ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Back to Base: Setting the Base Rate for Banks

In order to ensure greater transparency in setting lending rates, banks are expected to replace from 1 July the existing benchmark prime lending rate system with the new one of a base rate. Yet, the methodology and the approach that each bank will follow in setting this rate is still not clear. According to the Reserve Bank of India's guidelines, determination of the base rate will depend on the cost structure of bank liabilities as also the capacity to charge lower interest rates for certain groups of borrowers. Therefore, the base rate is likely to hover around the minimum lending rates charged at present by different bank groups (public sector, private sector and foreign banks). Since these rates differ across bank groups, the base rates too are likely to differ, leading to some competition. However, given the new system that the banks are going to introduce, it will take a while before a clear picture emerges.

MONEY MARKET REVIEW

Back to Base: Setting the Base Rate for Banks

EPW Research Foundation

may take the commercial paper route to fulfil their short-term needs.

Against the above backdrop, we attempt to briefly review the BR guidelines and glean the present structure of BPLR vis-à-vis lending rates across bank groups and assess what could be the emerging scenario with

In order to ensure greater transparency in setting lending rates, banks are expected to replace from 1 July the existing benchmark prime lending rate system with the new one of a base rate. Yet, the methodology and the approach that each bank will follow in setting this rate is still not clear. According to the Reserve Bank of India’s guidelines, determination of the base rate will depend on the cost structure of bank liabilities as also the capacity to charge lower interest rates for certain groups of borrowers. Therefore, the base rate is likely to hover around the minimum lending rates charged at present by different bank groups (public sector, private sector and foreign banks). Since these rates differ across bank groups, the base rates too are likely to differ, leading to some competition. However, given the new system that the banks are going to introduce, it will take a while before a clear picture emerges.

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

1 Introduction

S
tarting with the prime lending rate (PLR) in 1994, the lending rate guidelines for banks have followed a chequered path. The most crucial development was at the turn of the century when banks were given the freedom to charge loans at below the PLR, apart from the earlier system of having multiple PLRs. It was with a view to ensure greater transparency that a benchmark PLR (BPLR) system was introduced and multiple prescriptions of PLR were discontinued in April 2003. The Mohanty Working Group on BPLR constituted last year has come out with the recommendation to switch over to the Base Rate (BR) system, since the BPLR system had not ensured the needed transparency.

Starting 1 July 2010, the banks have been directed to replace the BPLR with a new BR system. Though the July target date is not far away, the discussions bankers held early this month did not seem to have led to any definitive solution as to the methodology to be adopted for fixing the BR. As the banks wanted more time to settle with the new system, they have bought more time and hence the Reserve Bank of India (RBI) has allowed a transition period of six months, during which the banks are free to change their methodology. The basic issue seems to be that there are divergences in practice among different bank groups and hence the introduction of the new base rate is expected to lead to some competition between banks and bank groups. The news reports predict that while most public sector banks are likely to follow the SBI way with a base rate of around 8%, private sector and foreign banks may go with a base rate of as low as 6%. There are also expectations that short-term lending portfolios may go in favour of private sector and foreign banks, and the companies themselves regard to BRs in different bank groups.

1.1 Crux of Base Rate Guidelines: Positives and Negatives

The important features of the BR system vis-à-vis the earlier BPLR mechanism in brief are:

  • (i) The BR shall include all those elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the base rate for a specific tenor that may be disclosed transparently. Banks are free to use any other methodology, provided it is consistent, and is made available for supervisory review. Banks will determine their actual lending rates on loans with reference to the base rate and by including such other customer specific charges as considered appropriate.
  • (ii) All categories of loans will be priced only with reference to the BR with a few exceptions. The BR can also serve as the reference benchmark rate for floating rate loan products, apart from other external market benchmark rates.
  • (iii) The floating interest rate based on external benchmarks should, however, be equal to or above the BR at the time of sanction or renewal.

  • (iv) The current stipulation of the BPLR as the ceiling rate for loans up to Rs 2,00,000 is withdrawn. It is expected that this will increase the credit flow to small borrowers at reasonable rates and direct bank finance will provide effective competition to other forms of high cost credit. The interest rate on rupee export credit has also been deregulated.
  • Positives: The positives of the BR system can be listed as follows:
  • (i) Since the BR will be the minimum lending rate of any bank, transparency is ensured to the extent that no lending can take place at below the BR, which was the nagging problem with the BPLR mechanism.
  • Economic & Political Weekly

    EPW
    june 19, 2010 vol XLV No 25

    MONEY MARKET REVIEW

    (ii) The restrictions on BR are minimal. The BR acts only as a floor and not as ceiling for any major categories of borrowers. The interest rate on export credit also will be freed. This is an extraordinary relief to the banking system and a path-breaking move towards lending rate deregulation. But, this must be followed in both letter and spirit. It may be recalled that we had the problem of subsidising banks’ interest rates in respect of certain categories of borrowers when the government took charge of fixing the lending rate ceiling. Such developments cannot be ruled out. While banks should have the freedom to charge loans on commercial principles, the government should devise mechanisms to subsidise vulnerable groups through other means.

    (iii) The BR, besides being a benchmark for pricing of loans, can also serve as the reference rate for floating rate loans. To ensure consistency, it has been stipulated that such other external benchmarks should be equal to or higher than the BR.

    Some Negatives: There are some negatives to the BR system:

    It does not adequately recognise the differences in practices across bank groups in deciding their lending rates. At present, the distribution of BPLR according to bank groups suggests that public sector banks have fixed BPLR generally in a lower range of 12% to 13% with a few banks choosing the 11% to 12% range and only one in the range of 13% to 14%. In contrast, both private sector and foreign banks have

    Table 1: Distribution of Banks According to BPLR

    (March 2010)

    No of Banks
    BPLR Range Public Sector Private Sector Foreign Banks
    (27 Banks) (22 Banks) (29 Banks)
    10.0 - 11.0 - - -
    11.0 - 12.0 3 - 1
    12.0 - 13.0 23 2 3
    13.0 - 14.0 1 4 -
    14.0 - 15.0 - 5 10
    15.0 - 16.0 - 7 5
    16.0 - 17.0 - 4 2
    Total 27 22 21*

    * - Data for 8 banks not available. Source: RBI.

    fixed BPLR mostly in the high range of more than 14% (Table 1).

    It is well known that the BPLR serves the purpose of an average rate and hence the below BPLR lending was common and the gap between the two had been widening since 2004. Between March 2007 and March 2009, the negative differential between the average lending rate and the BPLR has widened in all bank groups, but objections if the lending rate is fixed at a negative spread over the benchmark reference rate? Furthermore, there are no specific guidelines on what should be the qualifying characteristics of a benchmark

    the gap has widened fast-Graph A: Lending Rate Minus BPLR

    Public Sector Banks Private Sector Banks Foreign Banks
    er and steeper in private 0.0 Mar 05
    sector and foreign banks -0.5
    than in public sector -1.0
    banks (Graph A). -1.5
    This is perhaps because public sector banks remain -2.0
    also social sector banks -2.5
    serving larger socio-eco -3.0
    nomic goals, whereas the -3.5

    private and foreign banks are relatively more commercially oriented by design.

    Second, the BPLR system, as also now the BR guidelines look at the supply side insofar as the assumption that the rate should be fixed according to the cost structure of banks. We should recognise that there is a demand side to the solution of interest rate, and that is one reason the lending rates remain sticky downward in an imperfectly competitive situation as the banking industry is. There are also nonprice factors, which go into bank charges. The BR system does not recognise this side of the story. The EPWRF attempted to establish the relationship between BPLR, lending rates and cost of funds and no empirical results could be established. This shows that the cost side alone does not adequately capture the lending rate structure.

    Third, the formula suggested as indicative for arriving at the BR seems to consider average cost pricing. The question is whether the average cost of funds should set the minimum lending rate. If some banks follow the least cost principle for pricing (as seems to be the case of foreign banks and some large private sector banks at least in pricing loan maturities at the short end), there is a fear based on the present distribution of lending rates across bank groups that private and foreign banks are likely to fix the lowest BR, which will reverse the present position of them having the highest BPLR.

    Fourth, the reference rate issue for floating rate loans may open up a Pandora’s box. While the stipulation says that the reference rate should not be less than the BR, it has not said anything about the spread over the reference rate. Will there be

    Mar 06 Mar 07 Mar 08 Mar 09

    reference rate. The idea is perhaps not to allow a plethora of benchmark reference rates to emerge in the system. The RBI should prescribe guidelines on the choice of a benchmark reference rate. Otherwise, the opaqueness plaguing the system will reemerge.

    1.2 Emerging Scenario

    Since determination of the BR according to guidelines is dependent upon the cost structure of bank liabilities as also the capacity to charge lower interest rates for certain groups of borrowers, when the BR replaces the BPLR, it will tend to tilt in favour of the minimum lending rates charged at present by different bank groups. The present structure of lending rates for demand and term loans suggests that as of end March 2010, for which data are available, the minimum lending rate for demand loans in public sector banks was 9.4% on the average, while for foreign banks it was 8.2% on the average. For term loans also, public sector banks had minimum lending rate of 9.1%, and the foreign banks had 8.5%. The average of maximum lending rate also followed a similar pattern across these two bank groups. The private sector banks as a group had the highest levels of both minimum

    Table 2: Average and Variation in Lending Rates among Bank Groups (March 2010)

    Demand Loan Term Loan
    Max Min Max Min
    Public Sector Banks 12.8 9.4 13.0 9.1
    (1.7) (1.8) (1.6) (1.6)
    Private Sector Banks 13.4 10.2 14.1 10.4
    (2.9) (2.7) (1.9) (2.1)
    Foreign Banks 12.4 (2.4) 8.2 (3.1) 12.4 (3.2) 8.5 (2.7)

    Figures in bracket represent standard deviation. Source: RBI.

    june 19, 2010 vol XLV No 25

    MONEY MARKET REVIEW

    and maximum lending rates. The standard deviation of rates also shows that in the case of private and foreign banks, both minimum and maximum lending rates showed high variation whereas the variation was less in the case of public sector banks (Table 2, p 74).

    This wide variation in practice has not posed any problem so far, since banks have been free to lend at below BPLR. Now that the BR has to be the floor rate, one can reasonably expect that the BR will hover around the minimum lending rates charged presently by banks. In the case of public sector banks, it may turn out to be around 9% on average, in private sector banks, 10% and in respect of foreign banks, around 8% on average.

    Table 3: Money Market Activity (Volume and Rates)

    Overall, it appears still that the guidelines on BR is not the end of the road, but opens up fresh issues. For a clear picture to emerge it may take more than six months.

    2 Money, Forex and Debt Markets

    The sentiments in financial markets in general turned somewhat adverse during May as European countries felt a jolt following the debt crisis in Greece. India also witnessed a sudden fall in stock indices consequent to reversal of foreign institutional investors (FII) inflows and sales of equities in the market. The money market rates were steady throughout the month but ruled higher compared to the previous month on the expectation of a tightening of liquidity due to the payment towards third be pulling money out of emerging markets in favour of safer assets like the US dollar. In the currency futures segment, the volumes continued to expand in MCX-SX and NSE.

    Instruments May 2010 April 2010
    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 7,987 3.80 3.23-3.94 8,833 3.55 2.80-4.29
    Notice Money 1,771 3.93 2.90-4.29 1,212 3.78 2.52-4.91
    Term Money @ 145 - 3.25-7.20 140 - 3.10-6.92
    CBLO 43,871 3.59 2.32-4.55 52,434 2.98 1.19-3.69
    Market Repo 18,591 3.74 2.00-4.55 21,237 3.04 2.06-3.68

    It will be an unenviable task for the RBI to handle the funds crunch following payments towards spectrum auctions which may get further accentuated because of advance tax flows in June. The RBI has already taken some proactive steps easing the liquidity strain, viz, (i) additional liquidity support under the LAF to the extent of 0.5% of net demand and time liabilities; and (ii) conduct of second LAF on a daily basis up to 2 July 2010.

    2.1 Money Market

    The short-term money market rates were almost steady during May and hovered around the floor rate set by the reverse repo rate of 3.75%. The weighted average call rates moved in a range of 3.23%3.94% during the month. The month began with the call money rates ruling at a weighted average rate of 3.78% on 3 May and touched a low of 3.23% on 7 May. Thereafter, the overnight rates started to harden and ruled at 3.81% on most days of the week as demand for funds increased owing to tightening liquidity in the system. The key rates ruled steady around 3.57% and 3.80% during the third week of May as banks were reluctant to lend at a lower rate ahead of reporting Friday. Still, after the heavy outflow of funds – over Rs 67,000 crore due to 3G auctions, the last week of the month had seen the overnight rates touching a high of 3.94% on 25 May and the rates hovered in the range of 3.78% and 3.94% during the entire week. But for the quick steps taken by RBI to ease the liquidity strain, the call rates would have overshot the corridor and touched dizzy heights.

    The monthly weighted average rate of collateralised borrowing and lending

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

    S S Tarapore, the former deputy governor of the RBI, has argued that the BR that the banks will declare is likely to be much below the average effective lending rate and there would be a large gap between the BR and the maximum lending rate, which would give rise to the serious problem of adverse selection. For a transparent and meaningful system, the maximum lending rate should not exceed the BR by, say, 4 percentage points. Given the current scenario, this stipulation will prevent the system from following a pragmatic structure of lending rates according to each bank’s cost and demand conditions.

    According to a CEO of a large bank, “PSU banks do not want to lose lending opportunities. They are worried that if they keep the base rate higher, they may lose business to private banks while if they keep the rate too low, they may have to take a hit on their margins. It’s a Catch-22 situation. But, if major banks take a uniform decision on the base rate, they could match competition to some extent.” This is suggestive of some cartelisation to meet the competition with private and foreign banks, which is understandable.

    generation (3G) spectrum auction of about Rs 67,700 crore. The RBI’s liquidity adjustment facility (LAF) window reflected a surplus liquidity position though the volume of funds absorbed in daily reverse repo auctions dwindled during the last week of the month hinting at the emerging tightness of liquidity. During May, there were huge liquidity outflows from the banking system through government securities auction or redemption to the extent of Rs 30,817 crore, currency in circulation (Rs 22,478 crore), bank credit (Rs 15,436 crore) and also through newly introduced cash management bills (Rs 12,000 crore). The augmentation of liquidity came from the lower participation of banks in reverse repos to the extent of

    Graph B: Trends in Weighted Averages of Call Rates, Repo Rates Rs 29,505 crore through the and CBLO Rates – May 2010 RBI’s LAF window, besides the 5 growth of aggregate deposits

    4

    of Rs 19,473 crore.

    The rupee fell to its lowest 3 level in almost eight months during May and depreciated 2 by about 4.5% against dollar 1 as Europe’s debt crisis spurred

    0

    concerns that investors could 3/5 5/5 7/5 9/5 11/5 13/5 15/5 17/5 19/5 21/5 23/5 25/5 27/5

    Call Rates Repo Rates – outside the RBI CBLO Rates

    Economic & Political Weekly

    EPW
    june 19, 2010 vol XLV No 25

    MONEY MARKET REVIEW

    obligations (CBLO) hardened in May to 3.59% compared to 2.98% in April. During the month, they touched a high of 4.55% and a low of 2.32%. The daily average market repo rate also displayed a similar trend and weighted average rates ruled at 3.74% against 3.04% during the same period.

    As happens in times of tight liquidity conditions, the volumes in money market saw a decline. The daily average volume of call money transactions declined by 15% from Rs 8,833 crore in April to Rs 7,987 crore in May. In the major collateralised instruments, CBLO and market repo recorded a fall of 16% and 12%, respectively, in their volumes during the month (Table 3 and Graph B, p 75).

    The volume of outstanding certificates of deposit (CDs) dipped by about Rs 5,000 crore in the second fortnight from the first fortnight of April. There was also a marked improvement in the volume of the outstanding commercial papers (CPs) during the second fortnight of April over the first fortnight. The companies were anxious to borrow as they believed that the rates could rise, making refinancing of their existing CPs costlier. The outstanding CPs increased by Rs 15,604 crore during the second fortnight of April to reach Rs 98,769 crore.

    In the RBI’s LAF window, the daily average amount absorbed through reverse repo during May decreased by 36% to around Rs 35,000 crore from about Rs 54,000 crore in April. The RBI’s open market operations window remained practically closed (Table 4).

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

    Month/Year OMO (Net Purchase(+)/ LAF (Average Daily
    Sale(-)) Injection (+)/Absorption(-))
    December-09 630 -77,153
    January-10 -8 -76,949
    February-10 -4 -80,674
    March-10 -2 -44,404
    April-10 10 -54,009
    May-10 0 -34,749

    Source: RBI’s Weekly Statistical Supplement.

    During the month of May, the interest rate futures segment of the NSE recorded month of May, following weakness in the Euro due to the Greek debt crisis but it depreciated against the Japanese yen. Following the positive growth and recovery in the economy, the US dollar index added an enormous 450 basis points during the month over the previous month. The inherent relationship between FII flows, stock market and forex market behaviour was very much perceptible during May. After being net buyers in Indian markets for the whole financial year of 2009-10, FIIs

    became net sellers during May and liquidated a net amount of around Rs 9,400 crore or $2.0 billion in the equity market, though they made a positive net investment of about Rs 2,500 crore or $0.5 billion in debt. The equity markets depicted

    Table 5: Foreign Exchange Market: Select Indicators

    Rs/$ Reference Rate Appreciation(+)/ FII Flows Net Purchases BSE Sensex US Dollar
    (Last Friday Depreciation (-) ($ Million) by RBI (Month-end Index
    of the Month) of Rs/$ (in %) ($ Million) Closing)
    Dec-09 46.73 -0.53 1,873 (+) 525 17,465 78.22
    Jan-10 46.37 0.78 1,849 (+) 525 16,358 79.65
    Feb-10 46.37 0.30 946 (+) 525 16,430 80.44
    Mar-10 45.34 2.41 6,465 (+) 370 17,528 81.29
    Apr-10 44.44 1.58 2,783 (+) 370 17,559 81.99
    May-10 46.54 -4.51 -1,505 Not available 16,945 86.58

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

    a downward trend throughout the month with the BSE Sensex closing at 16,863 points on 31 May, posting more than 4% reduction over the previous month.

    Reversing the past two months’ trend, the rupee depreciated sharply against the dollar nullifying practically all the gains since December 2009. On 3 May the rupee dipped to Rs 44.56 per dollar

    March and country’s better growth prospects arrested the rupee from depreciating further. On 24 May, the rupee ruled slightly higher and appreciated by 28 paise per dollar but the appreciation was short-lived as on the very next day the rupee fell by 73 paise against the dollar and extended its loss for the second day and touched Rs 47.57 per dollar on 26 May as the greenback continued to strengthen against euro. On 28 May the rupee appreciated sharply against dollar tracking the

    improved sentiments in the domestic stock markets. Overall, the rupee ended the month with a huge depreciation of 4.5% over the previous month-end and closed at Rs 46.54 per dollar on 28 May 2010 (Table 5).

    The forward premia showed a downward trend during the beginning of the

    and continued to depreciate

    the US Dollar in the Domestic Inter-Bank Market

    till 7 May and weakened to Rs 45.58 per greenback. On 10 May, the rupee recovered from its earlier losses and touched Rs 44.96 per dollar following the euro zone’s bailout plan. But, again on 11 May the local currency paired its gains and slipped to Rs 45.14 per dollar and continued to depreciate till 21 May except on two intermittent days and touched a low of Rs 46.95 per dollar. The positive data on industrial production showing a rise by more than 13.5% for the month of

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

    Graph C: Spot Quotations and Annualised Forward Premium for

    month but the one-month premia ended higher during the month. The other two tenures of three-month and six-month premia continued to show a softening 0 10 20 30 40 50 60 -1 0 1 2 3 4 5 6 Monthly Averages (Apr 2007 to April 2010) (Daily) Working Days May 2010 1-month Spot 6-month
    some improvement in its turnover over the previous month and the average daily volume increased to Rs 1.08 crore against Rs 39 lakh recorded in April. Month Nov-09Dec-09Jan-10Feb-10 Merchant 213.1 -(12.4) 218.2 (2.4) 213.2 -(2.3) 221.8 (4.0) Interbank 573.4 -(3.6) 603.5 (5.3) 653.4 (8.3) 641.2 -(1.9) Spot 426.9 -(3.1) 421.4 -(1.3) 466.2 (10.6) 458.8 -(1.6) Forward 359.6 -(9.5) 400.3 (11.3) 400.4 (0.0) 404.1 (0.9) Total 786.4 -(6.2) 821.7 (4.5) 866.6 (5.5) 862.9 -(0.4)
    2.2 Forex Market The dollar appreciated significantly against most of the global currencies during the Mar-10 258.9 (16.8) 739.8 (15.4) Apr-10 233.6 -(9.8) 689.0 -(6.9) * Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are % change over the previous month. Source: Weekly Statistical Supplement, various issues. 512.5 489.7 (11.7) -(4.5) 486.3 433.0 (20.3) -(11.0) 998.7 922.6 (15.7) -(7.6)
    76 june 19, 2010 vol XLV No 25 Economic & Political Weekly
    EPW

    MONEY MARKET REVIEW

    trend and ended lower against the previ-to weaken further in the short-term than 6-month premia showed a hardening in ous month. Among the three tenures, the in the long term. The paying of interest on the beginning of the month and premiums one-month premia ruled higher than the account of liquidity tightening in the touched a high of 3.46% and 3.28%, three and six-month premia against the system also aided the sentiments. The respectively on 4 May but during the later backdrop of the sharp depreciation of the one-month premia shot up to 4.56% on 25 part of the month the premia witnessed a rupee and the market expected the rupee May, but contrary to this the 3-month and softening trend due to receiving interest Table 7: Details of Central Government Market Borrowings (Amount in Rs crore) (Graph C, p 76).

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

    There has been a marked decline in the

    Primary Dealers (in %)

    7-May-10 7.02% 2016 R 5,000 2.01 nil 7.39% (Rs 98.15) forex market turnover during April, and

    8.20% 2022 R 5,000 1.59 nil 7.75% (Rs 103.20) the total turnover recorded a fall of 6.2%

    8.26% 2027 R 3,000 2.56 nil 8.12% (Rs 101.25)

    over the previous month. The turnover in

    8.32% 2032 R 2,000 3.02 nil 8.23% (Rs 100.90)

    merchant section showed a decrease of

    14-May-10 7.38% 2015 R 4,000 3.37 nil 7.24% (Rs 100.59) 7.80% 2020 R 5,000 1.96 nil 7.54% (Rs 101.80) 12.4%. Similarly, interbank transactions

    8.28% 2032 R 3,000 2.38 nil 8.22% (Rs 100.59)

    21-May-10 7.02% 2016 R 5,000 1.85 nil 7.39% (Rs 98.16)

    8.20% 2022 R 5,000 1.88 nil 7.64% (Rs 104.26)

    8.26% 2027 R 3,000 2.50 nil 7.98% (Rs 102.60)

    28-May-10 7.38% 2015 R 4,000 1.84 nil 7.41% (Rs 99.86)

    recorded a fall of 3.6% during April over March 2010. The spot market turnover plunged by 3.1% and forward market transactions recorded a decline of 9.5%

    7.80% 2020 R 5,000 2.52 nil 7.60% (Rs 101.35)

    during the same period (Table 6, 76).

    8.28% 2032 R 3,000 1.99 nil 8.25% (Rs 100.70)

    Despite the weak performance of the

    Total for May 52,000 2.20 Total for April 49,000 2.56

    rupee against the dollar, the currency

    Unlike in the case of Treasury Bills and State Development Loans the weighted average. futures market turnover continued to

    R: Re-issue. N: New issue. Source: RBI press releases. accelerate during the month and the

    Table 8: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)

    Descriptions May 2010 Previous Month Three Months Six Months

    Last Week (30th) First Week (2nd) Total for the Month (April 2010) Ago (February 2010) Ago (November 2009) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

    1 Treasury Bills 9,905.54 9,261.22 33,103.04 61,864.45 25,903.40 12,661.77

    A 91-Day Bills 7,207.53 4.97 5,610.31 3.9 21,595.37 4.33 46,632.98 3.85 18,910.53 3.78 7,628.75 3.23

    B 182-Day Bills 1,725 4.99 1,537.8 4.25 4,925.19 4.55 6,865.18 4.14 2,292.33 4.16 2,431.08 3.57

    C 364-Day Bills 973.01 5.03 2,113.11 4.72 6,582.48 4.77 8,366.29 4.81 4,700.54 3.98 2,601.94 3.87

    2 GOI Dated Securities 82,451.86 7.5 80,594.39 7.43 3,61,583.98 7.45 2,49,090.36 7.44 1,47,852.12 7.52 2,08,088.37 7.27

    Year of (No of Maturity Securities)

    2010 6 --4,590.00 7.46 8,379.46 5.98 11,644.73 4.03 1,987.55 4.22 2,655.15 3.91

    2011 8 580.25 5.27 2,116.00 5.11 4,985.10 5.09 6,146.61 5.24 5,528.84 4.96 6,369.88 5.46

    2012 7 2,970.00 5.92 3,767.50 5.88 12,776.45 5.87 15,322.65 6.08 5,415.45 6.21 5,595.40 6.32

    2013 4 1,087.81 6.55 2,169.50 6.53 7,375.52 6.52 6,111.01 6.68 2,281.97 6.89 1,066.65 6.78

    2014 5 972.11 6.95 3,245.00 7.01 7,360.04 6.97 5,547.05 7.19 3,044.38 7.24 4,505.00 7.04

    2015 5 1,556.42 7.32 7,332.07 7.34 15,641.53 7.31 19,784.65 7.58 2,992.48 7.54 10,470.17 7.28

    2016 3 4,587.81 7.47 20,441.33 7.48 48,547.68 7.46 67,632.62 7.58 31,433.44 7.58 28,028.62 7.25

    2017 4 200.00 7.47 24.00 7.58 767.12 7.53 162.88 7.56 297.14 7.68 2,338.84 7.56

    2018 2 6.06 7.54 --47.56 7.64 89.26 7.90 28.52 7.88 110.05 7.64

    2019 2 23.34 7.88 27.00 7.94 411.70 7.77 1,615.50 7.92 7,150.37 7.86 70,383.66 7.25

    2020 4 30,927.50 7.45 17,847.19 7.67 1,16,896.20 7.51 63,076.48 7.89 81,772.04 7.77 70,465.23 7.58

    2021 2 11.00 7.76 25.00 7.98 41.00 7.90 96.77 7.99 57.97 8.12 333.29 7.77

    2022 2 36,814.75 7.71 15,946.19 7.85 1,19,969.17 7.75 42,848.82 8.12 364.42 8.12 107.13 7.91

    2023 2 174.45 8.09 --1,677.19 8.22 32.70 7.86 225.69 8.16 1,083.23 8.28

    2024 2 ----12.00 8.17 241.12 8.25 827.24 8.48 287.77 8.12

    2025 1 ----20.00 8.25 6.71 8.28 0.15 8.24 0.90 8.23

    2026 3 60.50 8.12 67.91 8.32 848.59 8.14 1,884.23 8.34 87.25 8.17 15.30 8.33

    2027 4 1,409.33 8.06 1,625.08 8.20 8,466.08 8.09 3,625.49 8.36 3,776.40 8.35 2,141.84 8.18

    2028 2 5.30 8.33 19.68 8.18 46.40 8.09 42.39 8.18 3.10 8.12 2.66 8.13

    2032 5 1,011.31 8.16 1,329.93 8.33 7,060.07 8.20 3,023.01 8.56 492.07 8.32 284.53 8.30

    2034 1 36.87 8.07 11.00 8.26 179.22 8.15 72.65 8.24 50.00 8.42 1,807.01 8.23

    2035 1 5.45 8.17 --6.45 8.16 58.00 8.26 14.90 8.17 7.08 8.16

    2036 1 11.60 8.16 10.00 8.32 65.95 8.21 25.01 8.54 20.50 8.35 9.00 8.28

    2039 1 ----3.50 8.32 --0.27 8.29 20.00 8.29

    3 State Govt Securities 1,301.98 7.98 1,564.70 8.17 5,731.80 8.08 9,496.66 8.07 6,785.97 8.11 4,187.36 7.95

    Grand total (1 to 3) 93,659.38 91,420.31 4,00,418.82 3,20,451.47 1,80,541.49 2,24,937.50

    (-) 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; base data from RBI, CCIL.

    Economic & Political Weekly

    EPW
    june 19, 2010 vol XLV No 25

    MONEY MARKET REVIEW

    aggregate turnover increased by 9% to Rs 7,13,905 crore during May. The aggregate average daily turnover also increased by 3% over the previous month to Rs 39,138 crore. The average daily turnover in the MCX-SX and NSE stood at Rs 21,154 crore and Rs 17,984 crore, respectively. Among the traded currencies in the currency futures segment on both NSE and MCX-SX, the rupee-dollar futures continued to attract more investors and accounted for 91% of the total notional value followed by rupee-euro (7%), rupee-pound (1.2%) and rupee-yen (0.5%) during the month.

    2.3 Government Securities Market

    One significant development that had an impact on the central government’s budgetary prospects has been the whopping revenue of about Rs 67,700 crore from auctions of the spectrum for their 3G services. For broadband services, another dose of about Rs 40,000 crore is expected which would augment the revenue by an aggregate of more than Rs 1 lakh crore. This huge windfall income should lead the government to cut back on their huge borrowing programme and the fiscal deficit to that extent.

    During the month of May, four auctions of central government securities, two auctions of state development loans (SDLs) and four auctions of treasury bills (TBs) were held with first ever introduction of cash management bills (CMB), which was auctioned twice, for 28-day and 35-day maturities. The quantum of government securities auctioned during May was higher at Rs 52,000 crore compared to Rs 49,000 crore in April. All dated securities auctions were reissues and subscribed fully without any devolvement on primary dealers.

    The bid cover ratio for May was subdued at 2.20 times against 2.56 times of April reflecting a gradual tightening of the liqui dity situation. The bid cover ratio for the first two auctions was higher as compared to the next two auctions. In the first auction four securities worth Rs 15,000 were sold, the second and fourth auction were for Rs 12,000 crore each and the third auction was for an amount of Rs 13,000 crore. The cut off yields of all the three securities firmed up in the fourth auction (Table 7, p 77).

    Trade in central government dated securities however surged by 45% in May at Rs 3,61,584 crore with yield to maturity (YTM) of 7.45% from Rs 2,49,090 crore in April with 7.44% YTM.

    for such increased trading activity. Banks also could have liquidated some portion of their investments to meet the growing cash needs. The most traded securities, were the 7.02% 2016, 7.80% 2020 and 8.20% 2022 securities. Overall, the higher trading volume resulted in yields softening across maturity as can be seen from the yield curve for May, which by and large shifted downward to the yield curve of April.

    Spread of yields between one year and 10-year securities has narrowed, as yield on securities with one year maturity has firmed up and at the same time, yields at 10-year maturities have softened. In the same way, yield spreads between one year and five-year maturities have also narrowed (Tables 8 9, 10 (pp 77, 78) and Graph D, p 79).

    2.4 Treasury Bills

    Treasury bills issuance volume was flat at Rs 36,000 crore during May under all usual maturities. The distribution among different maturities also remained the same.

    Table 10: Yield Spreads (Weighted Average): Central Government Securities –

    Trade has improved in the

    May 2010 (basis points (bps))

    last week of the month as Yield Current Month Previous Three Six Months Spread in BPS Last Week First Week Entire Month Month Months Ago Ago

    compared to the first

    1 Year - 5 Year 205 223 222 234 258 182

    week. Yields however

    5 Year - 10 Year 13 33 20 31 23 30

    remained flat. In a rising

    10 Year - 15 Year --74 39 47 65

    interest rate scenario, profit

    1 Year - 10 Year 218 256 242 265 281 212 booking could be a reason Source: As in Table 5.

    Table 9: Predominantly Traded Government Securities (Amount in Rs crore)

    Descriptions May 2010 Previous Month Three Months Six Months

    Last Week (30th) First Week (2nd) Total for the Month (April 2010) Ago (February 2010) Ago (November 2009) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

    GOI Dated Securities

    7.55 , 2010 --160.00 3.67 545.00 4.10 4,059.00 3.70 1,122.03 4.07 1,485.15 4.34

    6.57 , 2011 70.00 4.86 70.00 4.90 895.00 4.82 780.00 5.09 3,455.50 4.88 1,940.00 5.01

    9.39 , 2011 0.25 5.40 1,960.00 5.11 2,871.55 5.10 3,650.00 5.25 1,222.44 5.21 2,585.00 5.63

    7.40 , 2012 2,305.00 5.88 2,435.00 5.84 9,562.51 5.84 12,098.70 6.07 2,860.15 6.14 5,305.00 6.31

    7.27 , 2013 1,087.81 6.55 1,839.50 6.52 6,649.50 6.52 5,958.04 6.68 2,141.75 6.89 1,031.35 6.78

    7.32 , 2014 425.11 6.92 1,515.00 7.03 3,885.84 6.98 4,350.65 7.19 2,298.93 7.21 3,540.00 7.01

  • 6.49 , 2015 750.42 7.32 825.00 7.35 2,948.36 7.32 2,505.60 7.54 2,791.93 7.54 10,045.17 7.28
  • 7.38 , 2015 806.00 7.31 6,506.92 7.34 12,659.37 7.31 17,268.42 7.59 115.55 7.45 425.00 7.36
  • 7.02 , 2016 4,587.81 7.47 20,354.31 7.48 48,400.66 7.46 67,542.22 7.58 31,056.76 7.58 27,837.58 7.25

    6.90 , 2019 10.14 7.73 20.00 7.93 384.50 7.76 1,489.35 7.97 6,915.68 7.86 70,313.66 7.25

  • 6.35 , 2020 187.00 7.76 3,355.13 7.96 6,150.66 7.91 6,04,64.99 7.97 81,420.69 7.79 70,465.23 7.58
  • 7.80 , 2020 30,640.50 7.46 14,397.07 7.62 1,10,475.55 7.50 1,147.10 7.77 ---
  • 8.20 , 2022 36,814.75 7.71 15,946.19 7.85 1,19,949.17 7.75 42,787.66 8.12 113.00 8.12 90.00 7.89
  • 8.20 , 2023 172.85 8.09 --1675.59 8.22 0.40 8.20 30.30 8.26 955.96 8.29

    8.24 , 2027 67.00 8.08 234.24 8.22 985.16 8.13 834.05 8.25 3,775.20 8.35 1,986.44 8.18

    8.26 , 2027 1,292.23 8.06 1,390.84 8.19 7,427.81 8.08 2,790.99 8.39 --155.00 8.22

    8.28 , 2032 645.06 8.13 1,299.74 8.33 6,419.82 8.20 2,752.52 8.56 355.57 8.32 149.25 8.32

    Total (All Securities) 82,451.86 7.50 80,594.39 7.43 3,61,583.98 7.45 2,49,090.36 7.44 1,47,852.12 7.52 2,08,088.37 7.27

    (-) 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.

    june 19, 2010 vol XLV No 25

    MONEY MARKET REVIEW

    Graph D: Yield Curves for Dated Securities – Weighted Averages for May 2010 and contributed around of NCDs for a meagre amount of Rs 350

    Yield (% per annum) 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 0123456789 10 11 12 13 14 15 16 17 18 22 24 25 26 29 Current month Previous month 3-months ago
    were received for more than 4.5 times the notified amount in each auction. While The non-banking financial corporations’ (NBFCs) Table 11: Auctions of Treasury Bills (Amount in Rs crore) Date of Auction Bids Bid Cover Cut-off Accepted Ratio Yield (%) Weighted Average Cut-off Weighted Price (Rs) Average
    shorter maturity TBs were considered earlier by the RBI, in practice this is the participation declined considerably during the A: Cash Management Bills 11-May-10 6,000 4.57 3.87 Yield (%) 3.87 99.63 Price (Rs) 99.63
    first time such bills have been auctioned. month compared to the 18-May-10 6,000 4.65 3.92 3.92 99.70 99.70
    With such bills becoming more popular previous month and they Total for May 12,000
    over time, such auctions could help in together raised Rs 1,265 B: 91-Day Treasury Bills
    setting some bench marks for maturities of less than 91 days. The bid cover ratio also came down to 2.54 times in May from 3.10 times in April reflecting the liquidity tightness. In concrore through five issues including one NCD and showing around 21% of the total mobilisation. Infrastructure Development Fin 05-May-10 12-May-10 19-May-10 26-May-10 Total for May Total for April 7,000 7,000 7,000 7,000 28,000 28,000 3.74 2.60 2.19 1.63 2.54 3.10 4.13 4.17 4.22 5.04 4.39 4.14 4.09 4.13 4.17 4.87 4.32 4.08 98.98 98.97 98.96 98.76 98.92 98.98 98.9998.9898.9798.80 98.94 98.99
    trast, the attention of investors seemed to ance Corporation entered C: 182-Day Treasury Bills
    have turned in favour of longer maturity the market thrice and 12-May-10 2,000 2.85 4.55 4.49 97.78 97.81
    TBs. While the bid cover ratio of 182-day raised Rs 1,040 crore offer 26-May-10 2,000 2.79 4.97 4.91 97.58 97.61
    TBs was less, it fetched a higher price and ing 8.15% and 8.65% for 5 Total for May 4,000 2.82 4.76 4.70 97.68 97.71
    the 364-day TBs witnessed increased bid cover ratio of 4.10 times in May against 3.37 times in April fetching also a higher price in years and 15 years. Most of the companies carried AA+ and AAA ratings. Total for April D: 364-Day Treasury Bills 05-May-10 19-May-10 4,000 2,000 2,000 3.31 5.57 2.63 4.64 4.91 4.93 4.55 4.89 4.92 97.74 95.33 95.31 97.78 95.3595.32
    auctions (Table 11). Central undertakings Total for May 4,000 4.10 4.92 4.91 95.32 95.34
    showed less interest during Total for April 4,000 3.37 5.07 5.06 95.19 95.20
    2.5 Corporate Bond Market During May, there was a marked decline of May and only the Indian Railway Finance Corpora *: Cash Management Bills auctioned on 11 May and 18 May for maturity of 35 days and 28 days, respectively. Source: RBI's press releases.
    60% in the mobilisation of resources tion raised Rs 1,100 crore,
    through primary bond issues and the total amount raised stood at Rs 6,115 crore against Rs 15,240 crore during the previous the highest amount raised during the month offering 8.83% for 25 years with a Table 12: Details of Commercial Bond Issues during April 2010 Institutional Category No of Issues Volume in Range of Range of Rs Crore Coupon Rates Maturity in Years (Y) (in %) and Months (m)
    month. Most of the companies including 20-year moratorium thro FIs/Banks 8 3,400 6.22-9.07 1y-15y
    the National Housing Bank (NHB) offered a ugh issuance of commer- NBFCs 5 1,265 7.30-8.65 3y-10y
    green shoe option. The coupon rates ranged between 6.22% and 9.95%. Banks/financial institutions (FIs) were the major participants during the month cial paper. As regards corporates, only two companies tapped the market through issuance Central Undertakings CorporatesTotal for May 2010 Total for April 2010 Source: www.debtonnet.com. 1 2 16 21 1,100 350 6,115 15,240 8.83 8.80-9.95 6.22-9.95 5.90-10.25 25y 10y 1y-25y 1y 6m-15y
    Economic & Political Weekly june 19, 2010 vol XLV No 25 79

    In addition to normal maturities, the RBI commenced issuing CMBs. These bills of non-standard, discounted instruments issued for maturities less than 91 days are intended to meet temporary cash flow mismatches of the central government. Two auctions of CMBs were conducted for maturities of 28 days and 35 days for an aggregate of amount Rs 12,000 crore. Bids 56% of total mobilisation through eight issues raising an aggregate amount of Rs 3,400 crore. These bonds carried the coupon rates ranging between 6.22% and 9.07% for the maturity periods of one to 15 years. HDFC issued non-convertible debentures (NCDs) thrice during the month raising a total amount of Rs 1,250

    crore offering 6.22%-8.25% for the maturity of 1 to 10 years. The NHB hit the market twice during the month issuing bonds and upper tier II bonds for a total amount of Rs 500 crore, with a greenshoe option of Rs 500 crore. The NHB also offered put/call option for both the issues. Among banks/FIs the highest amount was raised by Central Bank of India for Rs 1,000 crore.

    crore. The two issues were assigned ‘AA& A+’ ratings by major rating agencies, sharing average fundamentals (Table 12).

    The secondary market transactions in commercial bonds during the month have seen a marginal increase during the month compared to the previous month. The aggregate turnover in the corporate bonds reported by BSE, NSE and Fixed Income Money Market and Derivatives Association of india (FIMMDA) increased by 9% during May and totalled Rs 72,711 crore over April, while the average daily volume was up by 3% to Rs 3,636 crore during the same period. During the month, the BSE witnessed a whopping rise of 47% in turnover over the previous month followed by NSE with 14% rise and FIMMDA reporting displayed a minimal 3% rise during the same period.

    EPW

    To read the full text Login

    Get instant access

    New 3 Month Subscription
    to Digital Archives at

    ₹826for India

    $50for overseas users

    Comments

    (-) Hide

    EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

    Back to Top