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Liquidity Management Gaining Ground

Before the global financial crisis, central bankers depended mainly on interest rates in policymaking and operations; in the post-crisis period when liquidity became a binding constraint, liquidity management assumed an equally important place. In India, ever since 2001, liquidity management has been playing an equally important role along with interest rates as part of the operating framework of monetary policy under what is now called the augmented multiple indicator approach. In the present context the Reserve Bank of India should continue to exercise a tight leash on liquidity, but at the same time ensure that the flow of credit to industry and other economic activities is revived.

MONEY MARKET REVIEW

Liquidity Management Gaining Ground

EPW Research Foundation

actions will depend upon a continuing assessment of how these factors shape up in months ahead”.

The other leg of RBI’s operations in the market being related to its liquidity management, in the current context therefore liquidity management gains ground. While in the pre-crisis environment, central bankers in general mainly depended upon the interest rates, in the post-crisis period when liquidity became a binding constraint, liqui dity management assumed an equally elevated place in policymaking and operations. In India, ever since 2001, liquidity management has been playing an equal role along with interest rates as part of the operating framework of monetary policy under the multiple indicator approach, which is now called the augmented multiple indicator approach after the announcement of significant changes in operating procedures since July 2011.

An analysis of liquidity flows in the recent period shows that the government’s operations have taken maximum advantage, practically crowding out the private production and investment demands. The RBI in its mid-quarter review alluded to this situation saying that the fiscal target exceeding the budgeted levels has the potential

Before the global financial crisis, central bankers depended mainly on interest rates in policymaking and operations; in the post-crisis period when liquidity became a binding constraint, liquidity management assumed an equally important place. In India, ever since 2001, liquidity management has been playing an equally important role along with interest rates as part of the operating framework of monetary policy under what is now called the augmented multiple indicator approach. In the present context the Reserve Bank of India should continue to exercise a tight leash on liquidity, but at the same time ensure that the flow of credit to

1.1 Introduction

T
he Reserve Bank of India (RBI) has come out with the much expected pause in policy rate hikes in its midquarter review of monetary policy that was announced on 16 December 2011. A reversal in stance at this time would not actually mean any immediate reduction in policy rates, but a pause sends a signal that the policy rate has peaked, and it is time to allow the lagged impact of past rate hikes to work themselves out. While support to revival of industrial activity and growth is recognised, the current phase has the added risks of persistently high inflation, and widening current account and fiscal deficits. Therefore, any extraordinarily accommodative monetary policy may land up in very high inflation with unsustainable external sector balances. The RBI is very much conscious about this and hence indicated that the “timing and magnitude of further

Table 1: Estimated Flow of Liquidity into the Financial System during October and November 2011 (Amount in Rs crore)

Particulars Total for November Total for October

Inflow Outflow Net Inflow Outflow Net

industry and other economic activities is revived. I Net Autonomous and Discretionary liquidity flows (I+II) Autonomous liquidity flows (a to b) 3,29,006 2,22,452 3,51,155 2,95,922 -22,149 -73,470 4,07,261 3,30,858 4,42,638 3,42,130 -35,377 -11,272
(a) Central Government’s Cash Balances with RBI 1 1 0 2 1 1
(b) Aggregate Deposits 46,145 9,843 36,302 0 88,708 -88,708
(c) Bank Credit 0 45,010 -45,010 68,533 1,922 66,611
(d) Currency Circulation 6,601 10,039 -3,438 0 35,822 -35,822
(e) Non-SLR 0 745 -745 0 11,117 -11,117
(f) Bankers Deposits with RBI 39,202 59,785 -20,583 96,493 44,868 51,625
(g) Cash Management Bills 0 11,000 -11,000 0 10,000 -10,000
(h) 91-day T bills 35,275 24,664 10,611 32,244 21,005 11,239
(i) 182-day T bills 6,500 8,001 -1,501 7,750 8,000 -,250
(j) 364-day T bills 4,000 8,230 -4,230 4,042 8,005 -3,963
(k) Government securities auction/redemption 12,213 59,741 -47,528 8,017 58,770 -50,753
(l) Coupon payments 15,773 0 15,773 17,732 0 17,732
(m) RBI credit to Govt (Net of OMO/Repo/Reverse Repo) 15,020 33,580 -18,560 28,267 18,844 9,423
(n) RBI credit to others (FIs and non-banks) 6,805 4,592 2,213 1,932 7,750 -5,818
(o) Net foreign currency assets 33,601 20,402 13,199 65,596 25,937 39,659
(p) Other deposits with RBI 1,316 289 1,027 250 1,381 -1,131
Team led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, V P Prasanth, Rema K Nair, Shruti J Pandey, R Krishnaswamy and Sharan P Shetty. II Discretionary liquidity flows [(i) to (iii)] (i) Open market operations (RBI) (ii) Repo/Reverse Repo by RBI (iii) RBI liquidity support Source: WSS and CCIL Market Update, various issues. 1,06,555 9,446 90,525 6,584 55,233 0 50,210 5,023 51,322 9,446 40,315 1,561 76,403 44 71,490 4,869 1,00,508 38 95,690 4,780 -24,105 6 -24,200 89
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MONEY MARKET REVIEW

of increasing the inflation risk. Given this environment, this note argues that the RBI should continue to exercise a tight leash on liquidity, but at the same time ensure that flow of credit to industry and other economic activities is revived, minimising the adverse impact of a crowding out effect. There is also scope for further streamlining the liquidity management practices.

1.2 Autonomous versus Discretionary Flows

The system faces a liquidity deficit or a surplus situation from time to time due to both structural factors and some frictional factors. Management of liquidity by central banks is technically analysed with reference to two types of liquidity flows in the system. One is the autonomous flow which is the

27

Graph A: Trends in Major Liquidity Indicators

Aggregate deposits Currency M3 Bank credit Reserve money

23

19

15

11

the reserve money growth, credit growth and net combined liquidity flows fortnightand also growth in currency were sus-wise since January 2010 are presented in tained at high levels till late 2010. Growth Table 2 (p 71) and Graph B. in aggregate deposits and M

3 Graph B: Autonomous and Discretionary Flows: Interaction

which remained somewhat 15,0000 subdued till end 2010 picked

10,0000

thereafter and has been ruling in a high range. However, 5,0000 reserve money growth has

0

been decelerating, driven by

-5,0000

lower rates of growth in currency. The growth in currency -10,0000 component of reserve money

-15,0000

Discretionary Estimated

has been showing some deceleration since late 2010. The year-on-year variation in currency as on 2 December 2011 was only 12.1% against 18.8% in the previous year. Credit growth has also decelerated beginning early 2011 (Graph A).

The simple regression of discretionary liquidity as a function of autonomous liquidity showed the following relationship: DL= 5116.51-0.33579AL R2= 0.4081

(4704.07) (0.0589) t = (-) 5.692 F-test = 32.403

The negative relationship of discretionary liquidity flows as a function of autonomous liquidity flows is as expected. Every increase/decrease of Rs 100 in autonomous liquidity was matched by an estimated one third of reverse movement in discretionary liquidity. This has no doubt been very successful in managing volatility in interest rates and as Deepak Mohanty, executive director of the Reserve Bank of India, brought out in his recent speeches, the volatility in short-term money market rates has been significantly contained.

1.3 Crowding Out?

Aggregate deposits of scheduled commercial banks recorded a robust growth of 17.9% year on year as on 2 December 2011 against 15.1% in the previous year. But a substantial part of it has been deployed by banks in government securities. During 2010, of the total accretion to deposits of Rs 6.37 lakh crore, investment in government securities amounted to Rs 0.97 lakh crore (15%) and deployment in bank credit was Rs 6.75 lakh crore, implying borrowed funds were also deployed in bank credit. In contrast during 2011, of the accretion of deposits of Rs 8.65 lakh crore as much as Rs 2.60 lakh crore (30%) has been invested in government securities. Deployment in bank credit was only to the tune of Rs 6.37 lakh crore, indicating that growth in credit in absolute terms declined.

During the current year, until 9 December, out of the revised Rs 4.70 lakh crore of

vol xlvi no 53

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15/1/1029/1/1012/2/1026/2/1012/3/1026/3/109/4/1023/4/107/5/1021/5/104/6/1018/6/102/7/1016/7/1030/7/1013/8/1027/8/1010/9/1024/9/108/10/1022/10/105/11/1019/11/103/12/1017/12/1031/12/1014/1/1128/1/1111/2/1125/2/1111/3/1125/3/118/4/1122/4/116/5/1120/5/113/6/1117/6/111/7/1115/7/1129/7/1112/8/1126/8/119/9/1123/9/117/10/11

21/10/114/11/1118/11/112/12/11

combined outcome of banking operations in deposit, credit and investment portfolios and government’s operations particularly in the primary segment of the debt market. The central bank operates through open market operation (OMO) and the liquidity adjustment facility (LAF) windows or any direct instruments such as the cash reserve ratio (CRR). In general, the central bank’s operations counteract the deficit or surplus situations of autonomous liquidity by either injecting liquidity to fill the system gap or absorbing the surplus, consistent with the monetary policy stance.

The trends in growth rates of major macro liquidity indicators such as M3, reserve money, aggregate deposits and bank credit and currency depict that despite the tightening stance of monetary policy that began sometime in early 2010,

The autonomous and discretionary flows of liquidity during October and November are shown in Table 1 (p 69). Governments’ operations in primary market alone have contributed to an outflow of nearly Rs 1 lakh crore during the months of October and November 2011. Declining currency in circulation has contributed to an outflow of about Rs 0.39 lakh crore and bank credit on a cumulative basis declined causing a net inflow of Rs 0.22 lakh crore.

The main objective of liquidity management is to smoothen the interest rate and containing its volatility, irrespective of the policy cycle and stance being in a tightening or easing mode. From this perspective, the discretionary liquidity through RBI’s operations should be negatively related to autonomous liquidity. The data on autonomous liquidity, discretionary liquidity

decEMBER 31, 2011

MONEY MARKET REVIEW

Table 2: Liquidity Flows and Variations in Select Interest Rates RBI’s liquidity management is extending a term repo/liquidity facility in

Autonomous Discretionary Net Call Money 91-Day 10 Year

now attuned more towards suc-the form of a general refinance to banks, as

Flows Flows Inflows Rate TBs G-sec Amount in Rs crore

Variations* cessful and smooth conduct of was done during mid-2008, to ease liquidity

15-Jan-10 44,469 7,418 51,887

the borrowing programme. in the face of crisis. This can ease some

29-Jan-10 28,759 -7,509 21,250 -0.18 0.30 -0.08

pressure. Such a facility should be subject to

12-Feb-10 -34,980 15,390 -19,590 -0.06 -0.01 0.14 26-Feb-10 5,414 25,566 30,980 0.08 -0.03 0.16 1.4 Further Streamlining limits and be offered at a slightly higher rate

Liquidity Management

12-Mar-10 -9,246 -6,590 -15,836 0.01 0.44 0.06 than the repo rate. It should be temporary. 26-Mar-10 -31,653 38,250 6,597 0.13 -0.23 -0.29 The LAF is now the principal The recent experience shows that the 09-Apr-10 48,066 -99,629 -51,563 -0.03 -0.40 -0.05

operating instrument of mone-government’s cash management needs

23-Apr-10 -32,346 38,087 5,741 -0.29 -0.10 -0.05

tary policy by the RBI. In the sophistication and refinement. The mini

07-May-10 -33,839 35,431 1,592 0.21 0.02 -0.31

current phase of tightening policy mum that can be done immediately is to

21-May-10 -12,548 -5,746 -18,294 0.02 0.14 -0.20 04-Jun-10 -1,38,358 64,537 -73,821 0.69 0.89 -0.01 stance, which began around find ways of releasing locked up funds as

18-Jun-10 -52,627 22,258 -30,369 0.69 0.28 0.06 January 2010, some profound cash balances to the market, as is done by

02-Jul-10 60,197 -62,557 -2,360 -0.08 -0.14 -0.23 changes have taken place in the many central banks. While this was report16-Jul-10 2,13,208 16,322 2,29,530 0.27 0.06 0.04

way the LAF operates. Consid-ed to be examined in policy circles, no

30-Jul-10 1,09,361 44,967 1,54,328 -0.38 -0.01 -0.17

ering the net LAF position, the action seems to have followed.

13-Aug-10 -86,009 8,971 -77,038 -0.03 0.16 0.15

system by and large has shifted Market development should focus upon

27-Aug-10 30,139 -19,093 11,046 -0.83 -0.35 -0.40 10-Sep-10 -37,071 28,593 -8,478 -0.32 -0.58 0.02 from a surplus to deficit mode developing short-term benchmarks for the

24-Sep-10 -72,569 14,635 -57,934 1.16 0.39 -0.01 since May 2010. money market. Banks should be incentiv

08-Oct-10 -15,787 -8,294 -24,081 0.23 0.46 -0.05 Since the LAF is operated ised to operate on a term basis, instead of 22-Oct-10 21,477 15,968 37,445 0.19 0.23 0.17

passively, the RBI’s operations purely on overnight basis.

05-Nov-10 -1,21,253 42,668 -78,585 0.10 -0.16 -0.27

fill the gap as needed by the

19-Nov-10 -31,458 28,808 -2,650 0.30 0.08 0.01

system almost automatically. 2 Money, Forex and Debt Markets

03-Dec-10 -38,367 -11,254 -49,621 -0.33 0.08 -0.04

17-Dec-10 -1,97,419 93,512 -1,03,907 -0.09 0.27 0.06 The real discretionary opera-The slowdown in growth of the gross 31-Dec-10 43,517 -9,952 33,565 0.24 0.03 -0.10 tion is only through OMO, domestic product (GDP) at 6.9% for the 14-Jan-11 65,075 -15,123 49,952 -0.48 -0.03 0.20

which has further contributed second quarter (Q2) of 2011-12 coupled

28-Jan-11 84,493 -5,276 79,217 0.01 -0.24 -0.27

to augmentation of liquidity in with a significant fall of 5.1% in index of

11-Feb-11 9,135 5,409 14,544 0.02 -0.08 0.04

the recent period. This only industrial production had a severe impact

25-Feb-11 45,180 -9,797 35,383 -0.15 -0.24 -0.22

goes to support the borrowing on the overall market sentiments across

11-Mar-11 27,293 -16,686 10,607 0.09 0.06 -0.11

25-Mar-11 -1,54,520 12,624 -1,41,896 0.38 0.09 -0.03 programme of the government different segments. On the inflation front, 08-Apr-11 2,24,361 -1,26,929 97,432 -0.47 -0.09 -0.27 and in containing any further a smoothening of headline inflation and 22-Apr-11 -41,519 73,413 31,894 -0.14 0.13 0.15

pressure on government securi-food price inflation has been noticed as the

06-May-11 -72,168 12,336 -59,832 -0.35 -0.16 -0.33

ties yield rates. The situation wholesale price index softened to 9.11% in

20-May-11 -45,592 30,470 -15,122 0.58 0.43 0.14

calls for further fine-tuning of November from 9.73% in October. But

03-Jun-11 68,495 -54,407 14,088 -0.01 0.10 0.07 17-Jun-11 -1,29,222 46,853 -82,369 -0.25 -0.20 -0.32 the operations of the LAF. inflation is yet to soften to comfortable

01-Jul-11 360 17,370 17,730 0.26 0.03 -0.02 Though the LAF operations levels. The eurozone worries combined

15-Jul-11 49,634 -63,414 -13,780 -0.12 -0.10 0.05 have turned to an injection with unrelenting inflationary pressures led 29-Jul-11 41,429 9,415 50,844 -0.30 -0.37 -0.48

mode since about June 2010, in to a steep fall in the rupee exchange rate.

12-Aug-11 -62,489 30,936 -31,553 0.27 -0.01 -0.04

late 2010 and early 2011, the Liquidity woes continued to disturb

26-Aug-11 53,459 -8,925 44,534 0.00 0.22 -0.02

injected funds far exceeded the bankers, as daily overnight borrowings from

09-Sep-11 -29,422 982 -28,440 -0.02 -0.04 0.05 23-Sep-11 53,706 10,621 64,327 -0.06 -0.19 -0.25 indicative limit of 1% of the the RBI stood above Rs 1 lakh crore for a

07-Oct-11 75,768 -51,147 24,621 0.03 -0.04 0.10 estimated net demand and time substantial part of the month. Since this

21-Oct-11 -31,517 69,459 37,942 0.09 0.07 0.35 liabilities. Since April 2011, while level was way above the indicative comfort 04-Nov-11 -19,505 -43,329 -62,834 -0.08 -0.01 -0.15

the injection amounts have level of 1% of NDTL, bankers expected that

18-Nov-11 -68,607 70,439 1,831 0.14 0.17 0.05

moderated within limits for most the RBI would cut the CRR in the mid-quarter

02-Dec-11 46,573 -27,326 19,247 0.06 0.02 -0.13

* : Fortnight over fortnight, adjusted for policy rate impacts in corresponding fortnights. of the period, it exceeded them policy review on 16 December by at least Source: www.epwrfits.com, WSS, CCIL Market Update, compiled by EPWRF.

occasionally but for the past two 25 bps. However, the absence of strong signs gross borrowing of the government only to three months again breached the limit of moderation in inflation compelled the Rs 3.67 lakh crore of borrowing has been substantially (Graph C, p 72). RBI not to resort to any significant amount completed, leaving a balance of Rs 1.03 lakh While there are instruments for short-of quantitative easing. But the RBI gave a crore to be raised before February 2012, as term absorption of liquidity, there are not pause to the series of policy rate hikes. per the calendar. But, given the lapse in enough instruments for short-term injection RBI has bought government bonds revenue figures and expected enlargement of liquidity and the entire operation, except through OMOs to ease the cash crunch in of expenditure on subsidies, it is very OMO, is skewed towards overnight funds. the system but the move made hardly any doubtful whether the borrowing will be In the absence of a term money market, impact on the money market rates and contained even within these revised limits. the central bank should therefore consider liquidity scenario.

Economic & Political Weekly

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decEMBER 31, 2011 vol xlvi no 53

Graph C: Net Liquidity +/- LAF Operations

-1% of NDTL Net liquidity (-) Injection (+) Absorption

MONEY MARKET REVIEW

2.1 Money Market Instruments November 2011 October 2011 Daily Average Monthly Range of Daily Average Monthly Range of

The money market experienced no signifi- Volume Weighted Weighted Average Volume Weighted Average Weighted Average (Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)

cant signs of volatility in November, large-

Call Money 8,699 8.58 8.14-8.69 9,848 8.24 7.61-8.39

ly anticipating a pause in policy tightening

Notice Money 2,903 8.57 7.29-8.69 3,356 8.27 6.99-8.54 by RBI in its mid-quarter monetary policy Term Money @ 201 -8.00-10.15 235 -6.85-10.01

Amount in Rs Crore 12,0000 10,0000 8,00006,0000 4,0000 2,0000 0 -2,0000 -4,0000 -6,0000 -8,0000 -10,0000

15/1/10

9/2/10

6/3/10

31/3/10

25/4/10

20/5/10

14/6/10

9/7/10

3/8/10

28/8/1022/9/1017/10/1011/11/106/12/1031/12/1025/1/1119/2/1116/3/1110/4/11

5/5/11

30/5/11

24/6/11

19/7/11

13/8/11

7/9/112/10/1127/10/1121/11/11

Heavy dollar demand from importers amid rising oil prices coupled with reversal of portfolio outflows following a shift in investor appetite towards safe haven assets on the back of the worsening eurozone debt crisis and bleak domestic fundamentals pushed the Indian currency to trade at all-time low rates against the dollar. The rupee-dollar reference rate touched a low of Rs 52.17 in November and the rupee was the worst performing currency in Asia. However, the sharp depreciation of the rupee prompted the government to take some quick measures to boost dollar inflows. The Union Finance Ministry increased the investment limit for foreign institutional investors (FIIs) in government securities and corporate bonds by $5 billion each to $15 billion and $20 billion, respectively. In addition, RBI deregulated interest rates on Non-Resident (External) Rupee term deposits and Foreign Currency Non-Resident (Banks) deposits to attract NRI deposit flows.

Due to higher market borrowing, the yields shot up in the government securities market, the yield on the 10-year benchmark paper in particular crossed the 9% mark in November. Heightened volatility in markets prompted the 1-year to 5-year securities spread to turn negative.

Corporate bond market activity remained buoyant and coupon rates moved in line with gilt-edged markets.

the constant upward move

ment in the short-term money

market rates. The liquidity

in the system also remained

tight, evident from the bor

rowings from the LAF window.

Overnight call money rate

remained stable around the

policy repo rate. One-day rates

moved in a narrow range of

8.17% and 8.54% in the first

week ending 4 November,

and remained range-bound in the subsequent week also. Fortnightly reserve requirements of banks again hardened the call rates in the third week and rates ruled in an upper range of 8.40% and 8.59%. Thereafter, the weighted average rates remained above the repo rate of 8.50% except on 25 November and closed at 8.25% on the same day.

The notice money rate also moved in tandem with overnight rates but even fell below the reverse repo rate of 7.50% on several occasions. Both call and notice money weighted average rates increased by 34 bps and 30 bps, respectively, over the one-month period. The term money segment reported a vast hardening in rates ruling in a wide range of 8% to 10.15% during the same period. Predicting a softening of interest rates in the coming days, collateralised instruments like collateralised borrowing and lending obligations (CBLO) and market repo rates ruled in a relatively lower range during the beginning of November, but inched up significantly thereafter and recorded a 40 bps rise each in November.

Lower volatility in rates resulted in reduced trading volume across the money market instruments. The average daily turnover of all the money market products reported a 17% fall over the month. Individually, CBLO recorded the highest fall of 23% followed by notice and call money segments showing a 14% and 12% reduction, respectively, in daily trading activity (Table 3). Table 3: Money Market Activity (Volume and Rates)

As per the latest available data from the RBI, the short-term certificates of deposit (CDs) market had seen a fall of Rs 3,735 crore in its outstanding amount during the fortnight ending 4 November over 21 October and stood at Rs 3,82,201 crore. The discount rates ranged between 9.20% and 9.99% during the period. Contrary to CDs, the outstanding amount of commercial papers (CPs) improved by Rs 21,841 crore during a period of one fortnight to Rs 1,66,462 crore on 15 October. Indian corporates preferred to raise funds through CPs to meet their short-term working capital needs, causing the rates to continue to rule in a wide and upper range of 8.75% to 13.50% in the fortnight ending 15 October.

According to the trading platform – Fixed Income Money Market and Derivatives Association (FIMMDA) – CDs recorded a notable fall of 14% in their daily trading activity during November. However, over a period of one month CPs reported a 25% jump in their daily turnover.

The cash crunch in the system on the back of the government’s borrowings through securities auctions worth more than Rs 50,000 crore and central bank’s intervention in the forex market to stem the fall of the rupee prompted an excessive use of RBI’s LAF repo window by banks during November. However, the purchase of securities through OMO by RBI eased the situation to some extent but advance tax payment for the third quarter added additional stress on the liquidity front towards the end of the month. In view of the fact that borrowings from the LAF are persistently above the central bank’s comfort zone, the RBI allayed the fears by announcing that further OMOs will be conducted as and when appropriate.

During November, the repo tendered amount in the RBI’s LAF window remained above Rs 1 lakh crore in most of the market sessions. However, in the beginning of the month, the borrowings by banks stayed

review of December 2011. However, the CBLO 33,347 8.40 7.15-8.63 43,076 8.01 5.98-8.45

Market Repo 13,024 8.46 8.07-8.65 13,674 8.07 7.41-8.42

repercussions of the rate hike by RBI in the

@: Range of rates during the month. November policy review was reflected in Source: www.rbi.org.in. and www.ccilindia.com

72 decEMBER 31, 2011 vol xlvi no 53

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MONEY MARKET REVIEW

within the comfort zone at Rs 46,000 crore per day. However, the liquidity situation tightened from 8 November and the average borrowings by banks remained above Rs 1 lakh crore excluding some intermittent days till 25 November and even in some market days the RBI injected more than Rs 1.3 lakh crore into the system in a single day. However, the RBI’s marginal standing facility was not accessed but the OMO window witnessed Rs 9,446 crore purchases of securities by the RBI in November (Table 4).

The interest rate futures segment of NSE reported nil trading activity in November as in October. Table 4: RBI’s Market Operations (Rs crore)

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

Jul-2011 -6 37,683

Aug-2011 -6 36,948

Sep-2011 5 52,194

Oct-2011 6 50,708

Nov-2011 9,446 91,719

Source: RBI’s Weekly Statistical Supplement.

Table 5: Foreign Exchange Market: Select Indicators

2.2 Forex Market

The forex markets suffered another month of turmoil with the worsening of eurozone sovereign debt crisis threatening to spread to other emerging market economies. Political turbulence caused by developments in Greece whipped the market sentiments from the beginning of the month and drove investors and market participants to seek safe haven assets and offload riskier ones. Benefiting from safe haven demand, the pound sterling limited its losses and fell marginally by 0.2% against the US dollar. Eurozone debt fears continued to stalk the region’s single currency and the euro fell by 1.5% against the dollar in November. Asian currencies depreciated the most on speculation that Europe’s worsening debt crisis will weaken exports and prompt regional policymakers to cut borrowing cost. The Japanese yen also declined by 2% versus the dollar on persistent inter-

Month Rs/$ Reference Appreciation (+)/ Total FII Flows BSE Sensex Dollar Index#
Rate (Last Friday Depreciation (-) ($ Million)
of the Month) of Rs/$ (in %) (Equity+Debt) Month-end Closing
Apr-2011 44.38 0.61 1616 19,136 68.34

May-2011 45.21 -1.84 -948 18,503 69.69

Jun-2011 * 44.72 1.10 1,083 18,846 69.36

Jul-2011 44.16 1.27 2,399 18,197 68.53

Aug-2011 46.05 -4.12 -1,766 16,677 68.85

Sep-2011 48.93 -5.87 -342 16,454 72.81

Oct-2011 48.82 0.21 634 17,705 70.52

Nov-2011 52.17 -6.41 -586 16,123 72.37

*: 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.

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

Month Merchant Interbank Spot Forward Total

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

Aug-2011 17.0 (21.6) 46.6 (3.3) 30.3 (6.2) 33.3 (9.0) 63.5 (7.7)

Sep-2011 15.1 -(11.2) 44.8 -(3.8) 29.6 -(2.3) 30.3 -(9.0) 59.8 -(5.8) Oct-2011 12.6-(16.7) 40.0 -(10.6) 26.7 -(9.8) 25.9 -(14.4) 52.6-(12.1)

*: Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are percentage change over the previous month. Source: RBI’s Weekly Statistical Supplement, various issues.

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

vention by the Japan government to further weaken the currency.

The overall strong performance of the dollar was also reflected in the 185 bps rise in the dollar index [Nominal Major Currencies Dollar Index (March 1973=100)] during November over October (Table 5).

The Indian rupee suffered the worst fall hitting a record low during November 2011 and remained the worst performing Asian currency plunging

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

04-Nov-11 7.83% 2018 R 4,000 1.82 Nil 8.86 95.03

8.26% 2027 R 3,000 2.04 Nil 9 93.82

by nearly 6.5% in one month, as persistent dollar demand from importers and portfolio outflows due to global risk aversion pounded the local currency. The rupee continues to face further depreciation threats on the back of a widening current account deficit, slowing growth and amid the strengthening US currency. Negative macro indicators harmed domestic share prices and the local currency moved taking its cue from the stock market activities.

The rupee started its depreciation against the greenback from the beginning of November, and fell continuously for three days in a row and shed 50 paise per dollar till 3 November tracking political events in euro area. On 4 November the domestic currency recovered by 29 paise per dollar on hopes of some positive developments in the euro region. Thereafter, once again the rupee fell back and depreciated by a whopping 317 paise against the greenback till 24 November since rising oil prices, bearish domestic stock markets and strengthening of the dollar put tremendous pressure on the rupee. However, from 25 November onwards the rupee recovered its losses though marginally by 32 paise till 29 November but again lost its ground towards the end of the month responding to the dismal Q2 GDP growth for the current fiscal and lost 23 paise to close at Rs 52.17 per dollar on 30 November. Overall, the rupee moved in a wide range of Rs 49.08 and Rs 52.70 against the dollar shedding 329 paise in a single month despite RBI intervention and during November posted one of its biggest monthly falls.

The forward premia across three maturities displayed varied behaviour with onemonth premia witnessing a more hardening trend during November compared to October anticipating further depreciation of the rupee in the near-term. The 30-days

8.79% 2021 N 6,000 2.55 Nil 8.79 premia ended at 6.90% on 30 November

11-Nov-11 7.99% 2017 R 4,000 Nil nil

8.30% 2040 R 3,000 2.76 861 9.25 90.45

9.15% 2024 N 6,000 2.42 1,506 9.15

18-Nov-11 7.83% 2018 R 4,000 1.97 Nil 8.88 94.93

8.79% 2021 N 6,000 1.91 1,150 8.83 99.70

8.28% 2027 N 3,000 2.01 Nil 9.13 92.95

25-Nov-11 FRB 2040 R 3,000 2.44 103 10.01 93.00

showing a 27 bps rise over the previous month. However, the three-month and six-month premia remained more volatile than one-month premia but reflected some softening trend showing a 75 bps and 61 bps fall in their respective premia over the

9.15% 2024 R 6,000 1.78 Nil 8.99 101.18preceding month and ended at 4.98% and

8.30% 2040 N 4,000 1.86 Nil 8.28 90.22 4.14%, respectively on 30 November. Total for November 2011 52,000 2.13 8.98

Despite huge forex market volatility due

Total for October 2011 43,000 1.88 8.85 94.79

to a massive fall in rupee value against

R: Reissue. N: New issue, @ Coupon decided in the auction at the cut-off yield.

Source: RBI press releases. most of its other trading partners the total

Economic & Political Weekly

EPW
decEMBER 31, 2011 vol xlvi no 53

MONEY MARKET REVIEW

and average daily turnover in the foreign exchange market crashed by 12% during October over September. The highest fall was registered by merchant and forward transactions (11.2% and 14.4%) while interbank and spot market dealings declined by 10.6% and 9.8%, respectively over the month (Table 6, p 73).

The currency derivatives trading increased by 10% in November over October following increased hedging activities in forex market due to a sharp fall in rupee versus dollar. The average daily turnover improved by 5% during the same period and the trading exchanges collectively recorded Rs 31,800 crore dealings per day. However, imposition of transaction charges for currency derivatives trading by exchanges from August 2011 continued to effect trading volumes adversely. The average trading in November more than halved compared to August.

Segment-wise, the futures turnover improved by 7% in total terms while options trading witnessed a vast rise of 31% during November over October. The futures segment continued to attract more market participants by contributing 85% of the total currency derivatives turnover. In the futures segment, GBP-INR and USD-INR currency pairs reported 23% and 7% increases in their total trading while the remaining two products recorded declines in their respective turnovers. The USD-INR favourite among market participants represented a 96% market share towards total futures trading.

Among the exchanges trading in currency derivatives products, the National Stock Exchange (NSE) dominated with a 51% market share and the Multi-Commodity Exchange (MCX-SX) cornered 43% towards the total currency derivatives turnover. However, the United Stock Exchange (USE) managed to garner just 6% of overall volumes in November.

2.3 Central Government Securities

With a view to mitigating the challenge of making the government borrowing hasslefree and to keep a lid on build-up of pressures on government securities yields, the RBI introduced OMO auctions. It may be recalled that devolvements in recent auctions became common after the announcement of a larger borrowing target for the second half of the fiscal. On 24 November, the RBI purchased securities worth Rs 9,435 crore through an OMO auction which included four securities – 7.99% 2017, 7.83% 2018, 7.80% 2021 and 8.13% 2022. Initiation of OMO auctions showed a positive impact on yields towards the end of the month.

In the primary market, four auctions of central government securities were held in the month for Rs 52,000 crore. Of the 12 securities issued during the month, five securities were new issues. Overall, the cut-off yield inched up to 8.98% in November from 8.85% in October. Devolvement on primary dealers in November was more than Rs 3,600 crore while in the second auction, on 11 November, one security 7.99% 2017 remained unsold. Investor response was slightly better during the month, with bid cover ratio of 2.13 times, compared with 1.88 times in October (Table 7, p 73).

The highest cut-off yield for the month, at 10.01%, was in respect of the FRB 2040 auctioned on 25 November for Rs 3,000

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

Descriptions November 2011 Previous Month Three Months Ago Six Months Ago Last Week (25) First Week (4) Total for the Month (October 2011) (August 2011) (May 2011) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

1 Treasury Bills 2,241 4,875 13,548 16,102 15,476 19,135

A 91-Day Bills 552 8.81 2,776 8.61 5,258 8.69 8,780 8.38 10,429 8.17 11,929 7.89

B 182-Day Bills 1,537 8.82 305 8.62 3,680 8.80 3,258 8.48 2,514 8.32 2,245 7.95

C 364-Day Bills 152 8.69 1,794 8.68 4,610 8.72 4,064 8.51 2,533 8.28 4,962 8.14

2 GOI Dated Securities 45,066 8.88 54,718 8.91 1,88,411 8.92 1,68,357 8.74 2,87,935 8.31 1,27,796 8.36

Year of (No of Maturity Securities)

2011 21 8.58 315 7.96

2012 (5) 350 8.86 520 8.67 1,516 8.76 2,546 8.61 783 8.27 1,105 8.11

2013 (1) 15 8.57 25 8.59 56 8.37 490 8.23 295 8.19

2014 (4) 140 8.70 90 8.59 230 8.66 342 8.42 212 8.15 311 8.25

2015 (3) 62 8.74 85 8.58 337 8.65 321 8.59 456 8.22 1,650 8.37

2016 (3) 0 8.60 297 8.83 421 8.84 422 8.65 3,623 8.25 4,106 8.43

2017 (3) 163 8.80 1,170 8.87 2,202 8.87 3,375 8.70 2,535 8.29 405 8.38

2018 (2) 7,280 8.84 7,084 8.83 22,669 8.87 13,088 8.72 18,507 8.30 8,988 8.42

2019 (1) 50 8.93 50 8.93 0 8.07 0 8.18

2020 (3) 459 9.40 30 9.10 1,364 9.25 970 9.06 1920 8.87 1,870 7.87

2021 (2) 24,546 8.82 30,825 8.91 1,04,712 8.89 1,13,304 8.73 1,85,767 8.28 49,678 8.28

2022 (2) 2,560 8.89 13,781 8.95 22,117 8.96 26,885 8.73 66,939 8.37 55,138 8.43

2024 (2) 7,406 8.97 2 8.96 27,914 9.01

2027 (3) 995 9.12 573 8.98 2,374 9.07 4,827 8.88 4,271 8.56 2,740 8.61

2028 (1) 1 9.27 4 8.38

2032 (1) 1 9.17 102 8.91 1,120 8.58 333 8.61

2034 (1) 1 8.99 5 9.15 3 8.39 7 8.40

2036 0 8.85 10 8.55

2040 (1) 1,056 9.23 246 8.99 2,472 9.21 2,118 8.94 1,284 8.64 833 8.60

3 State Govt Securities 779 9.19 279 9.03 2,337 9.15 2,353 8.94 2,328 8.57 2,708 8.58

Grand total (1 to 3) 48,086 59,873 2,04,295 1,86,812 3,05,738 1,49,639

(-) 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 2023-26 and 2035-39 are negligible. Source: Compiled by EPWRF; base data from RBI, CCIL.

decEMBER 31, 2011 vol xlvi no 53

EPW
Economic & Political Weekly

MONEY MARKET REVIEW

Table 9: Details of State Government Borrowings (Amount in Rs crore) seen throughout the month auctions of 42-day cash management bills
Date of Auction Number of Total Bid Cover YTM at Weighted Participating Amount Ratio Cut-Off Average to above 8.90%, which in the (CMBs) were also conducted for notified
States Accepted Price (%) Yield (%) last week ending 25 Novem amounts of Rs 6,000 crore and Rs 9,000
08-Nov-11 8 6,323 1.38 9.20 9.14 22-Nov-11 6 2,295 1.26 9.24 9.20 ber, softened to 8.88%. The crore, respectively. The second auction
Total for November 2011 14 8,618 1.34 9.21 9.16 top five traded securities in could garner only Rs 5,000 crore against
Total for October 2011 21 15,770 1.89 8.98 8.96 November were 8.79% 2021, the notified amount of Rs 9,000 crore.
Source: RBI press releases. 7.80% 2021, 9.15% 2024, The bid cover ratio has improved over the
Table 10: Auctions of Treasury Bills (Amount in Rs crore) 7.83% 2018 and 8.13% 2022, month, for 182-day and 364-day TBs to
Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Averagecontributing to almost 92% 2.39 times and 4.59 times, respectively.
Yield (%) Price (Rs) of total turnover. The 8.79% Cut-off yields increased across maturities.
A: 91-Day Treasury Bills 02-Nov-11 4,000 3.46 8.65 8.65 97.89 97.892021, a 10-year benchmark But over successive auctions cut-off yields
09-Nov-11 4,000 1.80 8.86 8.81 97.84 97.85was the most traded secu have softened for 182-day and 364 day
16-Nov-11 4,000 2.47 8.90 8.86 97.83 97.84rity, worth Rs 64,540 crore bills. The cut-off yield for 91-day TBs
23-Nov-11 4,000 3.23 8.86 8.86 97.84 97.84followed by another 10-year surged till the third auction when it
30-Nov-11 4,000 2.79 8.81 8.81 97.85 97.85 security, namely, 7.80% 2021 touched 8.90% and softened in the later
Total for November 2011 20,000 2.75 8.81 8.80 97.85 97.85 which traded for Rs 40,172 two auctions (Table 10).
Total for October 2011 16,000 3.19 8.55 8.54 97.91 97.92 crore. Yield spread between The turnover of TBs plunged by about
B: 182-Day Treasury Bills 09-Nov-11 4,000 1.69 8.95 8.88 95.73 95.76one and 10-year maturities 16% to Rs 13,548 crore in November from
23-Nov-11 4,000 3.09 8.84 8.81 95.78 95.79 remained almost flat at 13 Rs 16,102 crore in October. Over the period,
Total for November 2011 8,000 2.39 8.89 8.85 95.76 95.78 bps while it widened for yields across maturities firmed up to
Total for October 2011 8,000 2.08 8.66 8.62 95.86 95.88 one and five-year maturities 8.69%, 8.80% and 8.72%, respectively, for
C: 364-Day Treasury Bills (Table 8, p 74). 91-day, 182-day and 364-day TBs. The
02-Nov-11 4,000 2.98 8.74 8.72 91.98 92.00 16-Nov-11 4.89 8.85 8.84 91.89 91.90Two auctions for state turnover of CMBs with varied maturities
4,000 30-Nov-11 4,000 5.92 8.45 8.42 92.23 92.25 loans were conducted on 8 was to the tune of Rs 2,700 crore.
Total for November 2011 12,000 4.59 8.68 8.66 92.03 92.05 November and 22 Novem-Total for October 2011 8,000 2.67 8.60 8.58 92.10 92.12 ber for Rs 8,600 crore in 2.5 Corporate Bond Market
D: 42-Day Cash Management Billsthe aggregate. A total of 12 While there were no public issues, the
08-Nov-11 6,000 3.00 8.69 8.69 99.01 99.01states took part in these volume of privately placed corporate bonds
09-Nov-11 9,000 2.58 8.87 8.87 98.99 98.99 Total for November 2011 15,000 2.75 8.80 8.80 99.00 99.00 auctions, of which Andhra on the NSE more than doubled during
Source: RBI’s press releases. Pradesh and Goa accessed November to Rs 13,945 crore from Rs 5,637
Table 11: Details of Private Placement in Corporate Bonds in NSE during the market twice. The first crore in the previous month. Financial
November 2011 auction raised Rs 6,323 institutions raised the highest amount of
Institutional Category No of Volume in Range of Range of Maturity Issues Rs Crore crore while the second auc- Rs 6,530 crore through 12 issues followed
Coupon Rates in Years (y) and (in %) Months (m) tion garnered Rs 2,200 crore. by the central undertakings, which included
FI 12 6,530 9.50-10.02 1-10 Years Overall, the average cut-off only two issues by Rural Electrification
NBFCs 20 2,468 7.55-11.90 2-15 Years Central Undertakings 2 4,947 9.30-9.75 5-10 Years yield hardened to 9.21% Corporation mopping up Rs 4,947 crore.
Total for November 34 13,945 7.55-11.90 1 to 15 Years from 8.98% in October. Non-Banking Financial Corporations made
Total for October 20 5,637 7.51-10.25 2 to 17 Years The response to these auc 20 issues – the maximum across any insti-
Source: www.nseindia.com tions as reflected in bid tutional category – and raised only a moder
crore. In the first and third auctions which cover ratio has shrunk over the period to ate amount worth Rs 1,468 crore. Overall,
included two common securities, namely, 1.34 times in November, from 1.89 times the range of coupon rates has significantly
7.83% 2018 and 8.79% 2021, the latter aucin October (Table 9). moved up in November to 7.55%-11.90%
tion saw cut-off yields rising. 8.30% 2040 The secondary market turnover over the from 7.51%-10.25% in October. JM Financial
and 9.15% 2024 were two other common month remained almost flat at Rs 2,337 Products paid the highest coupon, i e,
securities issued on 25 November after crore with the overall yield firming up to 11.90% for three issues in the month rais
their first issuance on 11 November. There 9.15% in November over 8.94% in October. ing Rs 250 crore in aggregate. Ten issues
was softening in cut-off yield over the offered coupons at 10% and above while
period in both these securities due to RBI’s 2.4 Treasury Bills 16 other issues kept coupon rates at 9%
announcement to conduct OMO auctions The 91-day treasury bills (TBs) were issued and above (Table 11).
and also the increased limit of FII investfive times in November with the notified According to the data published by the
ment in government securities. amount at Rs 4,000 crore in each auction. Securities and Exchange Board of India,
The secondary market turnover surged Including other maturities, auctions total turnover in the secondary market
by about 12% in November to Rs 1,88,411 resulted in higher total issuance volume of corporate bonds, reported by BSE,
crore over October. Secondary market aggregating Rs 40,000 crore in November NSE and FIMMDA, improved by 10% to
yields also firmed up with overall yield at compared to Rs 32,000 crore in October. Rs 47,307 crore in comparison with the
8.92%. The tendency of hardening yield was In addition to regular TB auctions, two previous month.
Economic & Political Weekly decEMBER 31, 2011 vol xlvi no 53 75
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