Corporate Bond Market Activity: An Overview

MONEY MARKET REVIEW

Corporate Bond Market Activity: An Overview

EPW Research Foundation

The corporate bond market activity has picked up in recent years both in the primary and secondary market segments. However, this market is yet to acquire depth, vibrancy and integration comparable to other segments of the ﬁ nancial market. The secondary market trends support the view that over the counter trades are the most favoured route by investors. Data on primary and secondary market activity are from diversiﬁ ed sources and lack completeness and uniformity, making it difﬁ cult to draw meaningful conclusions. Apart from introducing various measures for the development of the market, the regulators should focus on the dissemination of comprehensive data on the corporate debt market in a transparent manner.

1 Introduction

ver since the onset of reforms in the ﬁnancial sector in the early 1990s, the development of the corporate bond market in India has been lackadaisical. The 2010-11 Economic Survey while stressing the need for deepening the domestic capital markets and the role of non-bank institutions, especially in the corporate bond and debt markets, indicated, “with bank ﬁnance drying up for long-term infrastructure projects in view of the asset-liability problems faced by the banking system, the need for further development of a deep and vibrant corporate bond market can hardly be overemphasised”. While the market for government securities has evolved over the years and expanded with the increasing borrowing requirements, the corporate bond market has languished in terms of both market participation and structure. As a result, in terms of size, the corporate bond market is only about 14% of the total bond market, and market liquidity and infrastructure remain constrained.

Several committees and working groups have looked into the issues – macro, micro, regulatory and legal – and the government has been continually engaged, paying attention and introducing various steps in coordination with the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) to give a boost to the development of this market. These measures have certainly resulted in some pick-up in both primary and secondary market activity in the recent past. The market is, however, yet to acquire depth, vibrancy and integration comparable to other segments of the ﬁnancial market. In this article we attempt to provide an overview of the activity in the corporate bond market in recent years and draw some broad conclusions.

1.1 Primary Market

Details of commercial bond issues during the period 2006-07 to 2010-11 according to the major categories of issuers, namely banks/ﬁ nancial institutions (FIs), nonbanking ﬁnancial companies (NBFCs), state undertakings, central undertakings and corporates are provided in Table 1 and Graph A (p 70).

The total issues that increased marginally from Rs 52,079 crore in 2006-07 to Rs 52,817 crore in 2007-08, showed a signiﬁ cant jump to Rs 82,421 crore in 2008-09 and further to Rs 1,14,318 crore in 2009-10. This could be partly attributed to companies relying more on domestic credit and bonds compared to external sources, following the global ﬁnancial turmoil. It is signiﬁ cant that this growth has been achieved despite the increase in government borrowing to provide ﬁscal stimulus after the crisis. The total issues, however, witnessed a dip to Rs 91,024 crore in 2010-11, partly reﬂecting slower industrial activity following tight liquidity conditions and the anti-inﬂationary stance of the central bank.

Throughout this period, the largest participation has been coming from banks and FIs, accounting for about 43% of the total issues. The second largest participation has consistently been from central government undertakings accounting for another 30% of the total issues. The NBFCs substantially increased their participation

Table 1: Commercial Bond Issues Volumes during 2006-07 to 2010-11 (Amount in Rs crore)

Issuer Category/Group 2006-07 2007-08 2008-09 2009-10 2010-11 Total (2006-2011) % to total

Central undertakings 12,570 (13) 19,057 (19) 23,352 (28) 33,481 (38) 29,120 (23) 1,17,580 (121) 29.94

State undertakings 2,130 (5) 676 (6) 1,195 (7) 2,025 (10) 1,123 (2) 7,149 (30) 1.82

FIs/Banks 35,404 (88) 28,885 (87) 39,274 (82) 33,015 (86) 32,985 (76) 1,69,563 (419) 43.18

Corporates 400 (1) 587 (5) 16,015 (31) 26,210 (55) 7,775 (19) 50,987 (111) 12.99

NBFCs 1,575 (7) 3,613 (14) 2,585 (18) 19,587 (77) 20,021 (43) 47,381 (159) 12.07

Team led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, Total 52,079 (114) 52,817 (131) 82,421 (166) 1,14,318 (266) 91,024 (163) 3,92,659 (840) 100

V P Prasanth, Rema K Nair, R Rekha Rani Rao Year on year growth 1.42 56.05 38.70 -28.80

and Sharan P Shetty. The figures in bracket represent number of primary issues. Source: www.debtonnet.com, compiled by EPWRF.

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Graph A: Volumes of Commercial Bond Issues (Rs crore)

Graph B: Trading in Corporate Bonds Market

(Amount in Rs crore) 450000

since 2009-10 to around Rs 20,000 crore, from the earlier level of Rs 1,500 crore to Rs 3,600 crore. During 2006-07 and 2007-08, participation from corporates had been meagre at only Rs 400 crore and Rs 587 crore. This saw a level jump in the two subsequent years to Rs 16,015 crore in 2008-09 and Rs 26,210 crore in 2009-10. But in 2010-11, the corporate participation dwindled to Rs 7,775 crore.

The trend thus shows that the increase in volumes since 2006-07 has not come from the private corporate sector. A majority of issues has been from the public sector, both ﬁ nancial and non-ﬁ nancial. Another noteworthy feature has been that banks, FIs and NBFCs, representing essentially the ﬁnancial sector, mobilise resources substituting their deposit resources and use the funds for on-lending to corporates. Thus, to the extent bond issues are dominated by the ﬁnancial sector itself, it does not result in the needed diversiﬁcation and disintermediation through the bond market development.

1.2 Secondary Market

Owing to the intervention by SEBI in recent years, there are two trading-cumreporting platforms, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) and a reporting platform for over the counter (OTC) trades in the Fixed Income Money Market and Derivatives Association (FIMMDA) for corporate bond trades in the secondary market. Coordinated by SEBI, this reporting system seems to be stabilising, bringing in greater transparency in the reporting of bond trades in the secondary market.

The platform-wise volumes of secondary market trades are summarised in Table 2 and Graph B. Firm data are apparently available from 2007-08 onwards. The aggregate traded volume in all the three platforms showed an exponential increase from Rs 95,890 crore in 2007-08 to Rs 6,05,274 crore in 2010-11, that is, a sixfold increase in three years. Of the total trades, FIMMDA trades witnessed the fastest growth from Rs 23,479 crore to Rs 4,09,742 crore over the same period, a seventeenfold increase. BSE trades were more or less stable at around Rs 40,000 to Rs 50,000 crore whereas the NSE trades showed a jump during the last two years.

One thing which is not clear is how much of the trade took place in the exchanges and how much represented the OTC trades. While the reporting by the FIMMDA includes by deﬁnition only the OTC trades, the reporting by the NSE and BSE includes both exchange traded volume and OTC trades reported to them. This makes the situation complex. It is

Table 2: Trading in Corporate Bonds Market (Volume in Rs crore)

Year	BSE @	NSE @	FIMMDA#	Grand Total
2006-07*	15,936 (4,535)	1,486 (123)	0 (123)	17,422 (4,658)
	91.47	8.53	0.00	100
2007-08	40,958 (11,203)	31,453 (3,787)	23,479 (3,787)	95,890 (19,079)
	42.71	32.80	24.49	100
2008-09	37,320 (8,327)	49,505 (4,902)	61,535 (4,902)	1,48,166 (22,683)
	25.19	33.41	41.53	100

also not clear whether there is double or treble reporting of trades. Taking the ﬁ gures at face value, we can deﬁ nitely surmise that most of the trades are OTC trades, and therefore, OTC is the preferred mode by the market participants.

1.3 Market Integration and Data Transparency

Technically, the corporate bond market is a part of the debt market segment of the capital market. The volumes, trades, ratings and spreads of such bonds should reﬂect the quality of these bonds in a transparent manner for a healthy market development. All these are closely linked to money and government securities market segments. Since government securities, particularly central government securities, are considered credit risk free, the spread of corporate bond yields in primary and secondary markets of relevant maturities and ratings should be reﬂective of the credit risks inherent to these bonds with reference to comparable maturities of central government securities.

Market integration can be brought about only with transparent dissemination of data on both primary and secondary market segments. At present, varied sources provide data on primary issuances. One private website provides some detailed information and issuer-wise data, including coupon or coupon range, type of bond, purpose of issue, rating, call and put and green shoe options offered, and maturity/ maturities. Yet another agency provides a review of such issuances in the primary market, but this data differs from the other source. The SEBI also provides information on primary issues, but it is very scanty and the coverage seems to be incomplete. Thus, at present there is no single reliable source of information on the primary issues in the corporate bond market. Obviously, it is very difﬁcult to get an idea about even the total outstanding stock of these bonds and their maturity structure.

Second, while public issues may be relatively more transparent, in the case of pri

2009-10 53,324 (7,408) 1,51,920 (12,522) 1,95,955 (12,522) 4,01,198 (38,230) vate placements, the essential bond

13.29 37.87 48.84 100 parameters may be subject to negotiations

2010-11 39,581 (4,465) 1,55,951 (8,006) 4,09,742 (8,006) 6,05,274 (44,060)

and the outcome may not be disclosed with

6.54 25.77 67.70 100

the complete details. Information on how

*: Data for January to March 2007. @: Comprises OTC trades and trades done on the exchange. # Figures comprise only OTC trades reported (FIMMDA reporting platform became operational with effect from September 2007). much of the issue is privately placed and Figure in brackets represent number of trades in exchange. Numbers in italics denotes percentage of total. Source: www.sebi.gov.in how much public is also not consistently

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Table 3: Spread of Corporate Bonds over SDLs (10-year maturity)		results are presented in
Month	Corporate Bonds	SDLs YTM CGS 10 Year (in %) YTM	Spread of Corporate	Spread of Corporate	Spread of SDLs over	Tables 3 and 4. The spread
Jan-10	Weighted Yield 8.78	8.30	(in %) 7.64	Bonds over SDLs (in Bps) 49	Bonds over CGS (in Bps) 114	CGS (in Bps) 66	of corporate bonds varied in the range of 6 basis points
Feb-10	7.81	8.46	7.68	-65	13	78	(bps) in November 2010 to
Mar-10	9.25	8.47	-	78	-	-	138 bps in May 2010. The
Apr-10	8.80	8.56	7.88	24	92	68	spread	over	state	loans
May-10	8.95	8.16	7.57	79	138	59	seemed somewhat stable,
Jun-10 Jul-10 Aug-10 Sep-10	8.59 8.54 9.21 8.91	8.10 8.17 8.36 8.39	7.60 7.73 7.96 7.86	49 37 85 53	99 82 125 105	51 45 40 53	but here again it ranged from a negative of 65 bps in February 2010 to 83 bps in
Oct-10	8.85	8.48	8.07	36	78	41	March 2011.

Nov-10 8.16 8.41 8.10 -25 6 31 The issuer group-wise Dec-10 8.48 8.39 8.04 10 44 35

spread of bond yields over

Jan-11 9.07 8.49 8.19 58 88 30

central government securi

Feb-11 9.31 8.51 -80 -

ties also does not show

Mar-11 9.24 8.42 -83 -

(i) In case of call or put option for any bond, years of call or put option is taken as maturity. any consistent relationship.

(ii) In December 10 year benchmark security was not reissued therefore yield rate given for

These differences may per-

December is secondary market rate for the central government security.

(iii) CGS: Central Government Securities. haps reﬂect differences in Source: RBI press releases, www.debtonnet.com.

risk perceptions of investors available. The RBI offers such data as part about the issuer, the complex structure of of its Handbook of Statistics, which throws the bond and differences in ratings. In the some light on this. absence of consistent and reliable data

Third, data on bond spreads are cur-that takes into account all relevant pararently provided by a variety of sources. meters, it is very difﬁcult to draw any FIMMDA provides maturity-wise, issuer meaningful conclusions about the trends group-wise and rating-wise data on sec-in bond spreads. ondary market spreads, which provide some broad indicators of bond spreads. 1.4 Concluding Observations The Clearing Corporation of India (CCI) is The corporate bond market activity has another source which provides informa-picked up in recent years both in primary tion on maturity-wise and issuer-wise and secondary market segments. Howspreads for corporate bonds. Because of ever, issuances are still concentrated in thin trades of these bonds, any attempt to ﬁnancial institutions and banks and to a draw meaningful conclusions based on certain extent in central government this data becomes difﬁ cult. undertakings and hence, the corporate

EPWRF attempted to work out the bond bond market is yet to acquire depth. The spreads for 10-year maturity since January secondary market trends support the 2010, based on primary market data. The view that OTC trades is the most favoured

Table 4: Spread of Primary Market Corporate Bond Yields over CGS (10-year maturity) (spread in bps)

Month/Year FIs/Banks

NBFCs

State Undertakings

Central Undertakings

Corporates

route by investors. Data on primary and secondary market activity are from diversiﬁed sources and lack completeness and uniformity and hence it becomes difﬁ cult to draw meaningful conclusions from the data. Apart from introducing various measures for the development of the market, the regulators should focus with some priority, on dissemination of comprehensive data on the corporate debt market in a transparent manner.

2 Money, Forex and Debt Markets

The last month of the ﬁnancial year 2010-11 proved to be tough for global ﬁ nancial markets, with the earth quake and nuclear crisis in Japan and attack in Libya by the United States and United Kingdom gripping the overall sentiments. The spread of unrest in west Asia and North Africa, engendering a sharp rise in crude oil prices raised global inﬂation concerns. The global oil prices dented market sentiments in India as well, with the central bank issuing warning signals about rising inﬂ ationary pressures and emerging risks to growth. The announcement of the Union Budget for the ﬁnancial year 2011-12 improved the market sentiments in the initial days of March, but the euphoria died out when the inﬂation rate for February turned out to be 8.31% against the earlier ofﬁ cial expectations of a falling trend, particularly of food prices. The RBI stuck to its antiinﬂationary stance. In its mid-quarter monetary policy review, it hiked the key policy rates – repo and reverse repo – by 25 bps each. Acceleration in inﬂ ation rate to 8.98% in March is likely to cause further hikes in policy rates by the central bank in its next policy review due in early

Bond Yield Spread Bond Yield Spread Bond Yield Spread Bond Yield Spread Bond Yield Spread May. On the positive side, the domestic

Jan-10 9.75 211 8.83 119 8.75 111 8.65 101 10.35 271

growth prospects for the year 2010-11

Feb-10 9.20 152 9.00 132 --8.80 112 10.00 232

remained optimistic, with the Central

Mar-10 9.65 -8.90 ---9.38 ---

Statistical Organisation projecting the gross

Apr-10 9.50 162 10.20 232 --8.75 87 10.25 237

domestic product growth rate at 8.6%.

May-10 9.07 150 8.65 108 --8.83 126 9.95 238 Jun-10 9.15 156 8.28 69 8.57 98 8.85 126 11.50 391 The advance tax collections from corpo
Jul-10	8.79	107	8.80	108	-	-	8.75	103	9.15	143	rates also increased by over 22% to Rs 1.97
Aug-10	10.40	244	10.00	204	-	-	-	-	11.69	373	lakh crore in the current ﬁ scal compared
Sep-10	9.05	119	9.00	114	-	-	-	-	9.00	114	to the corresponding period a year ago,
Oct-10	9.50	143	8.88	81	8.74	67	8.84	77	10.47	240	indicating buoyant economic activity.
Nov-10Dec-10Jan-11Feb-11	8.98 9.25 9.48 9.31	88 121 129 -	8.75 9.40 9.15 -	65 136 96 -	----	----	8.80 9.05 8.97 -	70 101 78 -	-9.30 9.70 -	-126 151 -	Liquidity remained tight towards the ﬁscal year end, even as the system struggled to meet the year-end needs in March. The
Mar-11	9.40	-	9.33	-	-	-	9.18	-	-	-	vast disparity between credit and deposit
Source : RBI Press Releases, www.debtonnet.com, Compiled by EPWRF.					growth rates during 2010-11 caused	a
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liquidity crunch and the gap continued in March also. During the month, aggregate deposits added 1.20 lakh crore to the system but bank credit drained out Rs 1.28 lakh crore. The system also witnessed higher than expected outﬂows in the form of advance tax payments to the extent of Rs 70,000 crore. The liquidity tightness had an impact on short term interest rates in terms of both level and volatility.

Table 5: Money Market Activity (Volume and Rates)

Along with the rates, the average daily turnover also showed overall 13% increase in March over February barring collateralised borrowing and lending obligations (CBLO). The overnight segment recorded 8% increase in daily average volume during the month, owing to huge volatility in rates. The notice money market showed a vast rise of 42% followed by market repo at 13% (Table 5).

March 2011			February 2011
Instruments	Daily Average	Monthly	Range of	Daily Average	Monthly Weighted	Range of Weighted
	Volume	Weighted	Weighted Average	Volume	Average	Average
	(Rs Crore)	Average Rate (%)	Daily Rate (%)	(Rs Crore)	Rate (%)	Daily Rate (%)
Call Money	9,823	7.12	6.30-8.61	9,058	6.73	6.24-6.98
Notice Money	2,425	7.55	5.86-9.01	1,711	6.68	5.45-6.83
Term Money @	184	-	7.0-11.55	139	-	6.50-10.20
CBLO	41,967	6.46	2.85-7.84	42,466	6.43	5.36-6.63
Market Repo	14,646	6.56	1.73-7.80	12,977	6.46	4.00-6.57

system to fulﬁl its reserve requirements. The liquidity injection by RBI’s twin repo auctions crossed the Rs 1 lakh crore level on several occasions during March reﬂ ecting the illiquidity of the banks. During the beginning of the month, for two weeks the RBI infused around Rs 61,500 crore into the system on a daily average basis through its repo window. Thereafter, during 14-18 March this trend reversed with the repo window showing a massive injection of funds which averaged to Rs 1,27,000 crore. However, the situation eased somewhat in the last two weeks of the month, bringing some relief, but still the amount averaged to Rs 81,000 crore. Overall, the average daily net liquidity injection amounted to Rs 88,000 crore in March showing a rise of 10% over the previous month. The open market operations (OMO) window of the RBI continued to remain practically inactive (Table 6).

Table 6: RBI’s Market Operations (in Rs crore)

Month/Year	OMO	LAF (Average Daily
	(Net Purchase(+)/Sale(-))	Injection (+)/Absorption(-))
October-10	1	62,309
November-10	8,354	98,001
December-10	41,383	1,16,355
January-11	17,510	90,349
February-11	2	79,677
March-11	-14	87,950

Source: RBI’s Weekly Statistical Supplement.

The interest rate futures (IRF) segment of the NSE continued to remain lacklustre, with the turnover remaining at Rs 1.17 lakh in March. On 7 March, the RBI amended directions on IRFs in 91-day treasury bills (TBs) allowing cash settlement of transactions; but even after a month of allowing this, bourses are still not getting any response from the market.

2.2 Forex Market

The US dollar witnessed an overall depreciating trend in March. Optimistic economic recovery with a positive jobs report in the

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

The forex market experienced vibrant behaviour with the Indian currency showing remarkable strength against global currencies, supported by portfolio inﬂ ows to the domestic stock market. With an overall reduction in the government’s annual borrowing programme for 2011-12 and also for the ﬁrst half of the year, huge redemptions and prospects of easing liquidity conditions, the government’s 10-year bench mark bond yields, unlike short term rates, remained stable after the rate hikes. This stability is likely to continue in the coming months.

The corporate bonds market displayed buoyant activity in March. To boost the market, SEBI raised the overall investment limit for foreign institutional investors (FIIs) in corporate bonds to $40 billion on 31 March 2011, following a decision announced by the Finance Minister Pranab Mukherjee in his Budget speech for 2011-12. In addition to this, SEBI also kept a minimum lock-in period of three years for investments by FIIs in corporate infrastructure bonds.

2.1 Money Market

Anticipation of increase in key policy rates kept the market sentiments depressed from the beginning of the month, taking a toll on short-term money market rates. Thus, the overnight rates ruled above the repo rate of the RBI throughout the period with the other short-term rates also following the same trend and moving in an upper bound.

The volume of outstanding certiﬁ cates of deposit (CDs) issued by scheduled commercial banks increased by Rs 10,662 crore during the period of one fortnight and the outstanding amount at the end of 25 February stood at Rs 4,18,524 crore. The discount rate ranged between 8.15% and 10.60% in February reﬂecting the prevailing demand for this short-term instrument. Similar to CDs, commercial paper (CP) rates also ruled higher but in a wider range of 6.30% to 13.05% in February. The higher rates, however, contributed to reduced volumes in CPs and the outstanding amount decreased by Rs 2,435 crore in the 15-day period and amounted to Rs 1,01,291 crore at the end of February.

According to FIMMDA, the traded volume in CPs and CDs showed a whopping rise of 91% and 20%, respectively, during March over February in the face of banks and corporates competing to meet their liquidity needs. It has been observed that banks have been raising funds heavily from the CD market as the deposit growth was dull compared to credit growth.

Table 7: Foreign Exchange Market: Select Indicators

At the same time, they were also Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex Dollar Rate (Last Friday Depreciation (-) (Equity +Debt) (Month-end Index

reported to be making arbitrage

of the Month) of Rs/$ (in %) in $ Million Closing)

returns in a highly volatile market. Sept-2010 45.54 2.90 7,100 20,069 78.72

The tight liquidity situation as Oct-2010 44.54 2.25 5,468 20,032 77.27

observed by the tendered amount Nov-2010 45.74 -2.62 4,785 19,521 81.19

in the Liquidity Adjustment Facil-Dec-2010 44.81 2.08 710 20,509 79.03 ity (LAF) window of the RBI,

Jan-2011 45.74 -2.03 1,198 18,328 77.86 Feb-2011 45.37 0.82 -721 17,823 76.92

showed a consistent rise in March

Mar-2011 44.65* 1.61 1,535 19,445 76.07

as the ﬁnancial year came to an

*: Data relates to 31 March 2011. end exerting pressure on the www.futures.tradingcharts.com

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US strengthened its currency during the initial part of the month. The revival was also boosted by a strong dollar demand from oil importing countries, following the instability in oil producing countries leading to soaring crude prices. The disaster earthquake in Japan also favoured the US dollar as a relatively safe currency against other assets. However, the strength of the US dollar waned later as the fears about Japan’s nuclear crisis receded, boosting investor appetite for emerging market assets.

The euro continued its resurgence against the dollar as in the past three months. Tracking a strong euro, most of the Asian currencies also appreciated against the greenback during March. The dollar index which tracks the greenback against the six major US trading currencies fell by 85 bps in one month.

Similar to Asian currencies, the Indian rupee appreciated against most of the global currencies particularly against the Japanese yen and the British pound. The

Table 8: Turnover in the Foreign Exchange Market* (in $ billion)

Month Merchant Interbank Spot Forward Total

Oct-10 398.9 (30.3) 1047.6 (27.8) 708.3 (26.7) 738.1 (30.3) 1446.4 (28.5)

domestic currency also strengthened against the dollar but rising crude oil prices overseas stemmed its further advancement. Favourable domestic fundamentals like optimistic domestic growth, efforts by the central bank to control inﬂation numbers, buoyant stock market activity and huge portfolio investments propelled the rupee to post handsome gains (Table 7, p 72).

The rupee started the month at Rs 45.12 per dollar with a marginal appreciation, and further added 16 paise on 3 March tracking huge portfolio funds of Rs 470 crore coming into the equity market. On 4 and 5 March, the rupee lost 17 paise in

Nov-10 369.2 -(7.4) 926.2 -(11.6) 634.1 -(10.5) 661.3 -(10.4) 1295.4 -(10.4) just two days, hurt by the unabated rise in

Dec-10 279.4 -(24.3) 769.5 -(16.9) 507.0 -(20.0) 541.9 -(18.1) 1048.9 -(19.0) crude oil prices. It bounced back again on

Jan-11 281.3 (0.7) 802.1 (4.2) 553.7 (9.2) 529.8 -(2.2) 1083.5 (3.3) 6 March, taking cues from positive activity

Feb-11 289.1 (2.8) 786.9 -(1.9) 510.2 -(7.9) 565.9 (6.8) 1076.0 -(0.7) in domestic bourses coupled with FII

*: Includes trading in FCY/ INR and FCY/FCY.

inﬂows into the market. From 10 March

Figures in brackets are percentage change over the previous month. Source: RBI’s Weekly Statistical Supplement, Various Issues. onwards the local currency displayed mixed

Table 9: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)

Descriptions March 2011 Previous Month Three Months Ago Six Months Ago

Last Week (31st) First Week (4th) Total for the Month (February 2011) (December 2010) (September 2010) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

1 Treasury Bills 4,490.94 3,936.41 23,023.78 12,826.72 12,902.86 15,768.39

A 91-Day Bills 3,337.73 7.07 2,165.06 6.94 14,097.85 7.04 8,911.34 6.93 7,883.30 6.99 11,315.07 5.97

B 182-Day Bills 510.59 7.27 819.46 7.38 3,889.29 7.20 1,598.58 7.30 2,191.23 7.16 1,356.91 6.21

C.364-Day Bills 642.62 7.38 951.89 7.41 5,036.64 7.38 2,316.80 7.47 2,828.33 7.17 3,096.41 6.31

2 GOI Dated Securities 38,627.30 8.11 29,719.44 8.18 1,33,541.74 8.17 1,24,461.98 8.15 1,39,918.70 7.99 2,29,375.66 7.84

Year of (No of Maturity Securities) 2011 4 322.04 7.39 10.00 7.40 1,306.54 7.43 736.75 7.40 1,160.44 7.50 615.16 6.43

2012 5 1,085.31 7.54 89.50 7.50 2,263.82 7.55 1,396.05 7.54 1,773.13 7.41 3,056.57 6.93

2013 3 75.32 7.58 105.53 7.69 819.43 7.65 800.11 7.73 68.86 7.53 1,535.36 7.20

2014 5 91.88 7.83 5.66 8.03 205.78 7.90 375.88 7.90 347.45 7.68 855.00 7.54

2015 6 1,185.76 7.90 1,305.38 7.96 7,664.21 7.92 13,869.84 8.10 12,297.53 7.92 27,528.91 7.71

2016 3 6.20 7.93 6.59 8.07 45.81 8.01 129.48 8.16 735.62 7.93 1,332.10 7.91

2017 4 526.24 7.92 1,297.52 7.99 9,091.40 7.93 12,635.31 8.12 38,087.79 7.95 6,822.84 7.96

2018 5 11.45 8.09 15.16 8.15 69.01 8.12 29.68 8.19 124.97 8.00 138.17 8.09

2019 4 28.90 7.95 11.00 8.14 203.10 8.07 69.78 8.20 12.23 8.14 205.21 8.02

2020 5 914.05 7.99 262.00 7.96 5,524.33 7.96 4,827.32 8.11 20,517.54 8.03 1,06,674.04 7.95

2021 2 7.24 8.05 0.72 8.10 81.67 8.10 17.80 8.20 8.07 8.11 2.04 8.24

2022 4 17,621.53 8.04 21,406.60 8.07 1,21,222.12 8.07 89,711.93 8.17 69,298.49 8.07 63,454.84 8.04

2023 2 0.50 8.08 6.75 8.20 5.85 8.38 2.10 8.32 5.05 8.51

2024 1 11.31 8.23 12.42 8.23 72.01 8.23

2026 1 10.00 8.49 206.10 8.42 3.00 8.42

2027 2 745.48 8.31 1,317.61 8.45 7,198.42 8.36 7,182.93 8.51 8,768.77 8.42 6,224.54 8.36

2028 1 3.18 8.45 10.58 8.39 4.50 8.55 10.94 8.30 3.42 8.18

2032 3 43.87 8.32 38.95 8.44 516.65 8.37 52.67 8.50 243.11 8.42 518.74 8.25

2034 1 2.75 8.29 52.78 8.37 2.11 8.50 16.99 8.37 60.00 8.26

2035 1 15.54 8.26 37.48 8.47 67.92 8.38 18.05 8.56 2.07 8.42

2036 1 30.02 8.34 85.00 8.45 401.02 8.39 0.50 8.14 110.62 8.47 50.00 8.40

2039 1 2.93 8.51 5.83 8.40

2040 1 212.93 8.35 246.54 8.48 1,413.82 8.40 1,600.16 8.57 2,969.09 8.47 1,240.39 8.38

3. State Govt. Securities 1,166.71 8.32 782.57 8.42 4,983.04 6.42 3,176.64 8.47 2264.49 8.36 2,679.40 8.20

Grand total (1 to 3) 28,584.67 30,987.64 1,86,396.34 1,49,545.10 1,71,723.21 2,38,770.17

(-) 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.2) Trades were negligible in maturities of 2023 to 2026 in the recent period. Source: Compiled by EPWRF; base data from RBI, CCIL.

Economic & Political Weekly

april 23, 2011 vol XLVI No 17

MONEY MARKET REVIEW

behaviour as rising crude oil prices, the earthquake in Japan and varied domestic fundamentals adversely affected market sentiments. However, on 17 March the rupee recouped its losses after the RBI took steps to contain domestic inﬂ ation and hiked the key policy rates. As the ﬁnancial year came to an end, the domestic currency showed mixed behaviour inﬂuenced equally by positive and negative sentiments. While massive portfolio inﬂows created a positive impact, crude oil prices fuelled adverse pressures. However, the rupee managed to end the month with a notable appreciation of 1.19% over 28 February and closed at Rs 44.65 per dollar on 31 March.

The forward premia across the three tenures showed a mixed behaviour during March. The sharp spike in crude oil prices and uncertainties about the future growth scenario propelled the forward premia to touch their highs during the middle of March. The volatility in rupee movement on the back of monetary policy review pushed the one-month premia to their highest 9.18% on 18 March. However, after the hike in policy rates, the forward premia across the three maturities showed a steady downward trend. The one-month premia showed massive volatility and moved in a wide range of 6.94% and 9.18% during March while closing at 6.99% on 31 March shedding 71 bps over the previous month-end. However, the other two tenures of 3-month and 6-month forward premia increased marginally, signalling that the rupee’s appreciation is likely to be restricted over the next three- to six-month period. The 3-month premia ended at 6.99%, while the 6-month premia at 6.85% on 31 March showing 8 bps and 25 bps rise respectively, over the corresponding period of the previous month.

As per the RBI data, the overall turnover in the forex market recorded a marginal fall of 0.7% during the month of February over January. The turnover in merchant and forward segment showed an increase of 2.8% and 6.8%, respectively, but reduction in spot and inter-bank transactions by 7.9% and 1.9%, respectively, led to the overall fall. While volatility in the foreign exchange market resulted in huge amount of forward dealings, continuous appreciation of the rupee against other currencies limited spot market activity (Table 8, p 73).

The uncertainty in the foreign exchange market led to enormous hedging activity in the currency derivatives market. During March, the total as well as

trading showed a growth of 21% while options recorded a whopping twofold rise. Among the products traded on the exchanges, EURO-INR displayed signiﬁ cant growth in its trading activity followed by JPY-INR and GBP-INR during the month. The USD-INR trade still contributed to 94% of the total futures trading.

Though trading only in futures, the Multi-Commodity Stock Exchange (MCX-SX) sustained its top position cornering 46% market share while the NSE put in 43%. The share of the United Stock Exchange remained at around 10% of the total currency derivatives turnover in March.

2.3 Government Securities Market

During March, there was no fresh issuance of central government securities in the primary market, thanks to the cushion of huge cash balances built up by the government. However, since the liquidity tightness continued through the month, exacerbated further by the policy rate hikes, the shortterm market remained tight. The clamour for short-term funds resulted in a higher

Table 11: Yield Spreads (Weighted Average) – Central Government Securities – the average daily turnover February 2011 (basis points (bps))
of domestic currency deriva-	Yield	March 2011	Previous	Three	Six Months
tives exchanges together recorded a staggering 46%	Spread in bps 1 Year-5 Year 5 Year-10 Year	Last Week First Week 39 57 12 3	Entire Month 46 9	Month Months Ago 62 52 4 18	Ago 98 33
and 26% increase, respec	10 Year-15 Year	-	39	32	22	-	-
tively, over February. On a	1 Year-10 Year	51	60	55	66	70	131
daily average basis, futures	Source: As in Table 9.

Table 10: Predominantly Traded Government Securities (Amount in Rs crore)

Descriptions		March 2011		Previous Month	Three Months Ago	Six Months Ago
	Last Week (31st)	First Week (4th)	Total for the Month	(February 2011)	(December 2010)	(September 2010)
AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM
GOI Dated Securities
9.39 , 2011	284.59	7.38	10.00	7.40	679.09	7.41	251.00	7.34	945.28	7.52	330.00	6.46
7.40 , 2012	785.31	7.52	50.00	7.45	1,025.31	7.51	737.66	7.49	1,284.58	7.38	1,275.00	6.92
7.27 , 2013	75.00	7.58	105.00	7.69	810.00	7.65	799.50	7.73	68.00	7.53	1,525.00	7.20
7.32 , 2014	60.00	7.86			65.00	7.87			200.00	7.70	695.00	7.56
7.17 , 2015	1,185.35	7.90	1,305.00	7.96	7,599.74	7.91	13,407.98	8.10	11,967.00	7.92	27,120.23	7.70
7.02 , 2016	5.00	7.96			25.00	8.02	125.00	8.16	699.30	7.93	1,040.00	7.90
7.46 , 2017	20.00	7.93	10.07	8.01	48.29	7.95	174.00	8.08	1,705.02	7.93	5,602.36	7.98
7.49 , 2017	194.24	7.92	806.67	7.99	3,871.62	7.93	5,117.16	8.12	4,050.71	7.97
7.99 , 2017	312.00	7.93	480.50	8.00	5,163.50	7.94	7,335.81	8.12	32,317.80	7.95	1,220.48	7.87
7.80 , 2020	796.85	7.99	257.00	7.95	2,767.83	7.97	4,287.10	8.12	19,182.50	8.04	1,06,427.26	7.95
8.08 , 2022	8,937.37	8.05	10,382.05	8.08	63,339.13	8.08	39,452.99	8.18	28,302.41	8.06	18,856.37	8.04
8.13 , 2022	8,580.20	8.03	10,872.20	8.07	57,345.40	8.06	50,183.88	8.16	40,721.14	8.07	43,655.74	8.03
8.20 , 2022	103.97	8.08	152.00	8.14	537.25	8.12	75.00	8.16	265.76	8.12	942.72	8.14
8.26 , 2027	743.44	8.31	1,307.66	8.45	7,127.15	8.36	7,124.43	8.51	8,442.12	8.42	6,199.05	8.36
8.28 , 2032	16.89	8.31	35.95	8.44	194.48	8.39	46.15	8.51	160.01	8.43	96.42	8.37
8.30 , 2040	212.93	8.35	246.54	8.48	1,413.82	8.40	1,600.16	8.57	2,969.09	8.47	1,240.39	8.39
Total (All Securities)	22,927.02	8.01	26,268.66	8.09	1,58,389.52	8.05	1,33,541.74	8.17	1,56,555.86	8.04 2,20,322.38	7.93
(-) 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 9.
74		april 23, 2011	vol XLVI No 17		Economic & Political Weekly

MONEY MARKET REVIEW

Date of Auction Number of Total Bid Cover YTM at Weighted

ﬁve years and one and ten crore and Rs 5,037 crore, respectively.

Participating Amount Ratio Cut-off Price Average

States Accepted (in %) Yield (%) years narrowed over the

Table 12: Details of State Government Borrowings (Amount in Rs crore) maturing between one and turnover of Rs 14,098 crore, Rs 3,889
01-Mar-11 8 4,185 2.68	8.47 8.46 month by 46 bps and 55	2.5 Corporate Bonds Market
15-Mar-11 9 5,233 2.06	8.37 8.34 bps respectively, due to a	The corporate debt market experienced
22-Mar-11 3 219 4.22	8.4 8.40 softening of rates across the	revived buoyancy in the month of March,
29-Mar-11 2 129 2.78 Total for March 22 2.38	8.41 8.39 8.42 8.39 maturity spectrum (Table 9,	especially in the ﬁrst half. The issuers
9,766 Total for February 16 11,809 2.11	8.51 8.49 p 73 and Tables 10 and 11,	made the market attractive by offering
Source: RBI press releases.	p 74).	higher coupon rates consistent with the
	State governments effec	high inﬂation scenario. The coupon rates
Table 13: Auctions of Treasury Bills (Amount in Rs crore) Date of Auction Bids Bid Cover Cut-off Weighted	Cut-off Weighted tively used the slack availa	increased from a range of 8.20%-9.80% in
Accepted Ratio Yield (%) Average	Price (Rs) Average ble in the primary market	February, to a range of 9.18% -11.80% in
Yield (%)	Price (Rs) and came out with four	March. In comparison with the previous
A: 91-Day Treasury Bills 01-Mar-11 5,000 2.19 7.14 7.14	98.25 98.25issues with participation by	month, the volume of funds mobilised
09-Mar-11 5,000 2.18 7.14 7.14	98.25 98.2522 states. The total amount	in March also witnessed a fourfold jump
16-Mar-11 5,000 2.05 7.23 7.19	98.23 98.24raised was slightly lower at	from Rs 2,250 crore to Rs 9,630 crore. All
23-Mar-11 5,000 2.08 7.31 7.27	98.21 98.22Rs 9,766 crore compared	categories of institutions participated in
30-Mar-11 5,000 2.19 7.31 7.27	98.21 98.22 with Rs 11,809 crore of the	primary issues during the month.
Total for March 25,000 2.14 7.23 7.2	98.23 98.24 previous month. The market	In all, nine institutions entered the
Total for February 20,000 3.07 7.15 7.14	98.25 98.25 response was good with a	market to mobilise funds. Among FIs/banks,
B: 182-Day Treasury Bills	higher bid-cover ratio of	HDFC and NABARD mobilised Rs 1,500
01-Mar-11 2,000 3.45 7.51 7.49	96.39 96.42.38 times compared with	crore and Rs 850 crore, respectively,
16-Mar-11 2,000 5.02 7.47 7.45 30-Mar-11 2,000 4.37 7.49 7.47	96.41 96.4296.4 96.41 2.11 times of the previous	through three issues each. Of the three
Total for March 6,000 4.28 7.49 7.47	96.4 96.41 month. Overall, the yield	issues from the corporates, TATA Sons
Total for February 3,500 3.47 7.51 7.48	96.39 96.4 rates softened by about 10	mobilised Rs 2,000 crore through two
C: 364-Day Treasury Bills	bps during the month. State	issues, a perpetual bond and a non-con
09-Mar-11 3,000 3.85 7.58 7.57	92.97 92.98loans also witnessed a rally	vertible debenture (NCD). A single issue
23-Mar-11 3,000 3.57 7.64 7.63	92.92 92.93 in the secondary market	by Rural Electriﬁcation Corporation Ltd
Total for March 6,000 3.71 7.61 7.6	92.95 92.96 with 57% higher turnover	raised Rs 3,000 crore among the central
Total for February 6,000 2.76 7.68 7.64	92.89 92.92 at Rs 4,983 crore, over the	undertakings group. The NBFCs mobilised
Source: RBI's press releases.	previous month (Table 12).	Rs 750 crore through three issues of
Table 14: Details of Commercial Bond Issues during March	2011	Rs 250 crore each, of which two were from
Institutional Category No of Issues Volume in Range of Rs Crore Coupon Rates	Range of Maturity in 2.4 Treasury Bills	LIC Housing Finance and one from IDFC.
in %	Years(y) and Months(m) Five auctions of TBs were	NCD seems to be the highly preferred
FIs/Banks 10 3,775 9.35-9.80	1y-15y held during the month for	mode of fund-raising by NBFCs, as both
NBFCs 3 750 9.33-9.85	14m - 15y Rs 37,000 crore against	LIC Housing and IDFC mobilised funds
Central Undertakings 1 3,000 9.18	10y Rs 29,500 crore in the pre	only through this route. Although various
Corporates 3 2,105 11.25-11.80	7y-perpetual vious month. The issuance	instruments were used by others to raise
	maturity amount was increased in	funds, data reveals that NCDs are the pre-
Total for March 2011 17 9,630 9.18-9.85	1y-15y respect of 91-day and 182	ferred mode. Of the 17 issues in the bond
Total for February 2011 8 2,250 8.20-9.80	3y-10y day bills by Rs 5,000 crore	market, excepting two, all others were
Source: www.debtonnet.com	and Rs 2,500 crore, respec	assigned a grade of AAA. The IDBI Bank
turnover in the secondary market for gov	tively. For 91-day TBs, the bid cover ratio	issued upper tier-II bonds of Rs 1,000
ernment securities.	was lower during the month with cut-off	crore with AA ranking and Elder Pharma-
The turnover in the secondary market	yields ﬁrming up consistently over the	ceuticals Ltd with A+ rating raised Rs 105
jumped by 19% to Rs 1,58,389 crore over	month (Table 13). On the other hand, for	crore (Table 14).
the previous month. Higher traded volume	182-day bills, the response rate was very	According to data published by the
also resulted in an overall fall in yield rate	high at 4.28 times bid-cover ratio, result-	SEBI, the average daily trade turnover
to 8.05% from 8.17% in February. Turnover	ing in softening of yields. The 364-day	reported by the BSE, NSE and FIMMDA
was more concentrated in the latter half	bills also received a better response cut	together increased by 15% in comparison
of the month after the advance tax out	ting off at lower rates compared to the	to the previous month. The aggregate
ﬂows from the system. The top ﬁ ve traded	previous month.	turnover also increased by a signiﬁ cant
securities namely 8.08% 2022, 8.13% 2022,	In the secondary market, yields ﬁ rmed	27%. Most noticeably, the turnover in BSE
7.17% 2015, 8.26% 2027 and 7.99% 2017	though the transactions were 79% higher	increased by 104.6%, and FIMMDA by
accounted for nearly 90% of the total traded	than the previous month. The 91-day, 182	31%, despite the massive fall of 16% in the
volume. The yield spread of securities	day and 364-day TBs recorded a higher	previous month.
vo	l XLVI No 17	75

Economic & Political Weekly

april 23, 2011