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

A+| A| A-

Corporate Bond Market Activity: An Overview

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.

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

E
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.

Economic & Political Weekly

EPW
april 23, 2011 vol XLVI No 17

MONEY MARKET REVIEW

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

0 10000 20000 30000 40000 2006-07 2007-08 2008-09 2009-10 2010-11 PSUs FIs/Banks NBFCs/Corporates
Graph B: Trading in Corporate Bonds Market

(Amount in Rs crore) 450000

2007-08 2008-09 2009-10 2010-11 400000 300000 200000 100000 0 BSE NSE FIMMDA

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

70 april 23, 2011 vol XLVI No 17

EPW
Economic & Political Weekly

MONEY MARKET REVIEW

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
    Economic & Political Weekly april 23, 2011 vol XLVI No 17 71
    EPW

    MONEY MARKET REVIEW

    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

    april 23, 2011 vol XLVI No 17

    EPW
    Economic & Political Weekly

    MONEY MARKET REVIEW

    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

    EPW
    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
    EPW
    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

    EPW
    april 23, 2011

    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