A+| A| A-

Are Market Operations Open?

The RBI's market operations in the post-reform period appear to have had a three-pronged objective: to maintain an appropriate interest rate regime, to manage the government borrowing programme, and to contain exchange rate volatility, while keeping an eye on its impact on competitiveness. Since early 2009, the market operations have led to a significant release of liquidity. It may be necessary for the RBI to make all the operations discretionary and indicate to the public in the interest of transparency the policy intentions of any major operation. While there could be an interest rate corridor for the money market, the repo and reverse repo operations, combined with open market operations in the securities and forex market, should perhaps target a pre-announced rate. The actual rate could be allowed to fluctuate depending upon the market conditions. As in the case of the forex market, the rate may be broadly market-determined, avoiding only extreme short-term volatility.

MONEY MARKET REVIEW

the market, with the objective of augment-

Are Market Operations Open?

ing or absorbing primary liquidity. The objective of this could be just to achieve a particular quantum, but it could be com-EPW Research Foundation bined with the rate objective if there is an

The RBI’s market operations in the post-reform period appear to have had a three-pronged objective: to maintain an appropriate interest rate regime, to manage the government borrowing programme, and to contain exchange rate volatility, while keeping an eye on its impact on competitiveness. Since early 2009, the market operations have led to a significant release of liquidity. It may be necessary for the RBI to make all the operations discretionary and indicate to the public in the interest of transparency the policy intentions of any major operation. While there could be an interest rate corridor for the money market, the repo and reverse repo operations, combined with open market operations in the securities and forex market, should perhaps target a pre-announced rate. The actual rate could be allowed to fluctuate depending upon the market conditions. As in the case of the forex market, the rate may be broadly market-determined, avoiding only extreme short-term volatility.

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

T
he Reserve Bank of India’s (RBI) monetary policy objectives have remained broadly the same since its incorporation, i e, to support growth and maintain price stability with differing weights, though couched in so many words from time to time. Financial stability, a later addition, is more a refinement of price stability, since price stability is an essential condition for financial stability, if not a sufficient one. These objectives are sought to be achieved with an appropriate framework and by using an array of instruments. The framework is one of multiple indicators from 1998 onwards. As a result, we have now multiple objectives, multiple indicators, and multiple instruments. While there can be no one-to-one correspondence between objectives and instruments, the use of instruments in either direction, respectively, in the tightening and easing phases of monetary policy is expected to be consistent with the stance of the policy. For instance, the revision in policy rates has a clear signal about short-term interest rates.

Under the present Liquidity Adjustment Facility (LAF) mechanism, a broad corridor for money market rates is defined, though the corridor itself is widened or narrowed depending upon market conditions. Similarly, when the cash reserve ratio or statutory liquidity ratio is revised, the intended purpose is clear. It is when we come to the open market operations (OMO) of the RBI that we get into the difficulty of understanding which way the policy works. The nature and dimensions of OMO have become so very complex in recent years and how these operations can be attuned to achieve the policy objectives consistent with the emerging stance in a tightening cycle look somewhat puzzling. We try to look at these complexities and the implications.

1 Objectives of OMO

From a textbook perspective, the objective of OMO of the central bank is simple. The central bank buys from or sells securities to

october 24, 2009

interest rate target in the short-term market.

When the OMO became active in India during the early 1990s, it was aimed at sterilising the liquidity impact of the early surge in capital inflows. With an arsenal of various refinance facilities, and the continued use of the cash reserve ratio (CRR), the OMO had limited operational significance for several years. It was when the LAF was introduced early this decade that OMO in the form of repo and reverse repo operations became the primary instrument for managing short-term interest rates. But, with the surge of capital inflows and build-up of reserves, LAF had to carry the heavy burden of sterilising such inflows. This led to the innovative market stabilisation scheme (MSS) which sterilised capital inflows, without providing budgetary support to the government, but by augmenting the supply of securities to the market, and hence it had interest rate implications. With the recent policy of desequestering, the government has been given the leeway to accommodate the fiscal deficit without additional borrowings from the market.

In the recent past, with the RBI’s in ability to participate in the primary issues market, the OMO assumed yet another role – of indirectly monetising the fiscal deficit, and as a consequence, primarily meeting the debt management objective of a smooth conduct of the government’s borrowing programme. The earlier direct private placement of debt with the RBI has been in a way replaced by an indirect public placement of securities. Another issue of debate in the context of OMO in securities is whether such operations should aim at influencing the short-term interest rate or it can be used to influence the entire spectrum of the yield curve. For instance, the United States Federal Reserve targets essentially the Fed Funds rate through its OMO. But even in the US, when the interest rate conundrum was evident the Fed announced at one stage that it would be prepared to deal in long maturities to influence the yield at the long end. When

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MONEY MARKET REVIEW

forward segments. While it may have other circumstances similar to the Month/Year RBI’s Net Net Repos Net Open Market Total
Foreign under the LAF Market Stabilisation
objectives such as stabilising the rupee present. All indications now Currency Assets # Operations Scheme
exchange rate, if not targeting it, in terms point to the beginning of the Apr-07 11,935 -19,189 -313 -12,951 -20,518
of the monetary impact it has the same tightening cycle of monetary May-07 8,138 -5,306 -680 -11,395 -9,243
Jun-07 27,655 -7,687 -252 4,702 24,418
features of OMO. When such operations take policy. Whether the October Jul-07 25,219 -3 -664 -2,410 22,142
place, it is anybody’s guess whether the policy in the coming week Aug-07 38,817 -13,855 -498 -21,407 3,057
RBI is aiming at arresting an appreciation initiates this process by revisSep-07 54,039 22,925 -398 -25,039 51,527
in the value of the rupee, inducing depreciing the policy rates and arrestOct-07 52,372 -24,205 -531 -42,804 -15,168
ation or having an impact on the quantum ing the channels of liquidity Nov-07 29,994 9,425 -146 -1,103 38,170
of liquidity. Usha Thorat, deputy governor flows into the system or not, the Dec-07 18,521 31,080 4,597 12,716 66,914
of RBI has clarified in Singapore, that RBI trend is clear and the market Jan-08 45,251 -34,305 680 1,607 13,233
does not target the exchange rate. But the is discounting this information. Feb-08 38,428 3,850 2,321 -14,031 30,568
markets will continue to interpret the RBI’s An upward revision in policy Mar-08 20,181 58,435 1,809 6,697 87,122
interventions as aiming at targeting the rates will pose an additional Apr-08 15,059 -83,115 -111 -4,052 -72,219
May-08 9,447 3,155 -54 -2,918 9,630
exchange rate and there is a strong school dilemma of higher capital Jun-08 -8,971 34,610 8,860 929 35,428
within India that export competitiveness inflows in the current context. Jul-08 -33,674 29,325 9,488 2,993 8,132
should be an important goal of exchange The annual reports released Aug-08 15,580 -26,725 1,883 -2,218 -11,480
rate management. One exactly opposite by the Reserve Bank in August Sep-08 -13,547 48,880 -836 -,146 34,351
version of this is that the exchange rate have been providing a compreOct-08 -42,465 -67,285 -1 8,617 -1,01,134
should be allowed to appreciate to control hensive table useful to market Nov-08 -47,375 6,785 -7 22,821 -17,776
inflation by reducing import costs. analysts (Table 3.3, p 202 of Dec-08 -2,262 -1,670 7,677 22,316 26,061
Annual Report, 2008-09) docJan-09 10,557 -48,915 6,621 11,286 -20,451
1.1 What Do the RBI’s Feb-09 6,022 -5,215 5,801 6,773 13,381
Operations Tell? umenting the primary liquiMar-09 -8,679 58,335 55,227 13,914 118,797
dity impact of all its market Apr-09 1,971 -106,945 18,591 17,861 -72,464
Looking at the track record, the RBI’s market operations, month-wise beginMay-09 -7,519 -26,410 16,959 30,326 13,356
operations in the post-reform period seem ning April 2007. The table as Jun-09 3,245 555 6,451 17,000 27,251
to have been three-pronged: to maintain an updated by the EPWRF till SepJul-09 23,592 -5,405 5,243 1,827 25,257
appropriate interest rate regime consistent tember 2009 reveals the folAug-09 18,003 -14,105 12,074 2,290 18,262
with giving weight to the twin objectives lowing: (i) the operations in Sep-09 -7,470 47,680 14,273 0 54,483
of supporting growth and containing forex market injected liquidity # : Adjusted for revaluation. + : Indicates injection of liquidity into the banking system. - : Indicates absorption of liquidity from the banking system.
inflationary pressures and expectations, of the order of Rs 3,70,550 (1) Data based on March 31 for March and last reporting Friday for all other months. (2) From April 2006 onwards, the Reserve Bank has stopped participating in the primary
to manage the government borrowing programme without serious disruptions, crore in 2007-08, absorbed an amount of Rs 1,00,308 crore market for government securities in line with the stipulations of the Fiscal Responsibility and Budget Management (FRBM) Act 2003. Source: RBI Annual Report 2008-09, updated by EPWRF.
Economic & Political Weekly october 24, 2009 vol XLIV No 43 29

the central bank operates on a wide range of maturities, it can alter the market portfolio and influence the yield curve as also the duration of portfolio. The RBI’s buy back operations a few years ago, essentially aimed at shortening the duration of the banks’ portfolio thereby reducing the market risk for banks. Similarly, there could be a shuffle between liquid and illiquid securities. Such operations, advertently or inadvertently, could make the central bank’s portfolio relatively riskier and illiquid.

Yet another complication is that while the OMO constitute a discretionary operation, the LAF, under the fixed rate repo regime, has become a passive operation resulting in automatic dumping of surplus liquidity with the RBI. At present, the absorption which is of the order of about Rs 1,20,000 crore is equivalent to a non-discretionary crr of about 4-5%.

The RBI’s operations extend to the foreign exchange market, both in its spot and and to manage the exchange rate containing its volatility, but keeping an eye on its impact on competitiveness. One may add perhaps the objective of accumulating reserves as part of reserves management policy. Ideally, most stakeholders including the government would like to have low inflation, a low interest rate, abundant liquidity and a depreciated exchange rate. Even a central bank would wish so, but, unfortunately, cannot

120000

100000

80000

60000

40000

20000

0 -20000 -40000 -60000 -80000 -100000

Graph A: Monthly Primary Liquidity Flows

RBI’s Net Foreign Currency Assets# Net Open Market Operations Total Net Repos under the LAF Market Stabilisation Scheme

-120000

4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09

deliver all these particularly in a tighten-in 2008-09 and injected liquidity of ing cycle and hence faces dilemmas in Rs 27,880 crore in 2009-10 so far; (ii) the using its various instruments from time to LAF released liquidity of Rs 21,165 crore in time. Such dilemmas were addressed by 2007-08, absorbed Rs 51,835 crore and

the former RBI governor Bimal Jalan about 10 years ago under

Table 1: Monthly Primary Liquidity Flows and Open Market Operations

(in Rs crore)

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MONEY MARKET REVIEW

Rs 1,04,630 crore, respectively in the next two years so far; (iii) the outright OMO in government securities released liquidity in all the three years, of Rs 5,925 crore, Rs 94,548 crore and Rs 73,591 crore, respectively; and (iv) under MSS there

Table 3: Money Market Activity (Volume and Rates)

Instruments September 2009 August 2009
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 8,043 3.25 2.13-3.71 6,656 3.22 3.02-3.35
Notice Money 1,807 3.24 2.25-3.34 1,451 2.98 2.25-3.34
Term Money@ 106 126
CBLO 63,838 2.63 1.27-3.36 58,565 2.49 1.12-3.33
Market Repo 28,818 2.75 1.79-3.06 23,998 2.62 2.43-2.96

Table 2: Maturity Distribution of Primary Issues, GOI Dated Securities and OMO Purchases by RBI (Rs in million)

Maturity Year (April 2009 to September 2009)

Primary % of Total OMO % of Total
Issues Purchase
1 2 3
2012-2014 1,08,000 16.3 19,788 20.0
2015-2019 2,74,000 41.5 45,345 45.8
2020 and above 2,79,000 42.2 33,944 34.2
Total 6,61,000 100 99,077 100

Source: www.rbi.org.in.

was absorption of Rs 1,05,418 crore in 2007-08, followed by injection of Rs 80,315 crore in 2008-09 and Rs 69,304 crore in 2009-10 so far.

The monthwise position (Table 1 and Graph A, p 29) shows a mixed trend as between instruments without any particular pattern. But, overall, in the recent period, net injection seems to be prominent throughout, beginning in April 2007, which is consistent with the current policy stance.

The maturity impact of OMO through securities operations since April 2007 reveals that of the primary issues of securities including MSS securities, about 85% of issues were in maturities of over five years, and the net OMO purchases of securities through auctions also were mostly in maturities of above five years. The maturity impact of OMO on market portfolio therefore does not seem to be significant (Table 2).

1.2 What Can the RBI Do?

One main question is how far has the liquidity impact of all these operations been consistent with the policy stance from time to time. Which objectives have these operations served? While this will require a further disaggregated analysis, if we take the present stance of accommodative policy since early 2009, as part of the road to recovery from the crisis, overall there had been a significant release of liquidity. However, it may be necessary for the RBI to make all their operations discretionary and indicate to the public the policy intentions of any major operations in the interest of transparency. In the case of LAF, the mechanism should change

@ Range of rates during the month. Source: www.rbi.org.in. and www.ccilindia.com.

from passive to active. While there could be an interest rate corridor for the money market, the repo and reverse repo operations, combined with OMO in securities and forex markets should perhaps target a pre-announced short-term rate, say the call money rate, but the actual rate could be allowed to fluctuate depending upon the market conditions. This can be achieved by active interventions in the repo market on a real time basis, now that the RBI has set up a dealing room for market operations. In outright transactions also, operations through the dealing room will be a better option than operating through preannounced auctions. As in the case of forex market, the rate may be broadly market-determined but avoiding only extreme short-term volatility. This will indeed make the RBI’s market operations discrete and more purposeful, instead of being somewhat shrouded and opaque as at present. Such a step would encourage better cash and interest rate risk management by banks, as also provide a healthy market environment for hedging products.

2 Money, Forex and Debt Markets

2.1 Money Market

The money market activity in general during September reflected higher demand for liquid funds. This could be partly attributed to increase in stock market activity and partly to increased demand for funds from the industry. Compared to a negative growth in August, bank credit expanded by as much as Rs 65,572 crore in September. Primary issues/redemption of securities resulted in outflow of liquidity of the order of Rs 60,542 crore during the month. While the RBI was active in outright OMO purchases of securities, it continued to absorb higher liquidity through LAF operations.

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Please send your application package, no later than October 30, 2009, by mail to the ICI office in your home country.

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For Indian Applicants: India China Fellowship Program C/o Centre for Policy Research Dharma Marg, Chanakyapuri New Delhi – 110021 Tel: +91-11-26115273-76 (4 Lines) If you have further questions, or if you wish to send the application by e-mail, please send to:

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october 24, 2009 vol XLIV No 43

MONEY MARKET REVIEW

4

3.5

3–

2.5 – 2–

1.5 – 1–

0.5 –

0 – 1/9 3/9 5/9 7/9 9/9 11/9 13/9 15/9 17/9 19/9 21/9 23/9 25/9

Graph C: Spot Quotations and Annualised Forward Premia for the US Dollar

Graph B: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO Rates – September 2009

Call Rates CBLO Rates Repo Rates – Outside the RBI

Premia in percentage

in the Domestic Inter-Bank Market

6

5

4

3

2

1

0

-1

An escalating trend observed in call money market transactions since July continued in September. The daily average volume of call money transactions was Rs 8,043 crore in comparison to Rs 6,656 crore in August, recording a growth rate of 20.8%. The call rates moved in the range of 2.13-3.71% with the weighted average call rate remaining flat at around 3.25% in September compared to 3.22% in August. Notice money market also witnessed an increase in the volume. The recorded volume in notice money market was Rs 1,807 crore in comparison with Rs 1,451 crore in August. The range of daily weighted average rate in notice money also remained flat at 2.25-3.34% but the weighted rate for the month edged up to 3.24% compared to 2.98% in August. The daily average volume in the term money market was negligible at Rs 106 crore in comparison with Rs 126 crore in August with

Table 4: RBI’s Market Operations (in Rs crore)

Monthly Averages (Apr 2007 to August 2009) (Daily) Working Days Sept 2009 spot 1-month 6-month

Month/ Year OMO (Net Purchase(+)/ LAF (Average Daily Sale(-)) Injection (+)/ Absorption(-))

60 50 40 30 20 10 0

the range of rates widening from 3.50%-6.90% in August to 2.50%-7.05% in September (Table 3, p 30).

The buoyant trend experienced in the Collateralised Borrowing and Lending Obligations (CBLO) and repo market in August also continued in September. The daily average volume in the CBLO segment was

Rs 63,838 crore with a

growth of 9% and the daily

average volume in the

repo market was Rs 28,818

crore with a growth of 20%.

In spite of the increase in

daily volumes, the interest

rate in the CBLO market

edged up to the range of

1.27-3.36% in comparison

with 1.12-3.33% in August.

The monthly weighted

average rate moved up from 2.49% to 2.63%. Interest rate range in the repo market displayed a wider band in comparison to the CBLO. The interest rate range was 1.79- 3.06% against 2.43-2.96% in the previous month. The monthly weighted average rate of 2.75% was higher in comparison with 2.64% in August (Table 3 and Graph B).

The market for comrange of 3.05%-9.35%. The total amount of outstanding certificates of deposit experienced a marginal fall from Rs 2.41 crore in July to Rs 2.33 crore in August. A marginal softening of interest rates was also observed at the lower bound. Interest rates were in the range of 3.60%-8.00% in August against 3.75%-8.00% in the previous month.

The net purchases through OMO of RBI increased to Rs 14,275 crore in comparison with Rs 12,073 crore in August, allowing more liquidity into the system. As in previous months, this was intended to smoothen the borrowing programme of the government. The liquidity absorption by RBI through its LAF operations remained flat at about Rs 1,24,812 crore in comparison to Rs 1,24,488 in August (Table 4).

2.2 Forex Market

The US dollar remained strong against most of the currencies. But, the rupee strengthened against dollar in the month of September, thanks to the huge inflow in the form of FII investments improving from $945 million to as high as $4,263 million between August and September which augmented the dollar supply. The stock market was buoyant, the BSE Sensex soaring from 15,667 to 17,127 points and the tandem between the movements in

Table 5: Foreign Exchange Market: Select Indicators

mercial paper issued Rs/$ Appreciation(+)/ FII Flows Net Purchases BSE Sensex Exchange Rate Depreciation (-) (US $ Million) by RBI (Closing)

by companies remained

(Month End) in % (US $ Million)

upbeat in the month September 48.05 1.75 4,263 17,126.84

of September. The total August 48.90 -1.50 945 (+) 619 15,666.64

amount outstanding July 48.20 -0.60 2,727 (+) 800 15,670.31 June 47.90 -1.20 1,059 (+) 745 14,493.84

increased by Rs 3,444

May 47.30 5.80 3,577 (+) 131 14,625.25

crore from Rs 79,582 crore

April 50.20 1,790 (-) 1071 11,403.25

in end-July to Rs 83,026

Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.org.in)

crore in end-August and further increased by a robust amount of foreign exchange rate and stock indices Rs 5,135 crore touching Rs 88,161 crore by was very much evident. Some temporary mid-September, reflecting a pickup in pressure exerted on the exchange rate demand for short-term funds from the intra-month was mainly due to demand by industry. The interest rates were in the oil importers.

Table 6: Turnover in the Foreign Exchange Market (in $ billion)

April-09 20,292 -95,915 Month Merchant % Change Interbank % Change Spot % Change Forward % Change Total Turnover % Change

May-09 16,959 -1,29,997 August 130.6 -9 321.1 -23.4 231.2 -18 220.5 -21.4 451.6 -19.7

June-09 6,451 -1,23,153 July 143.4 -3.7 418.9 -6.5 281.8 1.6 280.5 -12.3 562.3 -5.8

July-09 5,243 -1,26,740 June 149 -1.4 448 -0.3 277.2 -0.9 319.8 -0.3 597 -0.6

August-09 12,073 -1,24,488 May 151.2 27.2 449.3 13.9 279.8 32.5 320.7 6.2 600.5

September-09 14,275 -1,24,812 April 118.8 – 394.5 – 211.2 – 302.1 – 513.3 –

Source: RBI's Weekly Stastical Supplement. Source: Weekly Statistical Supplement.

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When the month began, the rupee was The upward trend experienced in the traded at Rs 48.89 per dollar and touched forward premia in the previous month the month’s high of Rs 49.06 per dollar on continued in September. The six-month, 2 September. However, the rupee strength-nine-month and one-year average premia ened later continuously till the month end. for the month of September, respectively, The month’s lowest of Rs 47.96 per dollar were 2.74% (2.47% in August), 3.01% was touched on 23 September. Overall, (2.44% in August) and 3.02% (2.26% in the rupee appreciated in nominal terms by August) (Table 5, p 31). 1.75% during the month, after depreciat-A declining trend in the activity of the ing consistently in the range of 0.6% to foreign exchange market was observed 1.5% during the previous three months. since July, extending to August. Interbank

transactions in foreign

Table 7: Details of Central Government Market Borrowings (Amount in Rs crore)

exchange market fell in

Date of Auction Nomenclature Notified Bid Cover Devolvement YTM at of Loan Amount Ratio on Primary Cut-off Price

August to $321 billion

Dealers (in %)

from $419 billion in July,

04-Sep-09 6.49% 2015 R 5,000 2.30 348 7.45 (Rs 95.54) recording a 23% fall in

6.90% 2019 R 5000 2.32 708 7.50 the volume. The volume
(Rs 95.85) of merchant transactions
11-Sep-09 8.24% 2027 R 7.40% 2012 R 2,000 5,000 2.59 2.23 nil nil 8.19 (Rs 100.45) 6.83 (Rs 101.35) also decelerated by 9% from $143 billion in July to $130.5 billion in
6.35% 2020 R 4,000 3.04 nil 7.84 August. The spot and
(Rs 89.56) forward markets also
8.28% 2032 R Total for September Total for August 2,000 23,000 36,000 2.47 2.46 1.79 nil 1,056 2,530 8.28 (Rs 100.00) witnessed a slowdown of 18% and 21.3%, respectively, in their total mar-
Unlike in the case of treasury bills and state development loans the weighted average prices of central ket turnover. The slug
government dated securities auctions are not disseminated and hence, weighted average yields are not available. gishness in each segment
R: Re-issue, N: New issue. Source: RBI Press Releases. of the foreign exchange
market led to a slow-
Table 8: Details of State Government Borrowings (Amount in Rs crore) Date of Auction Number of Notified Bid Cover YTM at Cut-off Participating Amount Ratio Price (in %) Weighted Average down in the total market turnover by 19.7% in
08-Sep-09 22-Sep-09Total for September States 8 5 13 8,350 9,150 17,500 2.62 2.25 2.42 8.30 8.10 8.20 Yield (%) 7.80 8.03 7.92 comparison to the previous month. An improvement in
Total for August 11 11,974 2.40 8.10 8.06 the trading activity in the
Source: RBI Press Releases. currency futures market
Table 9: Auctions of Treasury Bills (Amount in Rs crore) was however observed.
Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted The average daily turno-
Accepted Ratio Yield (%) Average Yield (%) Price (Rs) AveragePrice (Rs) ver in the MCX-SX and
A: 91-Day Treasury Bills NSE was Rs 5,772 crore
2-Sep-09 4,500 3.39 3.40 3.40 99.16 99.16 and Rs 5,673 crore,
9-Sep-09 5,000 3.62 3.40 3.40 99.16 99.16 respectively, amounting to
16-Sep-09 23-Sep-09 Total for September Total for August B: 182-Day Treasury Bills 5,000 5,000 19,500 23,000 3.13 3.00 3.28 3.04 3.40 3.40 3.40 3.35 3.36 3.40 3.39 3.32 99.16 99.16 99.16 99.17 99.17 99.16 99.16 99.18 a total of Rs 11,445 crore. This reflected a growth of 26.7% in volume in comparison to August.
2-Sep-09 1,500 4.91 3.99 2.72 98.05 98.66 The total number of con
16-Sep-09 3,000 4.54 4.03 4.01 98.03 98.04 tracts and notional value
Total for September 4,500 4.72 4.02 3.37 98.04 98.25 increased from 3.7 lakh
Total for August 3,000 2.18 3.84 3.74 98.12 98.17 crore to 4.5 lakh crore
C: 364-Day Treasury Bills and from Rs 1.81 lakh
9-Sep23-SepTotal for September 4,000 1,000 5,000 3.10 5.00 3.48 4.60 4.33 4.47 4.52 4.32 4.42 95.61 95.86 95.66 95.69 95.87 95.73 crore to Rs 2.18 lakh crore, respectively. The
Total for August 2,000 3.76 4.25 4.17 95.93 96.01 MCX and NSE shared the
Source: RBI's Press Releases. currency futures market
32 october 24, 2009

volume in terms of number of contracts almost equally at 50.4% and 49.6%, respectively.

2.3 Dated Government Securities

There was a 36% fall in primary issues of central government securities in September, compared to August. The total issuance by the central government amounted to Rs 23,000 crore in comparison to Rs 36,000 crore in August, raised through two instances of issuance. Instruments of three-year and six-year maturities accounted for the major share of the issuance although their bid cover ratios were the least – the bid cover ratios were 2.23 and 2.30, respectively. The issuance with maximum bid cover ratio of 3.04 was the instrument with a 11-year maturity. The devolvement on primary dealers was prominent in early September, but there was no devolvement later in the month. A total issuance of Rs 1,056 crore was absorbed by primary dealers through their underwriting commitments. Thanks to the reduced volumes, the bid cover ratio showed an overall improvement from 1.79 in August to 2.46 in September (Table 7).

Market borrowing by the state governments became more active in September, compared to August. A total amount of Rs 17,500 crore was raised recording a jump of 46% over the previous month. An increased participation of a number of states was also observed. Maharashtra, Rajasthan, Tamil Nadu and West Bengal borrowed at two instances in September. The highest bid cover ratio of 4.62 was recorded by the state of Meghalaya followed by Maharashtra with a bid cover ratio of 3.80 in its first issuance. Maharashtra is also the state to raise the maximum of Rs 3,000 crore. The cut-off yield rates on the state government securities edged up in comparison to August. Most of the states offered a cut-off YTM of above 8% for the 10-year maturity (Table 8).

Contrary to the trend in the primary market in general for government securities, the secondary market activity experienced a significant pickup by 72.8%. In all, 84 central government securities for an aggregate amount of Rs 2.21 lakh crore were traded in the secondary market. The seven-year and 10-year maturity

vol XLIV No 43

MONEY MARKET REVIEW

instru ments with higher volumes represented the benchmark securities yielding 7.25% and 7.22%, respectively. The volumes traded in six, 11 and 12 year maturities were also very high amounting to Rs 77,529 crore, Rs 68,277 crore and Rs 21,663 crore, respectively sharing in aggregate Rs 1,67,419 crore or 76% of the total turnover. There was not much trade in five year maturity, which was prominently traded in the previous month. The trading volume in five year maturity declined from Rs 32,155 crore in August to Rs 4,841 crore in September. The market expectations are in the direction of increasing interest rates. A shift in yield curve across maturities can be observed (Graph D). The yield spread in central government securities in 10-15 year segment increased from 91 bps to 108 bps between the first and last week of September and in 1-5 year segment, remained flat around 288 bps. The spread in 1-10 year segment showed a marginal easing from 291 bps to 288 bps between August and September. The predominantly traded securities were 6.49, 2015 (Rs 30,690 crore), 7.02, 2016 (Rs 46,321 crore), and 6.90, 2019 (Rs 68,208 crore), sharing two-thirds of the total market turnover in September.

2.4 Treasury Bills

The total issuance in treasury bills market inclusive of all maturities amounted to Rs 29,000 crore, a marginal increase in volume in comparison to Rs 28,000 crore in August. The 91-day bill commanded the larger share of issuance – 67.2%, though the absolute amount came down from Rs 23,000 crore to Rs 19,500 crore in the

8.5

Graph D: Yield Curves for Dated Securities – Weighted Averages for September 2009

Yield (% per annum) 4.5 5.5 6.5 7.5 Current month Previous month 3-month ago

3.5

2.5

0 1 2 3 4 5 6 7 8 9 101112131415161718192325262730

month. The 182-day and 364-day bills shared 15.5% and 17.2% of total issuance, respectively. The bid cover ratios were 3.28, 4.72 and 3.48 for 91-day, 182-day and 364-day bills, respectively. Overall, the demand for treasury bills seems to have improved during September. The cut-off yields also moved up in anticipation of higher short term rates in the future.

Table 10: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)

Descriptions September 2009 Previous Month Three Months Six Months
Last Week (25th) First Week (4th) Total for the Month (August) Ago (June) Ago (March)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
1 Treasury Bills
A 91-Day Bills 4527.64 3.31 1904.43 3.28 13645.52 3.36 7,473 3.25 12,043.64 3.31 14,358.99 4.58
B 182-Day Bills 1140.00 3.70 476.67 3.40 2376.36 3.63 2,075 3.43 2,175.25 3.34 2,650.52 4.65
C 364-Day Bills 1090.00 3.85 872.64 3.62 3505.54 3.69 1,929 3.73 5,885.15 3.69 5,084.06 4.83
2 GOI Dated Securities
Year of Maturity(No of Securities)
2009 - - - - - - - - - 387.50 4.34 10,940.58 5.36
2010 10 1,779.50 4.17 1,855.00 4.28 7,205.72 4.34 4,778 4.29 11,042.40 4.06 3,928.79 5.04
2011 7 2,518.50 5.87 1,086.50 5.96 7,621.35 5.91 6,481 5.53 2,498.82 5.29 5,125.21 5.42
2012 8 2,468.00 6.57 594.00 6.49 7,251.07 6.64 1,985 6.19 3,412.10 5.80 5,110.40 5.99
2013 3 771 6.91 599 6.86 2,071.1 6.92 2,184 6.74 4,443.25 6.41 6,256.44 6.51
2014 6 102.07 7.07 1,510.00 7.16 4,841.20 7.13 32,155 6.86 43,490.12 6.60 5,882.58 6.50
2015 4 4,455.00 7.08 2,624.33 7.35 30,944.94 7.17 10,710 7.02 19,917.24 6.57 3,194.12 6.73
2016 5 9426 7.11 15,437.82 7.38 46,583.61 7.25 16,674 7.16 42,016.56 6.87 3,180.17 7.01
2017 4 238.50 7.43 265.00 7.52 648.50 7.50 819 7.25 2,396.65 6.91 16,977.12 6.86
2018 4 0.62 7.49 5.10 7.51 51.43 7.64 160 7.26 276.79 6.71 23,161.58 6.53
2019 3 13,062.65 7.11 6,345.24 7.43 68,276.96 7.22 25,817 7.2 9,096.59 6.74 22,648.67 6.59
2020 1 3,995.36 7.52 156.5 7.63 21,662.75 7.58 11,596 7.47 16,605.57 6.83 218.63 7.11
2021 2 1,044.53 7.69 4,688.73 7.95 14,351.16 7.83 6,908 7.63 9,197.31 7.33 1,339.3 7.70
2022 1 16 7.88 130 8.08 216.20 8.02 291 7.68 12,782.99 7.44 4,039.43 7.53
2023 4 0.75 8.01 60.33 8.18 76.65 8.15 574 8.02 70.61 7.72 1,992.14 8.05
2024 4 1,760.88 8.19 820.49 8.34 2618.17 8.23 45 7.86 4,043.01 7.40 13,194.36 8.17
2025 2 - - 5.65 8.22 15.33 8.20 1 7.96 546.94 7.94 1,060.07 8.19
2026 4 3.89 8.11 28.14 8.11 43.12 8.11 307 7.94 1,676.703 7.95 740.094 8.13
2027 5 695.97 8.08 1,307.90 8.16 5,361.34 8.12 4,545 7.98 3,590.31 7.71 2,581.21 7.79
2028 - - - - - - - 3 7.92 4.35 7.46 85.41 7.43
2032 4 126.36 8.18 121.46 8.18 705.63 8.19 395 8 356.00 7.65 2,560.37 7.70
2034 1 - - 28.14 8.14 73.94 8.09 283 7.99 2,567.06 7.69 1,334.81 7.77
2035 1 7 8.10 42.35 8.12 76.92 8.12 954 7.99 878.84 7.74 210.10 7.46
2036 1 1.4 8.13 8 8.14 39.90 8.14 70 8.01 120.40 7.89 1,343.25 7.75
2039 - - - - - - - - - 687.19 7.39 2,183.33 7.78
Sub-total 84 42,473.98 6.99 37,719.68 7.29 2,20,736.99 7.17 1,27,736 6.97 1,92,105.28 6.67 1,39,288.17 6.73
3 State Govt Securities 1,256.39 7.83 161.85 8.12 3,806.84 7.98 4175 7.85 3,595.39 7.56 12,859.16 8.01
Grand total (1 to 3) 50,488.01 41,135.27 2,44,071.25 1,43,387.54 15,804.71 1,74,240.90

(-) 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.

Economic & Political Weekly

EPW
october 24, 2009 vol XLIV No 43

MONEY MARKET REVIEW
Table 11: Predominantly Traded Government Securities (Amount in Rs crore)
Descriptions September 2009 Previous Month Three Months Six Months
Last Week (25th) First Week (4th) Total for the Month (August) Ago (June) Ago (March)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
GOI Dated Securities
6.57 , 2011 652.50 4.57 405.00 4.80 2057.50 4.62 912.58 4.54 2404.50 4.17 1632.51 5.05
11.50 , 2010 100.00 4.48 400.00 4.60 1700.00 4.54 175.00 4.31 400.00 4.16 - -
12.29 , 2010 740.00 3.72 725.00 3.86 1745.00 3.81 900.00 3.97 1295.00 4.07 0.78 6.50
6.57 , 2011 528.50 5.64 81.50 5.73 1780.00 5.69 400.00 5.55 988.60 5.18 962.00 5.49
9.39 , 2011 1650.00 5.91 755.00 5.94 4810.76 5.96 4761.12 5.55 715.20 5.35 3538.17 5.37
7.40 , 2012 2336.00 6.56 474.00 6.39 6564.00 6.62 445.11 6.11 2998.31 5.77 1698.01 6.15
7.27 , 2013 586.00 6.86 599.00 6.86 1816.10 6.90 2059.20 6.73 4323.25 6.41 6027.85 6.49
6.07 , 2014 77.00 7.02 1365.00 7.16 4507.33 7.13 30961.96 6.86 40108.41 6.60 - -
7.37 , 2014 20.00 7.04 35.00 7.13 190.00 7.15 338.02 6.93 1086.68 6.53 2201.06 6.48
7.56 , 2014 - - 100.00 7.23 103.80 7.22 835.00 7.04 2291.30 6.60 1877.20 6.37
6.49 , 2015 4445.00 7.08 2624.15 7.35 30619.59 7.17 10613.80 7.02 19891.48 6.57 - -
7.02 , 2016 9333.00 7.11 15366.71 7.38 46320.50 7.25 13782.36 7.16 - -
7.59 , 2016 90.00 7.29 60.00 7.44 245.00 7.35 2870.84 7.17 41780.22 6.87 3101.31 7.01
7.46 , 2017 75.00 7.48 180.00 7.54 300.00 7.53 601.50 7.25 973.46 7.01 8848.47 6.78
7.49 , 2017 35.00 7.50 - - 65.00 7.66 21.00 7.32 297.08 7.00 1303.70 6.85
6.05 , 2019 25.00 7.38 25.20 7.42 65.35 7.44 112.70 7.27 7256.59 6.69 22632.11 6.59
6.90 , 2019 13034.80 7.11 6318.84 7.43 68207.56 7.22 25683.74 7.20 - -
6.35 , 2020 3995.36 7.52 156.50 7.63 21662.75 7.58 11595.57 7.47 16579.67 6.83 215.00 7.11
7.94 , 2021 992.79 7.68 4688.73 7.95 14299.42 7.83 6886.72 7.63 8029.51 7.35 696.73 7.49
8.20 , 2022 16.00 7.88 130.00 8.08 216.20 8.02 137.65 7.75 12544.73 7.44 1711.40 7.59
8.24 , 2027 678.97 8.08 1257.90 8.16 5126.94 8.12 4545.06 7.98 3455.10 7.70 2565.11 7.79
7.50 , 2034 - - 28.14 8.14 73.94 8.09 238.23 8.03 2178.95 7.74 1334.81 7.77
7.40 , 2035 7.00 8.10 42.35 8.12 76.92 8.12 954.08 7.99 878.84 7.74 210.10 7.46
Total (All Securities) 42473.98 6.99 37719.68 7.29 220736.99 7.17 127735.59 6.97 192105.28 6.67 139288.17 6.73

(-) 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.

Secondary market trading in treasury difference between primary and second-central undertakings and corporates bills picked up in September in contrast to ary market yields perhaps is indicative of constituted 32.5%, 20.4%, 34.7% and declining trend felt in August. The vol-subdued interest for fresh acquisitions in 12.4% of issues, respectively. Power umes have increased steeply in compari-the market. Grid Corporation of India, a triple ‘A’ son to August from Rs 11,477 crore to (by CRISIL) rated company, topped the list

2.5 Corporate Bond Market

Rs 19,528 crore. The yield to maturity on in bond issues with Rs 1,000 crore issue traded volumes of 91-day bills was 3.31%, A somewhat dormant corporate bond of bonds. The company issued bonds 182-day bill was 3.70% and 364-day bill market activity was observed in Septem-yielding a coupon rate of 8.8% for 16 was 3.85% in the last week of September ber compared to relatively more buoyant year maturity. (Table 10, p 33 and Tables 11 and 12). The trends in the previous months. The number The availability of a greenshoe option

of issues came down rose from Rs 257 crore in August to

Table 12: Yield Spreads (Weighted Average): Central Government Securities –

from 29 to 24 between Rs 1,250 crore in September. This rise can

September 2009 basis points (bps)

Yield Current Month Previous Three Six Months August and September. be attributed to the Rs 1,000 crore option Spread in bps Last Week First Week Entire Month Month Months Ago Ago

The volume of issues in against the issuance by the Rural Electrifi

1 Year-5 Year 289 288 280 257 253 147

the bond market fell by cation Corporation. The same company

5 Year-10 Year 4 26 9 34 14 8

47.2% to Rs 5,765 crore had raised Rs 2,000 crore and Rs 1,729

10 Year-15 Year 108 91 101 66 65 158 1 Year-10 Year 294 315 288 291 268 155 compared to the previous crore in July and August, respectively. Source: As in Table 5. month’s Rs 12,269 crore The market expectation of a rising interest and Rs 7,060 crore in the rate coupled with favourable investors’

Table 13: Details of Commercial Bond Issues

same month in 2008. The response could have led the company to

Institutional Category No of Issues Volume in Range of Range of Rs Crore Coupon Rates Maturity in Years fall in the total volume exercise the greenshoe option (Table 13). % Per Annum

can be attributed to the Contrary to the primary market scenario,

FIs/Banks 8 1,875 8.74-10.30 5.7-15

significant 59.4% fall in the secondary market trading in bonds

NBFCs 8 1,175 0-10.60 1.3-15

the volume of issuance improved, though marginally. The daily

Central Undertakings 4 2,000 7.90-8.80 3-15

by financial institutions average volume traded in the bond seg-

Corporates 4 715 7.25-10.75 1.3-5.6

and banks. The non-ment of NSE in September amounted to

Total for September 24 5,765 8.32-11.25 2-15

banking financial cor-Rs 662 crore in comparison to Rs 586 crore

Total for August 29 12,269 8.32-11.25 2-15 Source: Various Media Sources. porations/banks, NBFCs, in August.

october 24, 2009 vol XLIV No 43

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