.25-3.34 1,391 3.20 2.00-3.30
Term Money 126 193
CBLO 62,370 2.52 2.20-2.85 47,934 2.79 2.21-2.29
Market Repo 25,612 2.64 2.43-2.96 20,227 2.82 2.04-3.08
Source: and
Economic & Political Weekly september 19, 2009 vol XLIV No 38

Repo Rates – Outside the RBI CBLO Rates

7/8 9/8 11/8 13/8 15/8 17/8 19/8 21/8 23/8 25/8 27/8 29/8

Table 2: RBI's Market Operations (Rs crore)

Month/ Year OMO (Net Purchase(+)/ LAF (Average Daily
Sale(-)) Injection (+)/
April-09 20,292 -95,915
May-09 16,959 -1,29,997
June-09 6,451 -1,23,153
July-09 5,243 -1,26,740
August-09 12,073 -1,24,488

Source: RBI's Weekly Statistical Supplement.

2.2 Forex Market

The dollar remained weak against the British pound and euro, also vis-à-vis many other currencies, during August 2009. In comparison to the Chinese yuan and Japanese yen, the dollar remained stronger and so also with many other Asian currencies. As a consequence, the rupee remained weak against dollar. A significant factor that influenced the rupee exchange rate was the relative dip observed in FII investments. The total net inflow of FIIs was $ 1.95 billion only in August compared to Rs 2.73 billion in July. The equity market also exhibited a dip in total turnover though the stock indices performed better in comparison to July. The increase in net foreign exchange assets valued at about Rs 18,000 crore has also been indicative of net purchases of foreign currency by the RBI during the month.

The rupee started with a relatively stronger position in the beginning of the month due to the dollar remaining relatively weaker vis-à-vis other currencies, but the gains faded out soon. During the first week, the rupee ruled in the range of Rs 47.54 to Rs 47.86 per dollar. Towards the month end, the exchange rate of the rupee touched Rs 48.98 per dollar as increased demand for dollar came from importers. Another factor that could have led to the rupee remaining weak against

the dollar was the declaration of the bank interest. Devolvement on primary dealers Chart C: Yield Curves for Dated Securities – Weighted Averages for August 2009

employee’s strike for two days and a nega-was significant and amounted to Rs 2,530


tive sentiment that persisted with regard crore in August – representing 7% of the to outflow of money from the system. total issuances in comparison to a meagre Rs 7.5

The demand in spot and forward mar-278 crore in July. While the devolvement


Current month Previous month 3-month ago

Yield (% per annum)

kets by merchants fell approximately by on primary dealers might have helped in

1.5%. Interbank spot transactions in July keeping the yield rates at bay, the primary

remained almost flat in comparison to dealers would find it increasingly difficult



June at around $8 billion. The decline in volume of transactions in purchases also kept the interbank swap transactions activity dull. Turnover from sales in the foreign exchange market, in tandem with the purchase market, exhibited a downward trend. A 2.43% improvement was observed in the spot market operations conducted in the interbank segment.

The forward premia segment showed an overall increase in August and specifically in 6-month and 9-month segments. The 6-month average premia moved up from 2.33% in July to 2.47% and the 9-month average premia from 2.24% in July to 2.43% in August (Chart C).

The MCX and NSE shared the currency futures market volume almost equally at 49.97% and 50.03% respectively. The average daily turnover in the rupee dollar futures trades have further increased to Rs 9,034 crore compared to Rs 8,035 crore in July.

2.3 Dated Government Securities

The total issuance by the central government amounted to Rs 33,403 crore (Rs 44,249 crore in July) and that of the state governments to Rs 12,314 crore (Rs 12,300 crore in July). There were six instances of market borrowing by the central government and nine securities bearing a combination of both long- and medium-term maturities were issued. Instruments with maturity of six and seven years constituted 47% of the total issuance. The cut-off yields on comparable maturities moved up and ranged between 6.35 and 8.28% in August compared to 6.49-8.24% in July, respectively for six and seven year maturities. The bid-cover ratio was the highest for long-term instruments of 7.02% 2024 (bid-cover ratio 2.44) and 8.23% 2032 (bid-cover ratio 2.15) instruments.

The fact that the cut-off rates were not fixed at market clearing rates, but with high incidence of devolvement on primary dealers is another sign of declining market to distribute these securities in the second-3.5 ary market. The primary dealers, as a 2.5 result, were shown some sort of a regula

0123456789 101112131415161718192325262730

tory forbearance allowing them to build up significantly declined during the month of a portfolio on held-to-maturity basis. Their August, recording a fall by 51% compared two-way presence in the market is there-to July. The 5-year and 10-year maturity fore likely to be hampered (Table 3). instruments represented benchmark secu-

There were two instances of market bor-rities, with yields of 6.86% and 7.20%, rowing by state governments and 11 states respectively. The yield rates for securities participated. The state of Rajasthan had with longer maturity periods showed an participated in both the auctions and upward trend indicating market expectaraised Rs 1,000 crore. Maharashtra and West tions of the future short-term interest rates Bengal raised the maximum of Rs 2,000 to rise. This increase in secondary market crore. Higher yields on these securities were yield rates is devoid of any RBI policy interoffered by Goa – 8.24% and lower yields ventions and prior to any announcement were offered by the states of Maharashtra regarding the exit from the central bank’s and Karnataka. The bid-cover ratio accommodative monetary policy stance. amongst the state government securities RBI’s signal that the exit could be earlier was the highest for the state of Rajasthan, than many other countries could have which prompted the

Table 3: Details of Central Government Market Borrowings (Rs crore)

state to issue securi-

Date of Auction Nomenclature Competitive Bid Cover Ratio Devolvement on YTM at Cut-off ties once more in of Loan Bids Accepted Primary Dealers Price (%)

14-Aug-09 6.35% 2020 R 3,361 1.44 630 7.45% (Rs 92.13)

the same month. The

states with lower

7.35% 2024 R 1,991 2.44 nil 7.77% bid-cover ratios were (Rs 96.30)

Goa and Jharkhand. 7.02% 2016 N 5,705 1.98 286 7.02%

21-Aug-09 6.49% 2015 R 4,405 1.65 591 7.10%

The market demand

(Rs 97.11)

for state securities

6.90% 2019 R 4,675 1.56 321 7.30% was relatively higher (Rs 97.20)

because of higher 8.24% 2027 R 1,993 1.85 nil 8.10% (Rs 101.33)

yields. However, the

28-Aug-09 7.02% 2016 R 5,560 1.55 431 7.44%

overall bid-cover

(Rs 97.74)

ratio for state securi-7.94% 2021 R 3,717 1.52 272 7.99% (Rs 99.60)

ties also declined

8.28% 2032 R 1,996 2.15 nil 8.20%

significantly from

(Rs 100.79)

3.29 in July to 2.40

Total for August 33,403 1.79 2,530 in August, despite a Total for July 44,249 2.44 278

lower volume of issu-Unlike in the case of treasury bills and state development loans the weighted average prices of central government dated securities auctions are not disseminated and hence, weighted average yields are not available. ance (Table 4). R: Re-issue, N: New issue Source: RBI Press Releases

Eighty central se c

u rities for a volume Table 4: Details of State Government Borrowings (Rs crore)

Date of Auction Number of Competitive Bid Cover YTM at Cut-off Weighted

of Rs 1,27,736 crore

Participating Bids Accepted Ratio Price (in %) Average

were traded in the

States Yield (%)

secondary market. 04-Aug-09 6 7,474 2.28 7.99 7.96

Reflecting the gener-25-Aug-09 5 4,839 2.51 8.21 8.16 Total for August 11 12,314 2.40 8.10 8.06

al low market senti-

Total for July 11 12,300 3.60 7.85 7.82

ment, the secondary

Includes the green shoe option of Rs 400 crore of Andhra Pradesh state government. market turnover also Source: RBI Press Releases.

september 19, 2009 vol XLIV No 38



Table 5: Secondary Market Outright Trades in Government Papers: NDS and NDS-OM Deals (Amount in Rs crore)
Descriptions August 2009 Previous Month Three Months Six Months
Last Week (28th) First Week (7th) Total for the Month (July) Ago (May) Ago (February)
1 Treasury Bills
A 91-Day Bills 1,049 3.33 2,370 3.19 7,473 3.25 15,028 3.12 23,027 3.08 20,266 4.54
B 182-Day Bills 218 3.26 425 3.52 2,075 3.43 1,171 3.29 2,629 3.29 2,166 4.55
C 364-Day Bills 611 4.00 572 3.32 1,929 3.73 2,718 3.54 5,425 3.49 4,529 4.46
2 GOI Dated Securities
Year of Maturity (No of Securities)
2009 - - - - - - - - - 7,694 3.09 7,342 4.84
2010 8 1,145 4.22 1,149 4.05 4,778 4.29 5,507 3.85 7,187 4.14 6,105 4.75
2011 7 1,410 5.83 2,455 5.29 6,481 5.53 4,171 5.08 3,583 4.89 4,135 5.12
2012 6 40 6.50 495 6.07 1,985 6.19 3,661 5.74 2,719 5.84 1,784 5.87
2013 2 676 6.85 70 6.56 2,184 6.74 3,757 6.31 10,299 5.95 3,304 5.91
2014 4 6,990 7.01 6,640 6.82 32,155 6.86 57,784 6.46 45,422 6.09 15,833 5.94
2015 4 3,959 7.09 1,660 6.93 10,710 7.02 25,990 6.57 469 5.79 1,155 6.57
2016 4 6,966 7.25 635 7.05 16,674 7.16 8,538 6.78 13,475 6.79 3,335 6.53
2017 4 40 7.38 279 7.17 819 7.25 1,209 7.03 4,952 6.59 17,674 6.63
2018 2 - - 8 7.13 160 7.26 1,655 7.48 777 6.46 62,746 6.34
2019 4 16,841 7.26 4,389 7.02 25,817 7.20 34,930 6.86 1,10,630 6.31 20,803 5.93
2020 2 2,922 7.53 70 7.27 11,596 7.47 8,857 6.87 12,696 6.81 48 7.09
2021 3 2,543 7.86 2,017 7.42 6,908 7.63 74,813 7.21 1,424 6.75 329 6.82
2022 5 75 7.85 145 7.56 291 7.68 9,322 7.34 8,809 7.19 3,622 7.38
2023 7 133 7.95 268 8.11 574 8.02 942 7.90 479 6.86 2,417 7.13
2024 3 13 7.90 0 7.43 45 7.86 3,223 7.39 3,447 7.60 345 7.86
2025 1 1 7.97 - - 1 7.96 8 7.86 5,278 7.60 1,168 7.80
2026 5 135 7.95 6 7.87 307 7.94 2,257 7.89 7,916 7.78 51 7.80
2027 1 1,670 8.09 1,625 7.87 4,545 7.98 9,621 7.72 7,517 7.39 221 7.22
2028 2 0 7.72 0 7.55 3 7.92 19 7.54 24 7.13 26 6.94
2032 2 140 8.13 140 7.87 395 8.00 46 7.83 2,063 7.27 5,337 7.35
2034 2 69 7.88 21 7.94 283 7.99 2,158 7.79 7,144 6.88 2,836 7.62
2035 1 187 8.08 479 7.92 954 7.99 2,054 7.82 603 7.74 232 7.40
2036 1 11 7.98 10 8.06 70 8.01 33 7.78 1,425 7.48 3,724 7.40
2039 - - - - - - - 122 7.87 4,453 7.35 2,715 7.18
Sub-total 45,965 7.17 22,561 6.74 1,27,736 6.97 2,60,679 6.81 2,70,485 6.33 1,67,289 6.26
3 State Govt Securities 1,494 8.04 964 7.69 4,175 7.85 5,960 7.64 9,750 7.10 2,035 7.12
Grand total (1 to 3) 49,336 26,892 1,43,388 2,85,556 3,11,315 1,96,286

(-) means no trading. YTM = Yield to maturity in per cent per annum. NDS = Negotiated Dealing System. OM = Order Matching Segment. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: Compiled by EPWRF; based data from RBI, CCIL.

Chart D : Spot Quotations and Annualised Forward Premia for the US Dollar segment. The 1-5 year yield Rs 23,000 crore. The bid-cover ratio for in the Domestic Inter-Bank Market

spread increased from 195 91-day bills ranged from 2.54 to 3.50 with

6 60

bps three months ago to an average ratio of 3.04 in August. The

5 50

279 bps in August, but the bid-cover ratio for July was higher at 3.92.

4 40

1-10 year spread remained Interestingly, the bid-cover ratio for 364

flat at around 300 bps day bills was in the range of 3.32 to 4.20

3 30

(Table 7, p 32). with an average of 3.76, indicating inves


tors’ preference for these securities vis-à



2.4 Treasury Bills vis the other bills. The preference for 182


The treasury bills market day bills was the least with a bid-cover

seemed dull in the month ratio of 2.86 and 2.18 in July and August, triggered this trend. The volume traded in of August. The total respectively. The implicit yields at cut-off state securities also fell by one-third in issuance under treasury bills of all prices on these securities edged up in August (Tables 5, 6 and Chart D). maturities aggrega-

The top five traded central securities were ted Rs 28,000 crore Table 6: Yield Spreads (Weighted Average): Central Government Securities


(Basis Points (bps))

6.07% 2014; 6.45% 2015; 7.02% 2016; in August against

Yield Current Month Previous Three Six Months Spread in bps Last Week First Week Entire Month Month Months Ago ago

6.90% 2019 and 6.35% 2020, accounting Rs 40,000 crore in

1 Year - 5 Year 279 277 257 261 195 119

in the aggregate for a market share of 73% July, indicating a

5 Year - 10 Year 25 20 33 40 23 -1

in August 2009. The yield curve for central 30% fall in volume.

10 Year - 15 Year 64 41 66 54 129 193

securities has further shifted northwards 91-day bills took the

1 Year - 10 Year 304 297 290 301 217 117 during August, particularly in 1-5 year larger share of Source: As in Table 5.

Economic & Political Weekly

september 19, 2009 vol XLIV No 38 31

Premia in percentage

Monthly Averages (Apr 2007 to July 2009) (Daily) Working Days Aug 2009 6-month 1-month spot
Table 7: Predominantly Traded Government Securities (Amount in rupees, crore)
Descriptions August 2009 Previous Month Three Months Six Months
Last Week (28th) First Week (7th) Total for the Month (July) Ago (May) Ago (February)
GOI Dated Securities
6.57 , 2011 285 5.56 - - 400 5.55 805 4.88 700 4.87 440 4.94
9.39 , 2011 1,125 5.90 2,180 5.31 4,761 5.55 1,686 5.16 1,481 4.88 3,174 5.15
7.40 , 2012 30 6.50 355 6.04 445 6.11 3,490 5.73 2,243 5.86 1,025 5.78
7.27 , 2013 676 6.85 70 6.56 2,059 6.73 3,667 6.31 10,063 5.94 3,223 5.91
6.07 , 2014 6,545 7.00 6,585 6.82 30,962 6.86 54,198 6.45 11,858 6.03
7.37 , 2014 80 6.96 55 6.92 338 6.93 711 6.53 3,638 6.21 1,925 6.21
7.56 , 2014 355 7.17 - - 835 7.04 2,595 6.62 28,977 6.10 13,905 5.90
6.49 , 2015 3,959 7.09 1,585 6.92 10,614 7.02 25,974 6.57 - - - -
7.02 , 2016 6,711 7.25 - - 13,782 7.16 - - - - - -
7.59 , 2016 245 7.30 635 7.05 2,871 7.17 8,538 6.78 13,470 6.79 3,334 6.53
7.46 , 2017 - - 183 7.16 602 7.25 567 7.00 1,722 6.58 15,494 6.62
7.49 , 2017 10 7.36 - - 21 7.32 43 7.09 443 6.47 347 6.61
6.05 , 2019 71 7.35 10 7.16 113 7.27 2,478 6.94 1,10,356 6.31 20,753 5.93
6.90 , 2019 16,750 7.26 4,379 7.02 25,684 7.20 32,439 6.85 0 6.51 0 6.37
6.35 , 2020 2,922 7.53 70 7.27 11,596 7.47 8,841 6.87 12,490 6.81 26 6.73
7.94 , 2021 2,522 7.86 2,017 7.42 6,887 7.63 74,806 7.21 1,353 6.78 318 6.78
8.20 , 2022 42 7.84 25 7.56 138 7.75 8,963 7.33 7,551 7.21 724 6.95
8.24 , 2027 1,670 8.09 1,625 7.87 4,545 7.98 9,516 7.72 7,517 7.39 221 7.22
7.50 , 2034 24 8.06 21 7.94 238 8.03 1,803 7.87 7,144 6.88 2,836 7.62
7.40 , 2035 187 8.08 479 7.92 954 7.99 2,054 7.82 603 7.74 192 7.27
6.83 , 2039 - - - - - - 122 7.87 4,453 7.35 2,715 7.18
Total (All Securities) 45,965 7.17 22,561 6.74 1,27,736 6.97 2,60,679 6.81 2,70,485 6.33 1,67,289 6.26

(-) Means no trading. YTM = Yield to maturity in percentage per annum. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: As in Table 5.

Table 8: Auctions of Treasury Bills (Rs crore) 4.25% against 3.77% in institutions and banks, constituting 42.2%

Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted

Accepted Ratio Yield (%) Average Price (Rs) AverageJuly. It is significant to of total issues. The non-banking financial Yield (%) Price (Rs)

note that yields at corporations, central undertakings and

A: 91-Day Treasury Bills

weighted average prices corporates constituted 25.12%, 19.80%

5-Aug-09 8,000 2.74 3.28 3.28 99.19 99.19

in auction widened from and 12.8%, respectively. The Rural Electri

12-Aug-09 5,000 2.54 3.36 3.28 99.17 99.19 18-Aug-09 5,000 3.40 3.36 3.36 99.17 99.17 cut-off yields compared fication Corporation (REC), a triple A rated

26-Aug-09 5,000 3.50 3.40 3.36 99.16 99.17 to July, indicating wider company topped the list in bonds issues by Total for August 23,000 3.04 3.35 3.32 99.17 99.18 spreads in bid prices. volume. The company issued bonds worth Total for July 34,000 3.92 3.23 3.20 99.20 99.21

The accompanying win-Rs 1,729 crore, yielding coupon rates of

B: 182-Day Treasury Bills

ner’s curse would natu-8.35% and 8.72% for 5 and 10 years maturi

5-Aug-09 1,500 1.83 3.76 3.61 98.16 98.23

rally affect secondary ties. In July, the same company had issued

18-Aug-09 1,500 2.53 3.92 3.86 98.08 98.11

market trades. As evi-bonds worth Rs 2,000 crore. The other

Total for August 3,000 2.18 3.84 3.74 98.12 98.17 Total for July 3,000 2.86 3.45 3.42 98.31 98.33 dent, trading of treasury major participants were State Bank of

C: 364-Day Treasury Bills bills in the secondary India (SBI) (‘AAA’ by CRISIL) yielding cou12-Aug 1,000 4.20 4.17 4.07 96.01 96.10

market fell by a huge pon rate of 9.10% for 10 year maturity and

26-Aug 1,000 3.32 4.34 4.28 95.85 95.91

margin with respect to Srei Equipment Finance Co (‘AA’ Fitch,

Total for August 2,000 3.76 4.25 4.17 95.93 96.01

91-day and 364-day bills. ICRA) yielding coupon rates in the range of

Total for July 3,000 3.90 3.77 3.74 96.38 96.41 Source: RBI's Press Releases. Similar to the primary 10.50%, 10.75% and 11% for maturities in

market, the yields in the range of five years. Bonds worth

Table 9: Details of Commercial Bond Issues

the secondary market Rs 1,000 crore each were issued by these

Institutional Category No of Issues Volume in Rs crore Range of Rates Range of Maturity in Years showed upward trends two companies. The REC issued regular

FIs/Banks 12 4,615 8.45-11.25 3-15

in August (Table 8). bonds, while the SBI issued perpetual

NBFCs 7 2,745 7.15-11.00 2-15

bonds with a step-up facility of 50 bps if

State Undertakings 7 2,745 7.15-11.00 2-15

2.5 Corporate call is not exercised at the end of 10 years.

Central Undertakings 0 0 0.00 0

Bonds Market

Corporates 3 2,164 8.32-8.72 5-15 The Srei Equipment Finance issued non-Total for August 29 12,269 8.32-11.25 2-15 The corporate bonds convertible debentures (Table 9). Total for July 28 10,430 7.00-11.75 1-15

issues experienced an The daily average volume traded in the

Source: Various Media Sources.

increase in volume by NSE on the bonds segment has shown a August: 91-day bills at 3.35% against 4.5% to Rs 10,924 crore in comparison to significant increase in August – Rs 586 3.23% in July, 181-day bills at 3.83% Rs 10,430 crore in July. The market was crore compared to Rs 503 crore in July and against 3.45% in July, and 364-day bills at dominated by bonds issued by financial Rs 348 crore in June 2009.

september 19, 2009 vol XLIV No 38

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