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Deregulation of the Savings Bank Deposit Rate

Deregulation of the interest rate on savings bank deposits will allow more room for non-price competition for improving the quality and diversification of customer service rather than result in a rate war. Given the nature of savings bank deposits vis-à-vis other deposits, some further regulatory guidelines would be required to complete the rationalisation of these accounts. It is the category of current account deposits in the current plus savings bank deposits segment that essentially determines the differences in the cost of funds between banks.

Deregulation of the Savings Bank Deposit Rate

EPW Research Foundation

An attempt is made in this note to analyse certain related issues concerning the pattern of ownership of savings bank deposits (SBDs) and facilities associated with these deposits. It is proposed that given the nature of SBDs vis-à-vis other forms of deposit, some further regulatory guidelines

Deregulation of the interest rate on savings bank deposits will allow more room for non-price competition for improving the quality and diversification of customer service rather than result in a rate war. Given the nature of savings bank deposits vis-à-vis other deposits, some further regulatory guidelines would be required to complete the rationalisation of these accounts. It is the category of current account deposits in the current plus savings bank deposits segment that essentially determines the differences in the cost of funds between banks.

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

1 Introduction

A
lmost culminating in full interest rate deregulation, the Reserve Bank of India (RBI) in its October 2011 policy announced that the banks are free to determine their savings bank deposit interest rate (SBR). The RBI has also fixed a threshold size of Rs one lakh up to which a uniform rate will apply and beyond that level, the banks are free to apply differential rates. Though apparently there was opposition to this move particularly from the public sector banks, the RBI needs to be commended for the way in which it prepared the ground for deregulation well ahead by releasing an excellent discussion paper and inviting public comments. For obvious reasons, the non-resident deposits will continue to be administered and freeing of those rates has to await full convertibility of the rupee. Yet another set of rates on small savings schemes of the government, though remaining regulated for practical reasons, has been bench marked against appropriate market-related rates in the system.

In a recent speech, K C Chakrabarty, deputy governor of the RBI has mentioned that the RBI has set the tone for increased competition by deregulating the saving deposit rate. The measure would go a long way in encouraging thrift behaviour in the economy. This step is also expected to further strengthen the rate channel of transmission in monetary policy besides resulting in better integration of financial markets. To promote competition, the RBI has also charted out a course for entry of new private sector banks and also given a clear indication that foreign banks are encouraged to come by setting up a bank subsidiary. The RBI has also allowed domestic scheduled commercial banks to set up new branches in Tier 2 centres. All these augur well for improved competition in the financial industry and financial market development.

november 26, 2011

would be required to complete the rationalisation of these accounts. Second, it is established that it is the component of current account deposits in the current plus savings bank deposits (CASA) segment that essentially determines the differences in the cost of funds between banks. It is argued that rather than result in a rate war the SBR deregulation will allow more room for nonprice competition for improving the quality and diversification of customer service.

1.1 Some Distinguishing Features of SBDs

The nature of SBDs in India differs with international practices in two respects. First, there is a diversified ownership and, second, cheque writing facility is allowed practically without limits. As a result, apart from individuals, including high net worth individuals, SBDs are owned by a variety of persons including government, financial and non-financial sectors. This may perhaps be attributed to historical factors.

Table 1 (p 73) shows the ownership pattern of SBDs in terms of deposit amounts. Though the household sector held about 85%, farmers and wage earners together accounted only for about 25% of the ownership, while businesspersons and the nonhousehold sector accounted for the rest. While the government sector accounted for about 9%, a somewhat nebulous category, “other individuals”, within the household sector accounted for about 39%.

1.2 Price and Non-Price Factors in Competition

One of the arguments for not freeing interest rate on SBDs thus far was that it could increase the cost of funds for the banking system, particularly for public sector banks. There could be possibilities of competitive hikes of deposit rates particularly by the foreign banks and private sector banks and this could wean away the deposit base from the public sector banks.

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MONEY MARKET REVIEW

Since these accounts are operated more as Overall, the safety factor lies with the The fear that deregulation of SBR would current accounts, there is no reason why public sector. In spite of lower rates, public result in a rate war has been belied. So far, banks should be willing to pay significantly sector banks should be in a position to only four new relatively smaller sized prihigher rates of interest on these accounts. retain their deposit base. vate sector banks have revised their rates Table 1: Ownership of CASA Deposits with Scheduled Commercial Banks 2010 (Rs crore) upward from the earlier administered rate of

Current Savings CASA Total Current/ Savings/ CASA/Total CASA CASA

Government sector 92,140 1,05,378 19,7,518 6,55,091 46.6 53.4 30.2

(15.9) (8.6) (10.9) (13.5)

II Private corporate sector (non-financial) 1,91,309 6,965 1,98,274 7,13,696 96.5 3.5 27.8

(33.0) (0.6) (11.0) (14.8)

III Financial sector 46,379 4,817 51,196 4,82,043 90.6 9.4 10.6

(8.0) (0.4) (2.8) (10.0)

4% to a range of 5.5% to 6%. All these banks had a very low savings bank deposits to total deposits ratio of 10% or less, excepting Ratnakar Bank with a ratio of 19.5%.

In terms of value, the public sector banks accounted for about 76%, private sector

IV Household sector 2,37,317 10,48,573 12,85,890 28,04,875 18.5 81.5 45.8 about 10-15% and the foreign banks a

(41.0) (85.2) (71.0) (58.0)

meagre 1-3%. This can be attributed to the

of which

implementation of regulated branch licens-

Individuals (including Hindu 1,06,018 9,13,807 10,19,825 21,84,273 10.4 89.6 46.7 undivided families) (18.3) (74.2) (56.3) (45.2)ing policy and traditional dominance of the

Farmers 4,250 1,02,452 1,06,702 2,11,842 4.0 96.0 50.4

(0.7) (8.3) (5.9) (4.4)

Businessmen, traders, professionals 47,190 1,19,750 1,66,940 3,41,997 28.3 71.7 48.8 and self-employed persons (8.2) (9.7) (9.2) (7.1)

Wage and salary earners 6,615 2,08,327 2,14,942 4,29,811 3.1 96.9 50.0

(1.1) (16.9) (11.9) (8.9)

Shroffs, moneylenders, stockbrokers, 4,753 5,044 9,797 29,162 48.5 51.5 33.6 dealers in bullion, etc (0.8) (0.4) (0.5) (0.6)

Other individuals 43,209 4,78,234 5,21,443 11,71,461 8.3 91.7 44.5
(7.5) (38.8) (28.8) (24.2) tered rates on SBDs provided a protective
V Foreign sector 11,704 65,450 77,154 1,80,657 15.2 84.8 42.7 umbrella to the public sector. Given the
(2.0) (5.3) (4.3) (3.7) limitations, the private sector and foreign
Grand total 5,78,849 12,31,183 18,10,032 48,36,362 32.0 68.0 37.4 banks tended to focus upon non-price factors
(100.0) (100.0) (100.0) (100.0)
Figures in bracket are percentage to total. to sustain their deposit base and minimise
Source: RBI. the cost of funds.
Table 2: Bank Group-wise Pattern of CASA Deposits of Scheduled Commercial Banks (March 2010) The reach of branches is an important
Bank Group % to Total Deposit Amount per Current to CASA CASA to Total Cost of
Account in Rs Deposits Funds factor in deciding competitive power. On
Current Savings Current Savings No of Accounts Amount in Lakh No of Accounts Amount in Lakh this score, public sector banks still hold an
SBI and Associates 21.2 26.2 1,53,343 23,342 5 27 81 43 5.32 advantageous position. Studies have shown
Nationalised Banks 42.0 49.5 1,33,349 21,601 6 28 80 36 5.37 that the deregulation of banking sector had
Total Public Sector 63.3 75.7 1,39,454 22,174 6 27 80 38 5.35 not improved significantly the competitive
Private Sector Banks Regional Rural Banks Foreign Banks All SCBs 23.5 1.3 11.9 100.0 15.2 6.2 3.0 100.0 2,62,841 57,865 19,87,639 1,74,955 36,647 8,886 1,14,010 21,992 9 1 9 5 41 9 65 31 75 86 81 80 39 58 45 39 4.83 -2.83 5.10 efficiency of banking system precisely for this reason. However, despite a regulated branch licensing policy, it has been
Source: RBI, Compiled by EPWRF. observed that the private sector banks have
Table 3: Bank Group-wise Growth in Deposits (1999-2000 to 2009-10)
State Bank Group Nationalised Banks Public Sector Banks
1999-2000 2009-10 CAGR 1999-2000 2009-10 CAGR 1999-2000 2009-10 CAGR
No of Branches 13,356 17,229 (2.9) 32,568 41,596 (2.8) 45,924 58,825 (2.8)
CASA Deposits (Rs lakh) 84,19,179 4,40,90,496 1,64,67,903 8,41,96,033 2,48,87,082 12,82,86,529
Current (Rs lakh) 29,56,174 117,95,174 49,72,015 2,33,33,351 79,28,189 3,51,28,525
Savings (Rs lakh) 54,63,005 3,22,95,322 1,14,95,888 6,08,62,682 1,69,58,893 9,31,58,004
Total Deposits (in crore) 2,03,049 10,18,666 4,42,493 23,65,598 6,45,542 33,84,263
Per Branch Amount of Deposits (Rs lakh) 1,520 5,913 (16.3) 1,359 5,687 (17.2) 1,406 5,753 (17.0)
Per Branch Saving Deposits (Rs lakh) 409 1,874 (18.4) 353 1,463 (17.1) 369 1,584 (17.6)
Per Branch Current Account Deposits (Rs lakh) 221 685 (13.4) 153 561 (15.5) 173 597 (14.8)
Private Sector Banks Foreign Banks All SCBs
No of Branches 5,010 10,027 (8.0) 186 308 (5.8) 51,120 69,160 (3.4)
CASA Deposits (Rs lakh) 26,81,409 3,17,44,055 15,42,007 1,02,48,915 2,10,28,170 17,85,72,304
Current (Rs lakh) 14,43,835 1,30,55,320 10,42,831 66,18,838 1,05,45,802 5,55,23,683
Savings (Rs lakh) 12,37,574 1,86,88,735 4,99,176 36,30,077 1,99,73,368 12,30,48,621
Total Deposits (in crore) 97,001 8,06,569 46,842 2,28,186 8,21,420 45,61,029
Per Branch Amount of Deposits (Rs lakh) 1,936 8,044 (17.2) 25,184 74,086 (12.7) 1,607 6,595 (17.0)
Per Branch Saving Deposits (Rs lakh) 247 1,864 (25.2) 2,684 11,786 (17.9) 391 1,779 (18.3)
Per Branch Current Account Deposits (Rs lakh) 288 1,302 (18.3) 5,607 21,490 (16.1) 206 803 (16.3)
Source: RBI, Compiled by EPWRF.
Economic & Political Weekly november 26, 2011 vol xlvi no 48 73

public sector. Overall, the safety factor favours the public sector. In spite of lower rates, public sector banks should be in a position to retain their deposit base (Table 2).

When the price is administratively mandated, it stifles competition. In a public sector-oriented banking system, adminisexpanded their branches at a faster pace exception of a few banks most of Graph A: Relationship between CASA and Cost of Funds (March 2010)

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compared to the public sector and so was the banks had a good CASA base, the case with foreign banks as well. The per the current accounts to CASA 7 branch mobilisation of deposits by private ratio varied in a wide range. The

6

and foreign banks had recorded a faster ratio was more favourable in

growth over the last decade compared to the case of private sector banks

public sector banks (Table 3, p 73). and foreign banks. Thus, despite

Cost of Funds

5

4

3

An analysis of the relationship between the fact that current accounts do

the cost of funds and the type of deposits not earn any interest, these banks 2 held by the banks shows that the cost of were able to attract huge current

1

funds was influenced equally by the extent account deposits perhaps because of current accounts component in the CASA of non-price factors in the form besides the extent of CASA in total deposits of the quality and diversity of services (Table 4 and Graph A). While with the these banks provide to customers. The

Table 4: Pattern of CASA Deposits and Cost of Funds: Select Banks (March 2010)

Savings to Current to CASA Current to CASA to Cost of Total Deposits Total Deposits (Rs crore) CASA Ratio Total Deposits Funds

11 14 17 20 23 26 29 32 35 38 41 44 47 50 53 56

CASA to Total Deposits

freeing of SBR would result in further intensification of this competition. Such competition can become more intensive with the entry of new private sector banks.

A Public Banks 25.1 9.9 12,36,158 28.2 35.0 5.351.3 Suggestions Allahabad Bank 26.9 7.9 36,530 22.6 34.8 5.37

SBDs like in other countries could offer

Andhra Bank 20.8 8.6 22,761 29.2 29.4 5.38

minimum facilities such as withdrawal

Bank of Baroda 25.4 8.6 70,360 25.3 34.0 4.37 Bank of India 22.1 7.2 63,660 24.5 29.3 4.97 and ATM/debit card with modest interest

Bank of Maharashtra 27.1 9.7 23,301 26.3 36.8 5.28

Canara Bank 21.8 7.8 67,720 26.4 29.7 5.61

Central Bank of India 26.1 9.2 55,126 26.1 35.3 6.06

Corporation Bank 16.3 16.8 26,448 50.8 33.1 5.08

Dena Bank 27.8 9.1 18,320 24.6 36.9 5.67

Indian Bank 25.1 7.6 28,360 23.2 32.7 5.56

Indian Overseas Bank 24.4 8.5 35,700 25.9 32.9 6.14

Oriental Bank of Commerce 16.5 8.5 29,947 33.9 25.0 6.21

Punjab & Sind Bank 19.6 6.6 12,255 25.3 26.2 5.75

Punjab National Bank 31.9 9.0 1,00,087 21.9 40.9 4.90

Syndicate Bank 26.5 9.8 36,079 26.9 36.3 5.42

UCO Bank 18.6 7.4 29,706 28.5 26.1 5.78

payment but it may not offer cheque writing facility, beyond a certain limit.

RBI should allow price competition without attempting micromanagement of fixing or restricting bank charges for services rendered. That kills both price as well as non-price competition. The accounts with cheque writing facility like current accounts should not offer any interest payment on balances.

Union Bank of India 22.9 9.2 52,886 28.7 32.2 5.28

United Bank of India 29.1 9.6 25,719 24.8 38.7 5.92

Vijaya Bank 17.3 7.3 15,225 29.6 24.6 5.84

State Bank of India 33.0 14.6 3,71,135 30.6 47.5 5.14

IDBI Bank Ltd 5.6 9.6 23,891 63.2 15.2 5.19

Average 23.1 9.2 54,534 29.4 32.3 5.47

Opening of SBDs may be allowed only by individuals and family, and all other categories of account holders like government organisations, trusts, non-banking organisations, etc, should be made to

B Private Banks 23.7 16.5 3,16,270 41.1 40.2 4.83 switch over to chequable deposit accounts. ING Vysya Bank Ltd 21.2 19.0 8,234 47.4 40.2 4.10

With these measures, RBI would be

Tamilnad Mercantile Bank Ltd 13.4 12.0 2,906 47.2 25.4 6.96

moving a further step ahead towards

The Federal Bank Ltd 21.2 4.8 9,321 18.3 25.9 6.11

rationalisation of deposit accounts.

The Jammu & Kashmir Bank Ltd 30.6 14.3 15,054 31.8 44.9 5.32

The Karnataka Bank Ltd 16.1 7.2 5,518 30.9 23.3 7.45 The Karur Vysya Bank Ltd 13.1 10.8 4,530 45.2 23.9 6.79 2 Money, Forex and Debt Markets

The Ratnakar Bank Ltd 19.5 18.0 567 48.0 37.5 5.86

The South Indian Bank Ltd 19.6 4.8 5,319 19.7 24.4 6.42 a series of hikes in policy rate clearly
Axis Bank Ltd 24.9 22.7 64,673 47.6 47.6 4.03
HDFC Bank Ltd 30.2 21.9 86,048 42.0 52.2 4.66 showing its repercussions on the growth
ICICI Bank Ltd 27.8 15.4 82,730 35.7 43.2 4.18 front. Still, the RBI continued its hawkish
IndusInd Bank Ltd 7.9 17.8 6,262 69.4 25.7 5.69 stance and raised the key policy repo
Kotak Mahindra Bank Ltd 10.4 20.6 7,364 66.4 31.0 4.50 rate once again on 25 October in its
Yes Bank Ltd 1.6 10.1 2,818 86.1 11.7 6.05Second Quarterly Monetary Policy Review.
Average 18.4 14.2 21,525 45.4 32.6 5.58
C Foreign Banks 16.1 29.3 1,02,699 64.5 45.4 2.83 However, the central bank signalled a
Bank of America NA 10.0 44.1 2,887 81.5 54.1 1.85possible pause in rate hikes largely hoping
Citibank NA 21.3 30.4 27,942 58.8 51.7 2.67 that inflation might start easing after
Standard Chartered Bank 18.9 29.2 22,115 60.8 48.0 3.04 December 2011.
The Bank of Nova Scotia HSBC Average 3.2 19.5 14.6 12.5 28.8 29.0 306 26,556 15,961 79.8 59.7 68.1 15.7 48.2 43.6 2.403.172.63 Money market rates sustained their upward movements in October with key
Source: RBI, Compiled by EPWRF. interest rates touching their peaks. After

The continuing and high inflation forced

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MONEY MARKET REVIEW

Table 5: Money Market Activity (Volume and Rates)
October 2011 September 2011
Instruments Daily Average Monthly Range of Daily Average Monthly Range of
Volume Weighted Weighted Average Volume Weighted Average Weighted Average
(Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)
Call Money 9,848 8.24 7.61-8.39 10,320 8.11 7.48-8.28
Notice Money 3,356 8.27 6.99-8.54 3,027 8.10 7.25-8.29
Term Money @ 235 - 6.85-10.01 353 - 7.00-10.65
CBLO 43,076 8.01 5.98-8.45 43,408 7.95 6.56-8.24
Market Repo 13,674 8.07 7.41-8.42 13,714 8.03 5.25-8.27
@: Range of rates during the month.
Source: www.rbi.org.in. and www.ccilindia.com
Table 6: RBI’s Market Operations (Rs crore) yields also inche d up on the b ack of rising
Month/Year OMO LAF Net (Average Daily
(Net Purchase(+)/ Injection (+)/gover nment bond yields.
Sale(-)) Absorption(-))
Jun-2011 981 72,204
Jul-2011 -6 37,683
Aug-2011 -6 36,948
Sep-2011 5 52,194
Oct-2011 6 50,708

Source: RBI’s Weekly Statistical Supplement.

experiencing some normality in the beginning of October, the liquidity in the system showed signs of tightness following festive season demand along with the huge market borrowing programme by the government, which absorbed more than Rs 50,000 crore from the system. A massive fall in deposits growth to the extent of around Rs 90,000 crore and outflows caused by a fall in currency circulation amounting to Rs 36,000 crore also resulted in a severe cash crunch. However, the drop in credit growth by Rs 66,000 crore and a fall in bankers’ deposits to the extent of Rs 52,000 crore supported the system in managing the funds crunch. The RBI continued to meet the liquidity deficit and banks borrowed around Rs 50,000 crore on a daily basis in the RBI’s LAF window during the month.

Impressive fund inflows and positive stock market movements coupled with euro area developments propelled the Indian rupee to recover from its lows during the month and the local currency marginally gained by 0.2% against the dollar.

Following the government’s move to raise its bond sale target by Rs 53,000 crore in the second half of the current fiscal, yields advanced further on supply concerns. Notably, sale of government bonds devolved on three occasions on primary dealers in October as investors sought higher yields. India’s benchmark 10-year bonds yield saw its worst since May 2009 on speculation that the government’s debt sale target could further dampen overall demand. Corporate bond

2.1 Money Market

Another round of policy rate hikes and the emergence of a liquidity crunch in the system again prompted short-term money market instruments to sustain their northward trend in the month of October. A possible pause in the rate hike was belied in the beginning of October itself with RBI officials clearly signalling the significance of controlling inflation. Thus, despite the slowdown in growth, the government officials also expressed preference for following strict monetary action. However, in the policy review there was a softening of tone when it indicated by way of forward guidance about some ease in inflation, as well as of interest rates in coming months.

Following all these developments, the overnight and 14-day weighted average rates increased by 13 basis points (bps) and 17 bps, respectively over a period of one month. However, the likely pause in rate increase in the coming policy review influenced the movements of rates on term and the collateralised instruments which ruled in a relatively lower bound compared to call and notice money rates. In October, the CBLO and

the notice money segment, the remaining four money market instruments reported a lower trading volume. The overnight segment recorded a 5% fall in its daily turnover due to a sharp rise in rates during the month over the previous month. Similarly, CBLO and market repo also registered reduction in their trading volume though only marginally over the period. The heightened expectation of an easing in rates induced a sudden fall in the term money trading. However, borrowers preferred to borrow funds from the notice money segment which registered a 11% rise in its trading activity during the review period (Table 5).

As per the latest available data by RBI, the short-term certificates of deposit (CDs) market had seen a fall of Rs 22,000 crore in its outstanding amount during September over August primarily due to lessening credit demand and rising interest rates. Still, in the fortnight ending 23 September, the issuance of CDs amounted to Rs 66,000 crore. The range of discount rates hardened notably and crossed the 10% mark in the upper-bound in both the fortnights of September.

Contrary to CDs, the outstanding amount of commercial papers (CPs) improved by Rs 17,000 crore during a period of one month till 15 September. The rates continued to rule in an upper range of 8.47% and 14.00% in the fortnight ending 15 September. During the same period, the CPs reported Rs 31,000 crore issuances.

According to the trading platform – Fixed Income Money Market and Derivatives Association (FIMMDA) – CDs and CPs recorded a notable fall in their daily trading activity

Table 7: Foreign Exchange Market: Select Indicators

market repo rates inched Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex Dollar Index Rate (Last Friday Depreciation (-) (Equity +Debt) (Month-end (Month-end up slightly by 6 bps and 3 of the Month) of Rs/$ (in %) in $ Million Closing) Closing)#

bps, respectively over Sep-Jun-2011 * 44.72 1.10 4,883 18,846 69.36 Jul-2011 44.16 1.27 2,399 18,197 68.53

tember. Overall, compared

Aug-2011 46.05 -4.12 -7,903 16,677 68.85

to September, all the short

Sep-2011 48.93 -5.87 -1,866 16,454 72.81

term money market instru

Oct-2011 48.82 0.21 634 17,705 70.52 ments ruled in a wider *: Data relates to last day of the month. #:Nominal Major Currencies Dollar Index. Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov.

range despite witnessing less volatility. Table 8: Average Daily Turnover in the Foreign Exchange Market* ($ billion)

Month Merchant Interbank Spot Forward Total

Uncertainty in rates

Jun-2011 12.7 -(5.8) 48.1 -(0.5) 27.4 -(5.2) 33.4 (1.5) 60.8 -(1.7)

coupled with liquidity

Jul-2011 14.0 (9.5) 45.1 -(6.3) 28.5 (4.0) 30.5 -(8.8) 59.0 -(3.0)

crunch in the system

Aug-2011 17.0 (21.6) 46.6 (3.3) 30.3 (6.2) 33.3 (9.0) 63.5 (7.7) resulted in varied trading Sep-2011 15.1 -(11.2) 44.8 -(3.8) 29.6 -(2.3) 30.3 -(9.0) 59.8 -(5.8) *: Includes trading in FCY/ INR and FCY/FCY.

behaviour across the money

Figures in brackets are percentage change over the previous month. market instruments. Except Source: RBI’s Weekly Statistical Supplement, various issues.

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november 26, 2011 vol xlvi no 48

during October. Over a period of one month, both the products reported 40% and 33% fall in their total turnover, respectively.

The severe cash crunch experienced during September sustained itself in October also due to a fall in currency circulation and deposit growth, in addition to the huge market borrowing programme which put huge cash demands on banks. To manage the situation, the borrower’s dependence on the RBI’s LAF window increased remarkably during the period as overnight money market rates also crossed the prevailing repo rate. In the aftermath of advance tax payments by companies for the second quarter of 2011-12, the system experienced some moderation in the liquidity situation in the beginning of October with the repo tendered amount coming down to just Rs 11,000 crore on a daily average basis in the first week. However, banks borrowings spurted immediately from the second week onwards with the government starting its borrowing programme for the second

Table 9: Details of Central Government Market Borrowings (Amount in Rs crore)

Date of Auction Nomenclature Notified Amount Bid-Cover Ratio Devolvement on YTM at Cut-off Cut-off Price of Loan Primary Dealers Price (in %) (in Rs)

07-Oct-11 8.07% 2017 R 3,000 1.84 nil 8.64 97.61

half of the current fiscal. The situation remained the same for the remaining weeks of the month with the average daily borrowing lingering above Rs 61,000 crore. Despite a lower demand for credit, the last week of the month reported the banks borrowings crossing Rs 1 lakh crore on 25 October. Overall, during the month of October, the injection of funds by the RBI averaged around Rs 55,000 crore as in the previous month. During the same period, banks parked around Rs 4,000 crore in RBI’s reverse repo window. However, RBI’s marginal standing facility (MSF) as also its OMO window remained inactive (Table 6, p 75).

8.08% 2022 R 6,000 1.74 nil 8.70 95.68The interest rate futures (IRFs) segment

8.28% 2027 R 3,000 1.98 193 8.87 95.00

8.30% 2040 R 3,000 1.84 706 8.92 93.59

14-Oct-11 7.83% 2018 R 4,000 1.51 1,614 8.79 95.31

7.80% 2021 R 6,000 1.79 2,424 8.78 93.75

8.26% 2027 R 3,000 3.10 nil 8.95 94.21

28-Oct-11 7.99% 2017 R 4,000 1.84 149 8.92 95.90

8.13% 2022 R 6,000 1.74 nil 8.95 94.35

of NSE reported nil trading activity in October, However, to revive the segment by attracting huge participation from banks, SEBI is planning to allow the launch of derivatives based on 2-year and 3-year bonds on cash-settled basis.

8.28% 2027 R 2,000 1.98 nil 8.98 94.12 8.30% 2040 R 3,000 1.84 nil 8.98 93.03 2.2 Forex Market

Total for October 2011 43,000 1.88 8.85 94.79

In the domestic market, the rupee com-

Total for September 2011 22,000 2.21 8.44 97.44

pleted its first monthly gain after a span of

R: Reissue. Source: RBI press releases. two months as the central bank increased

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

Descriptions October 2011 Previous Month Three Months Ago Six Months Ago Last Week (28) First Week (7) Total for the Month September 2011 (July 2011) (April 2011) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

1 Treasury Bills 2,613 6,167 16,102 27,761 43,075 17,843

A 91-Day Bills 1,531 8.62 3,834 8.29 8,780 8.38 21,065 8.31 33,678 8.04 12,653 7.09

B 182-Day Bills 771 8.62 900 8.29 3,258 8.48 2,787 8.35 3,730 8.16 2,526 7.19

C 364-Day Bills 311 8.56 1,432 8.47 4,064 8.51 3,909 8.34 5,667 8.24 2,665 7.37

2 GOI Dated Securities 28,274 8.80 33,202 8.57 1,68,357 8.74 2,45,522 8.35 2,36,766 8.36 1,00,608 8.09

Year of (No of Maturity Securities)

2011 317 9.08 1,353 7.58

2012 (4) 1,010 8.68 29 8.34 2,546 8.61 1,003 8.32 923 8.08 3,453 7.73

2013 (2) 56 8.36 56 8.37 822 8.27 210 8.16 371 7.79

2014 (5) 221 8.35 342 8.42 266 8.26 122 8.21 796 7.98

2015 (3) 55 8.53 210 8.56 321 8.59 1,067 8.32 826 8.33 2,285 8.02

2016 (3) 95 8.73 111 8.51 422 8.65 997 8.33 2,968 8.32 2,845 8.17

2017 (4) 823 8.87 1,056 8.53 3,375 8.70 5,405 8.33 2,649 8.34 4,114 8.01

2018 (4) 1,778 8.78 2,477 8.53 13,088 8.72 12,051 8.34 12,173 8.34 3,941 8.00

2019 25 8.34 101 8.45 16 7.91

2020 (1) 630 9.06 970 9.06 1,590 8.97 1,136 8.81 1,759 7.98

2021 (2) 18,689 8.78 17,976 8.53 1,13,304 8.73 1,74,377 8.32 1,54,392 8.32 24,634 8.03

2022 (3) 5,008 8.86 8,994 8.61 26,885 8.73 42,386 8.41 53,783 8.41 51,697 8.16

2023 1 8.65 2 8.29 2 8.20

2027 (3) 453 8.92 1,004 8.75 4,827 8.88 4,218 8.57 3,777 8.63 1,927 8.41

2028 1 8.51 25 8.77 4 8.31

2032 (1) 102 8.91 231 8.58 1,411 8.58 8 8.37

2034 4 8.51 1 8.56 2 8.46

2035 2 8.92 105 8.37

2040 (1) 363 8.95 440 8.89 2,118 8.94 1,076 8.63 1,947 8.61 1,297 8.46

3 State Govt. Securities 129 9.01 678 8.82 2,353 8.94 2,042 8.62 3,960 8.59 1,785 8.30

Grand total (1 to 3) 31,016 40,046 1,86,812 2,75,325 2,83,801 1,20,236

(-) 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) Trading in 2024-26 and 2036-39 securities were negligible. Source: Compiled by EPWRF; base data from RBI, CCIL.

november 26, 2011 vol xlvi no 48

MONEY MARKET REVIEW

interest rates again and Europe stepped up efforts to contain a debt crisis that drove funds from emerging market assets. The downward pressure on the Indian rupee was sustained in the beginning of the month with data showing a widening of the current account deficit and increasing concerns about the global and domestic economic outlook. The rupee lost 50 paise against the dollar and crossed the 49-mark on 3 October. The restrained demand for emerging market assets resulted in huge portfolio outflows in the first week of October and the stock market activities also remained bearish. Overlooking all the negative indicators and tracking the strengthening of the Asian currencies, the rupee reversed the trend from 4 October and recovered by 39 paise till 11 October. Thereafter, the local currency displayed see-saw movements till 17 October but again turned to a depreciating mode. Huge dollar demand by oil importers put enormous pressure on the rupee and the currency lost a substantial 117 paise versus the dollar till 21 October and crossed the psychological 50-mark. At this point, the RBI was also reported to have intervened in the market to arrest the rupee’s slide. However, a smart rebound in local stocks along with fresh dollar selling by exporters amid dollar weakness overseas coupled with the resumption of capital inflows supported the domestic currency in its bounce back in the last week of October. The rupee recovered by a smart 117 paise and closed at Rs 48.87 per dollar on 31 October registering 0.1% appreciation over 30 September.

The forward premia across three maturities displayed a hardening trend during October on a likely depreciation of the rupee in the near term. The premia of three different maturities remained relatively volatile and moved in a wide range. During the month as a whole, the one-month premia inched up by 99 bps over the previous month to 6.63% as on 31 October. Similarly, the 3-month and 6-month premia increased by 58 bps and 105 bps, respectively to 5.73% and 4.75% during the review period.

Despite a spurt in exports and imports, the total and average daily turnover in the foreign exchange market plummeted by 5.8% each, during September over August. The highest fall was registered by merchant transactions (-11.2%) followed by forward, inter-bank and spot market dealings (Table 8, p 75).

Imposition of transaction charges for currency derivatives trading by the exchanges from August continued to pinch trading activity in the currency derivatives market in October. The segment reported a 41% fall in its collective turnover traded in three different exchanges. The average daily turnover also plunged by 38% to

one-year of operation in domestic exchanges but was able to achieve just a 13% market share towards total currency derivatives turnover.

2.3 Government Securities Market

The government securities market entered a difficult phase with both central and state governments increasing their primary issues even as the selling pressure mounted in the secondary market. Primary auctions saw more devolvement and yields in both primary and secondary markets moved northward. Continued inflationary pressure combined with prospects of lower economic activity weighed down on the fixed income markets.

During October, three auctions of government securities were held for Rs 43,000 crore in the aggregate. As expected, the overall yield inched up to 8.85% from 8.44% in September. A dip in investors’ response for auctions, measured by the bid cover ratio was also witnessed as it came down to 1.88 from 2.21 during the last month. Since 29 September, when the RBI announced increased market borrowings, almost worth Rs 53,000 crore for the second half of the current financial year, yields

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

Rs 30,000 crore during the (Basis points)

Yield October 2011 Previous Three Six Months

month. Both options and

Spread in bps Last Week First Week Entire Month Month Months Ago Ago

futures segments reported a 1 Year-5 Year 5 17 4 0 24 44

5 Year -10 Year 5 2 8 -1 0 -14

38% fall each in their average

10 Year-15 Year -7

daily trading. Options trad

1 Year-10 Year 10 19 12 -1 24 30 ing in currencies completed Source: As in Table 10.

Table 11: Predominantly Traded Government Securities (Amount in Rs crore)

Descriptions October 2011 Previous Month Three Months Ago Six Months Ago
Last Week (28) First Week (7) Total for the Month September 2011 (July 2011) (Aril 2011)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
GOI Dated Securities
7.40 2012 1,010 8.68 29 8.33 2,439 8.61 364 8.28 676 8.05 2,665 7.77
7.27 2013 55 8.36 56 8.36 750 8.23 210 8.16 370 7.79
7.17 2015 55 8.53 160 8.42 251 8.46 991 8.28 786 8.34 2,278 8.02
7.59 2016 95 8.73 91 8.48 401 8.65 970 8.31 2,700 8.31 2,812 8.17
7.49 2017 1 8.52 1 8.52 76 8.30 275 8.32 190 8.02
7.99 2017 667 8.90 185 8.51 1,067 8.80 2,477 8.36 646 8.32 1,479 8.03
8.07 2017 152 8.75 870 8.54 2,304 8.65 2,802 8.32 1,460 8.34
7.83 2018 1,778 8.78 2,476 8.53 13,087 8.72 12,041 8.34 11,976 8.35 3,930 8.00
7.80 2021 18,689 8.78 17,976 8.53 1,13,304 8.73 1,74,374 8.32 1,54,349 8.32 24,634 8.03
8.08 2022 1,000 8.81 5,835 8.63 13,995 8.71 9,931 8.40 20,292 8.42 28,681 8.18
8.13 2022 4,008 8.87 3,159 8.57 12,885 8.76 32,390 8.41 33,428 8.41 22,978 8.13
8.20 2022 8.60 60 8.57 45 8.40 37 8.11
8.26 2027 117 8.90 20 8.75 1,785 8.91 562 8.57 2,375 8.61 1,914 8.41
8.28 2027 336 8.92 984 8.75 3,041 8.87 3,656 8.57 1,382 8.64
8.28 2032 103 8.91 218 8.58 1,361 8.59 4 8.36
8.30 2040 363 8.95 440 8.89 2,118 8.94 1,076 8.63 1,947 8.61 1,297 8.46
Total (All Securities) 28,274 8.80 33,202 8.57 1,68,357 8.74 2,45,522 8.35 2,36,766 8.36 1,00,608 8.09
(-) 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 10.
Economic & Political Weekly november 26, 2011 vol xlvi no 48 77
EPW
Table 13: Details of State Government Borrowings (Amount in Rs crore) pressures in the secondary

Date of Auction Number of Total Bid Cover YTM at Weighted

market contributed to the

Participating Amount Ratio Cut-Off Average States Accepted Price (%) Yield (%) overall secondary market

04-Oct-11 9 7,735 1.58 8.88 8.86

yield increasing significantly

13-Oct-11 1 300 6.1 8.98 8.95

from 7.74% to 8.35% in

18-Oct-11 11 7,735 2.03 9.07 9.06

October over the previous

Total for October 2011 21 15,770 1.89 8.98 8.96

month. Secondary market

Total for September 2011 11 9,050 1.72 8.64 8.63

Source: RBI press releases. trading also fell steeply by Table 14: Auctions of Treasury Bills (Amount in Rs crore) 31% during the month to

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

Rs 1,68,357 crore. The most

Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs) traded security was the

A: 91-Day Treasury Bills 10-year benchmark, 7.80% 05-Oct-11 4,000 3.69 8.44 8.44 97.94 97.94

2021, which alone contrib

12-Oct-11 4,000 2.85 8.48 8.48 97.93 97.93

uted to 67% of total traded

19-Oct-11 4,000 2.88 8.65 8.60 97.89 97.90

volume, while the top-five

25-Oct-11 4,000 3.33 8.65 8.65 97.89 97.89

Total for October 2011 16,000 3.19 8.55 8.54 97.91 97.92 traded securities including

Total for September 2011 28,000 2.70 8.41 8.40 97.95 97.95 8.08% 2022, 7.83% 2018,

B: 182-Day Treasury Bills

8.13% 2022 and 8.28%

12-Oct-11 4,000 1.82 8.62 8.57 95.88 95.90

2027 accounted for 93% of

25-Oct-11 4,000 2.33 8.71 8.66 95.84 95.86

the total turnover. The con-

Total for October 2011 8,000 2.08 8.66 8.62 95.86 95.88

tribution of the top 10 secu-

Total for September 2011 6,000 2.69 8.43 8.41 95.97 95.98

C: 364-Day Treasury Bills rities was almost 99%. The 05-Oct-11 4,000 2.66 8.52 8.51 92.17 92.18yield curve assumed an unu 19-Oct-11 4,000 2.67 8.68 8.66 92.03 92.05

sual and quite an inverted

Total for October 2011 8,000 2.67 8.60 8.58 92.10 92.12

shape even as yields firmed

Total for September 2011 5,742 3.49 8.40 8.39 92.27 92.28

up more towards the high-

D: 48-Day Cash Management Bills 17-Oct-11 10,000 2.19 8.69 8.61 98.87 98.88 er end of maturities as

Source: RBI’s press releases. compared to shorter matu-

Table 15: Details of Private Placement in Corporate Bonds in NSE rities. The yield spread was during October 2011

narrowed by 12 bps for

Institutional Category No of Volume in Range of Range of Maturity Issues Rs Crore Coupon Rates in Years (y) NS 1-year and 10-year maturi(in %) Months (m)

ties and 4 bps for 1-year and

Corporates 7 214 9.95-10.25 3-5 years

5-year maturities (Table 10,

NBFCs 10 3,408 7.51-10.10 2-17 years Central Undertakings 3 2,015 8.97-9.35 5 years p 76 and Tables 11 and 12,

Total for October 2011 20 5,637 7.51-10.25 2 to 17 p 77).

Total for September 2011 6 6,329 9.38-10.15 1 to 15 Through three auctions

Source: www.nseindia.com

have been moving upwards. Primary market yields during October auctions were far higher than one or two months before. Despite elevated cut-off yields, every auction in the month parti ally devolved on the primary dealers. This amounted to 12% of the aggregate notified amount for the month. The cut-off yields as also devolvement could have been much higher, but for the passive injection of liquidity by the RBI through its LAF window. The average borrowing from the repo window in the month was Rs 57,806 crore, a bit higher than RBI’s comfort zone of Rs 50,000 crore, and touched its high of more than Rs 1 lakh crore on 25 October, the day of the policy announcement (Table 9, p 76).

Elevated yields in primary auctions coupled with devolvement and the selling

state governments raised Rs 15,770 crore in the aggregate during the month, 74% larger than in September. A total of 16 states took part in these auctions out of which Andhra Pradesh, Kerala, Maharashtra, Rajasthan and Tamil Nadu accessed the market twice. A strengthening of cut-off yields was seen over the auctions. Overall, the average cut-off yield firmed up to 8.98% from 8.64% over the month. The bid cover was almost equal to that of central government auctions. In the second auction, Punjab was the only participant with a very high bid cover of 6.10 (Table 13).

A sharp surge in yield was also seen in the secondary market trades of SDLs as it moved to 8.94% from 8.62% in September; but some improvement was seen in the turnover at Rs 2,353 crore.

november 26, 2011

2.4 Treasury Bills

Treasury bills (TBs) with regular maturities were issued for lower notified amounts as compared to the pervious month, but after 21 July, the RBI resumed issuance of cash management bills (CMBs) on 17 October, with maturity of 48-days, for Rs 10,000 crore. In the month, a better response was realised only by 91-day TBs, 3.19 times the aggregate notified amount. A firming up of cut-off yields was seen across maturities. For 91-day, 182-day and 364-day TBs cut-off yields were set at 8.55%, 8.66% and 8.60% in October against 8.41%, 8.43% and 8.40% in the previous month. Forty-eight day CMBs were issued at a cutoff yield of 8.69% (Table 14).

Overall, the turnover of the TBs fell over the month by 42% to Rs 16,102 crore. Among different maturities, 91-day TBs recorded a 58% fall in traded volume. Yields in general moved up but it was the highest for 364-day TBs by 17 bps to 8.51% over the month.

2.5 Corporate Bond Market

Private placement issues at Rs 5,637 crore on NSE was lower by about 11% over the previous month, though the number of issues was more in October at 20 against only six in the previous month. IDFC mopped up Rs 1,510 crore through three issues, followed by two issues of the Rural Electrification Corporation which raised Rs 1,415 crore. The Airport Authority of India, NABARD, L&T Infrastructure Finance Company and Power Finance Corporation of India were others raising funds of above Rs 400 crore. The largest amount was raised by NBFCs during the month followed by central undertakings. A few issues did not disclose coupon rates. Corporates offered highest coupon rates ranging between 9.95% and 10.25% followed by central government undertakings and NBFCs. Maturity wise, the shortest bonds were issued by corporates followed by central government undertakings and NBFCs (Table 15).

According to data published by SEBI, the total turnover in the secondary market of corporate bonds, reported by BSE, NSE and FIMMDA, dropped further by about 4% in October to Rs 43,263 crore in comparison to the previous month, mainly due to a fall in NSE trades.

vol xlvi no 48

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