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Fiscal Consolidation Left Behind

The postponement of fi scal consolidation, as is evident from the Union Budget, 2012-13, is likely to add pressure to the external sector balance and enhance the risk of managing the trade-off between infl ation and growth. This note addresses some of these and related issues.

MONEY MARKET REVIEW

of treasury bills (TBs) is likely to keep

Fiscal Consolidation Left Behind
short-term rates high, and the yield curve inverted for some more time to come with resultant implications for growth. EPW RESEARCH FOUNDATION The Reserve Bank of India (RBI) with-

The postponement of fi scal consolidation, as is evident from the Union Budget, 2012-13, is likely to add pressure to the external sector balance and enhance the risk of managing the trade-off between infl ation and growth. This note addresses some of these and related issues.

1 Introduction

I
t was widely expected before the presentation of the Union Budget, 2012-13 that the central government would come out with a credible fi scal consolidation path so as to return to the fiscal rules under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. This confidence was belied. Since further amendments are proposed to the FRBM Act to suit the new fi scal paradigm, for all practical purposes, the central government seems to have given an indefinite holiday to sustained effort in consolidating its fiscal position. Doubts have already been raised about even the marginal reduction in the fi scal defi cit number for 2012-13. Therefore, the loud signal that comes out of the current budget is that the fi scal deficit is likely to be sustained at a higher level in the immediate future.

There are indeed other signs of fi scal distress. The higher fi scal defi cit has consequently increased the risk of a ballooning of government borrowing. Added to this is the evidence that the maturity structure of the government debt has been shortening signifi cantly thereby increasing the rollover risk of public debt. Furthermore, the higher shortterm debt in the form of large issuance held policy rate easing, though it announced a pause to its tightening stance, presumably on the ground that the government might resume its fi scal consolidation path, to some extent relieving it from the burden of managing a burgeoning borrowing programme. While commenting on the borrowing programme of the government for the ensuing year, RBI Deputy Governor H R Khan lamented that it is of a tall order and it is a challenge to manage. Under this circumstance, easing of the policy rate is likely to be delayed and the pace of easing may also prove to be slower than during earlier policy cycles.

The postponement of fi scal consolidation at this juncture is also likely to add pressure to the external sector balance and add to the risk of managing the trade-off between inflation and growth. This note addresses some of these and related issues.

1.1 Trends in Fiscal and Revenue Defi cits

The central government’s fi scal defi cit touched a low of Rs 1.27 lakh crore and as a share of gross domestic product (GDP) touched a dream number of 2.5% in 2007-08. This size got multiplied by a factor of more than four since then to touch a high of Rs 5.22 lakh crore in

Table 1: Trends in Fiscal and Revenue Deficits (Rs crore)
Year Central Government State Governments Combined
Fiscal Deficit Revenue Deficit Fiscal Deficit Revenue Deficit Fiscal Deficit Revenue Deficit
2000-01 1,18,816 (5.5) 85,234 (3.9) 87,922 (4.1) 55,316 (2.6) 1,99,852 (9.2) 1,38,803 (6.4)
2001-02 1,40,955 (6.0) 100,162 (4.3) 94,261 (4.0) 60,398 (2.6) 2,26,425 (9.6) 1,59,350 (6.8)
2002-03 1,45,072 (5.7) 1,07,879 (4.3) 99,727 (3.9) 57,179 (2.3) 2,34,987 (9.3) 1,62,990 (6.4)
2003-04 1,23,273 (4.3) 98,261 (3.5) 1,20,631 (4.3) 63,407 (2.2) 2,34,501 (8.3) 1,59,408 (5.6)
2004-05 1,25,794 (3.9) 78,338 (2.4) 1,07,774 (3.3) 39,158 (1.2) 2,34,721 (7.2) 1,14,761 (3.5)
2005-06 1,46,435 (4.0) 92,299 (2.5) 90,084 (2.4) 7,013 (0.2) 2,39,560 (6.5) 99,312 (2.7)
2006-07 1,42,573 (3.3) 80,222 (1.9) 77,509 (1.8) -24,857 -(0.6) 2,30,432 (5.4) 55,366 (1.3)
2007-08 1,26,912 (2.5) 52,569 (1.1) 75,455 (1.5) -42,943 -(0.9) 2,03,922 (4.1) 9,626 (0.2)
2008-09 3,36,992 (6.0) 2,53,539 (4.5) 1,34,589 (2.4) -12,672 -(0.2) 4,72,807 (8.4) 2,40,864 (4.3)
2009-10 4,18,482 (6.5) 3,38,998 (5.2) 1,88,820 (2.9) 31,018 (0.5) 6,25,009 (9.7) 3,75,724 (5.8)
2010-11 3,73,591 (4.9) 2,52,252 (3.3) 2,07,857 (2.7) 22,916 (0.3) 5,76,583 (7.5) 3,00,881 (3.9)
The EPWRF team is led by K Kanagasabapathy 2011-12 RE 5,21,980 (5.9) 3,94,951 (4.4) 1,99,427 (2.2) -16,580 -(0.2)
and supported by Anita B Shetty, 2012-13 BE 5,13,590 (5.1) 3,50,424 (3.4)
Vishakha G Tilak, V P Prasanth, RE - Revised Estimates, BE - Budget Estimates.
Shruti J Pandey and Sharan P Shetty. Figures in brackets are percentage to GDP. Source: www.indiabudget.nic.in, RBI.
Economic & Political Weekly march 31, 2012 vol xlviI no 13 65
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MONEY MARKET REVIEW

2011-12 and is expected to remain almost flat in 2012-13. The revenue defi cit, after touching a low of 1.1% in 2007-08, moved up to a range of 3.3% to 5.2% in later years.

A positive signal comes from the state governments which reduced their fi scal deficit from 2.9% in 2009-10 to 2.2% in 2011-12 and eliminated the revenue defi cit, earning an estimated surplus of Rs 16,580 crore in 2011-12 (Table 1, p 65 and Graph A).

With the central government giving a holiday to fiscal rules, it may be diffi cult to anticipate that the state governments would adhere to the fiscal rules for long. There is an inevitable risk of perverse competition and the combined defi cit of both central and state governments going awry in the coming years.

1.2 Ballooning Borrowing Programme

The trend in the borrowing programme of the central government and the average cost of borrowing, as refl ected in weighted average yields in auctions, show a more alarming picture. The gross borrowing programme of Rs 5.70 lakh crore and the net borrowing of Rs 4.79 lakh crore in 2012-13 represent a signifi cant jump on top of Rs 4.99 lakh crore and Rs 4.36 lakh crore respectively of 2011-12 (Table 2 and Graph B, p 67).

The weighted average yields in auctions increased from 7.23% in 2009-10 to 8.45% in 2011-12, which may contribute to further ballooning of borrowing to meet interest payments. Interest payments

Table 2: Central Government Borrowings

Year Market Borrowings Weighted Average Yields (Rs crore) of Central Government

increased from Rs 2.13 lakh crore in 2009-10 to Rs 2.76 lakh crore in 2011-12 and are further estimated to increase to Rs 3.20 lakh crore in 2012-13.

The borrowing programme of the government is likely to be overburdened also because of lower small savings collections. The net small savings collections during 2011-12 was negative to the extent of about (-)Rs 10,000 crore and the budget estimate for the year 2012-13 at (+)Rs 1,198 crore seems unrealistic. The government has further announced a large issuance of tax-free bonds which will attract funds from small savers. This is on top of other debt instruments offering attractive returns. There is also the

Graph A1: Fiscal, Revenue and Combined Deficits (Rs crore)

Graph A 2: Fiscal, Revenue and Combined Deficits as % to GDP -50000 50000 150000 250000 350000 450000 550000 650000

fear that small savings withdrawals may come under the tax net.

1.3 Maturity Distribution of Central Government Debt

While state governments conventionally borrow at a uniform maturity of 10 years, the central government issues securities in a diversifi ed maturity, besides borrowing short-term in the TBs market. Considering dated securities, it

-1.0 1.0 3.0 5.0 7.0 9.0 11.0 2000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-12 RE2012-13 BE Central Govt -FD Central Govt -RD State Govt -FD State Govt -RD Combined -FD Combined -RD

Table 3: Maturity Pattern of Government of Indian Rupee Loans (Rs crore)

is observed that the maturity pattern of central government debt has tilted significantly in favour of short tenures in the recent past. The share of debt in the maturity range of above 10 years had fallen over the years from 44.6% in 2003-04 to 29.1% in 2010-11, though it is expected to show a marginal increase to 31.8% in 2011-12. The share of maturities in the range of five to 10 years also fell in recent years from 34.2% in 2009-10 to

Borrowings

Year Up to % to Total One to Four % to Total Between % to Total Over 10 Years % to Total Total

Gross Net (Dated Securities) (%)

One Year@ Years 5 and 10 Years Amount

2000-01 1,15,183 73,787 10.95

2000-01 22,978 4.8 1,58,832 33.3 1,78,072 37.4 1,16,764 24.5 4,76,646

2001-02 1,33,801 92,302 9.44

2001-02 26,676 4.7 1,64,169 29.2 1,90,788 33.9 1,81,367 32.2 5,63,000

2002-03 1,51,126 1,04,118 7.34

2002-03 40,279 5.6 1,77,900 24.9 2,33,691 32.7 2,62,612 36.8 7,14,482

2003-04 1,47,636 88,816 5.71

2003-04 37,984 4.4 1,84,810 21.4 2,55,157 29.6 3,84,645 44.6 8,62,596

2004-05 1,06,501 46,050 6.11

2004-05 90,874 8.9 2,21,228 21.7 2,83,839 27.8 4,24,545 41.6 10,20,486

2005-06 1,60,018 98,237 7.34

2005-06 1,10,224 9.6 2,45,501 21.5 3,07,269 26.9 4,79,527 42.0 11,42,521

2006-07 1,79,373 1,11,275 7.89

2006-07 1,62,051 12.4 2,75,158 21.0 3,46,920 26.5 5,25,341 40.1 13,09,470

2007-08 1,88,205 1,09,504 8.12

2007-08 1,91,116 12.1 4,16,978 26.5 4,13,475 26.3 5,53,311 35.1 15,74,880

2008-09 3,18,550 2,42,317 7.69

2008-09 2,64,784 14.5 4,03,178 22.1 5,37,175 29.5 6,16,538 33.8 18,21,675

2009-10 4,92,497 3,94,358 7.23

2009-10 2,50,743 11.5 4,59,159 21.0 7,46,644 34.2 7,25,060 33.2 21,81,606

2010-11 4,37,000 3,25,414 7.48

2010-11 2,52,769 12.1 5,30,553 25.4 6,96,625 33.4 6,07,060 29.1 20,87,007

2011-12 RE 4,99,000 4,36,414 8.45

2011-12 * 3,52,090 14.0 6,24,473 24.9 7,35,382 29.3 7,97,060 31.8 25,09,005

2012-13 BE 5,69,616 4,79,000 * - Does not take into account the additional net borrowings announced in the later part of the year. RE - Revised Estimates, BE - Budget Estimates.

@ - Outstanding stock of all tresaury bills including 14-day TBs. Source: RBI.

Source: RBI, Compiled from EPWRF database.

march 31, 2012 vol xlviI no 13

MONEY MARKET REVIEW

Gross market borrowings Net market borrowings

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13

Graph B: Central Government Borrowings (Rs crore) primary market jump6,40,000

ing from a range of 3.5% to 4.5% in 2009-10 to 6.0% to 6.6% in 2010-11,

5,40,000

4,40,000

to a high of 8.4% in

3,40,000

2011-12. The notifi ed amounts of 182-day and 364-day TBs dur

2,40,000

1,40,000

ing 2011-12 nearly dou

40,000

bled and that of 91-day

TBs was raised by about 29.3% in 2011-12. The share of maturity 50% to a whopping Rs 3.01 lakh crore in in one to four years jumped to about 2011-12 (Table 4). With 10-year yields 25% in the last two years compared with hovering at times lower than the TBs about 21% in 2009-10. The shortening of rate, the yield curve remained inverted maturity of government debt increases in the recent past. the rollover risk of debt stock and makes the job of debt management on the part 1.4 Other Implications of RBI signifi cantly diffi cult. The current account balance is adverse,

The rollover risk gets exacerbated ruling above the comfortable threshold when we look at the short-term borrow-level of around 3.0% as per the Tarapore ings of the central government through Committee’s guidance. The infl ation TBs. The net increase in outstanding TBs rate is yet to be tamed to a comfort zone of all maturities was phenomenally high of below 5.0%. A higher fi scal defi cit and at nearly Rs 1 lakh crore during 2011-12, absence of commitment to fi scal consolitaking the total to Rs 3.52 lakh crore dation is already a dampener to the RBI Table 4: Gross Issuance of Auction Treasury Bills in turning the mone-

Year 91-day 182-day 364-day tary policy stance in
Notified Amount Cut-offYield Notified Amount Cut-off Yield NotifiedAmount Cut-off Yield favour of supporting
(Rs crore) (%) (Rs crore) (%) (Rs crore) (%) growth. High fi scal and
2000-01 5,200 8.97 2,600 9.43 15,000 9.71 current account defi cits
2001-02 2002-03 2003-04 12,100 21,000 34,500 6.88 5.71 4.62 300 -- 8.44 -- 19,500 26,000 27,000 7.30 5.93 4.66 together with uncomfortable infl ation levels
2004-05 98,000 4.90 - - 49,000 5.17 are a devilish combina
2005-06 80,000 5.43 27,500 5.40 42,000 5.87 tion and a recipe for

2006-07 98,000 6.70 37,000 6.93 50,000 7.06 inviting a crisis situa2007-08 1,24,500 7.12 45,000 7.43 55,000 7.51

tion. This dilemma is a

2008-09 2,09,000 6.73 40,000 7.29 50,000 7.17

challenge to both the

2009-10 2,96,500 3.54 42,500 4.00 41,000 4.53

RBI and the government.

2010-11 2,19,000 6.04 43,000 6.48 42,000 6.64

The silver lining is

2011-12 * 3,01,000 8.39 82,000 8.44 82,000 8.38 * - During 2011-12, Government of India issued Cash Mangement bills worth Rs 97,000 crore that foreign infl ows are in aggregate up to November 2011 for maturities ranging from 42 to 77 days at cut-off yield at a weighted average yield of 8.1%. -: not available strong and the equity Source: RBI.

market is poised for a from the level of around Rs 2.5 lakh crore turn around. Food inflation is on a to Rs 2.6 lakh crore in the previous three-downward path and the prospects for year period. The net accretion through revival of economic activity are good. short-term borrowings for the year 2012-

Table 5: Money Market Activity (Volume and Rates)

13 is pitched at a low of just Rs 9,000 crore

Overall, given all the attendant risks, significant monetary easing at this stage may not be desirable. The second-round impact of cash reserve ratio (CRR) cuts is yet to be felt in the system. It would be appropriate for the RBI to keep the policy rate at the existing level over the next (about) six months, watching, in particular, developments in the fi scal situation, the currency market, trade and balance of payments.

2 Money, Forex and Debt Markets

Financial market activity recouped during February on the back of optimistic global developments like recovery in the United States (US) economy and fi rmness in resolution over the euro debt crisis. However, a gloomy domestic GDP growth projection for 2011-12 and an inevitable fiscal slippage hampered domestic market confidence to a great extent despite corporates showing better performances for the third quarter. The easing of infl ation and encouraging industrial production numbers for January raised hopes for a reduction in the key policy rate, but spiking crude oil prices overseas dampened such expectation. In general, market participants remained cautious ahead of the policy review and the union budget scheduled for March. Foreign investors nevertheless sustained confi dence in the Indian markets.

Despite a 50 basis points (bps) cut in the CRR in the January 2012 policy review and the release of more than

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

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

Sep-2011 5 52,194

Oct-2011 6 50,708

Nov-2011 9,446 91,719

Dec-2011 33,687 1,12,599

Jan-2012 34,772 1,28,471

Feb-2012 20,590 1,33,547

Source: RBI’s Weekly Statistical Supplement.

Instruments February 2012 January 2012 against the revised estimate of Rs 1.16 Daily Average Monthly Range of Daily Average Monthly Range of

lakh crore in 2011-12. The budget esti- Volume (Rs Crore) Weighted Average Rate (%) Weighted Average Daily Rate (%) Volume (Rs Crore) Weighted Average Rate (%) Weighted Average Daily Rate (%)
mate is a serious suspect and even if this Call Money 10,321 8.90 8.45-9.15 14,049 8.89 8.37-9.28
is to happen, there is likely to be a spill Notice Money 3,121 8.79 7.50-9.20 3,856 8.96 7.60-9.48
over into medium to long-term borrow- Term Money@ 289 - 8.00-10.75 381 - 7.70-10.80
ings (Table 3, p 66 and Graph C, p 68). The increase in gross issuance of auction of TBs has resulted in the TB rates in the CBLO 32,392 8.41 Market Repo 11,698 8.56 @: Range of rates during the month. - : not available. Source: www.rbi.org.in. and www.ccilindia.com 7.09-8.69 8.31-8.65 29,588 9,639 8.55 8.66 7.56-8.90 8.30-8.87
Economic & Political Weekly march 31, 2012 vol xlviI no 13 67
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MONEY MARKET REVIEW

Graph C: Maturity Pattern of Central Government Securities

48 44 36 28 20

Between 5 and 10 years 12

4

Up to one year
Over ten years

One to four years

Years

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2011-12

eased by 17 bps over the month and the rates in collateralised instruments like collateralised borrowing and lending obligations (CBLO) and market repo also moved downwards during the same period.

Rs 100 billion in the (OMO) window starting November 2011, the liquidity situation in the system worsened further in February ahead of advance tax outfl ows scheduled for mid-March. This prompted the RBI to once again reduce the reserve requirements of banks by 75 bps effective 10 March 2012. In the aggregate the cuts in CRR released primary liquidity of the order of Rs 80,000 crore. The tightened liquidity conditions in the system were partly attributed to heavy market borrowings by the government. The budget for the year 2012-13 has pitched the net market borrowing further higher by around Rs 4.8 lakh crore. High government borrowing in the coming fi nancial year has been rightly commented upon by the RBI as of a tall order and a challenge to manage.

2.1 Money Market

Rampant liquidity shortage in the system and unpredictable monetary actions confused short-term money market activity in February. A severe cash crunch resulted in a sharp rise in overnight money market rates from the beginning of the month and weighted average one-day rates ruled above the 9% mark for a couple of days.

The daily trading activity in the overnight segment fell by 26% compared to the previous month. The daily traded turnover in the notice and term money segment declined by 19% and 24%, respectively during February over January. However, the weighted average rates ruling around the key policy repo rate of 8.50% prompted heightened trading volume in the CBLO and market repo segments dur

ing the month with both the products depicting respectively 10% and 21% more daily turnover (Table 5, p 67).

As per the latest available data from the RBI, the issuance of certifi cates of deposit (CDs) by scheduled commercial banks fell notably during the fortnight ending 13 January 2012 and amoun ted to Rs 11,240 crore. The outstanding amount reached Rs 3,74,890 crore during the same period showing a Rs 28,000 crore decline over the fortnight. CPs issued by corporates amounted to Rs 27,470 crore for the fortnight ending 15 January 2012 and the outstanding amount also declined by more than Rs 18,600 crore to Rs 1,52,830 crore for the same fortnight. The discount rates for CDs ranged between 9.25% and 10.10%, while for CPs, the rates ruled between 8.38% and 14.00% for the same review period.

According to the trading platform – Fixed Income Money Market and Derivatives Association (FIMMDA) – both CDs and CPs recorded a 22% and 20% jump in their daily trading activity during February over January. However, the CDs volume might thin out in the coming months as SEBI recently reduced the threshold for mark-to-market requirement on debt and money market securities of mutual funds from 91 days to 60 days.

Table 7: Foreign Exchange Market: Select Indicators

Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Index Rate (Last Friday Depreciation (-) (Equity+Debt) (Month-end (Month-end of the Month) of Rs/$ (in %) (in $ million) Closing) Closing)#

Sep-2011 48.93 -5.87 -1,866 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

Dec-2011 53.26 -2.05 4,195 15,455 73.33

Jan-2012 49.68 7.20 5,087 17,194 72.60

Feb-2012 49.07 1.26 7,164 17,753 72.14

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

Month Merchant Interbank Spot Forward Total

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)

Nov-2011 12.3 -(2.2) 41.0 (2.5) 26.6 -(0.3) 26.7 (3.1) 53.3 (1.4)

Dec-2011 11.2 -(8.4) 35.6 -(13.2) 22.8 -(14.2) 24.0 -(10.0) 46.8 -(12.1)

Jan-2012 9.9 -(11.9) 38.7 (8.6) 22.8 -(0.3) 25.8 (7.4) 48.6 (3.7)

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

However, call rates eased signifi cantly Date of Auction Nomenclature of Loan Notified Amount Bid-Cover Ratio Devolvement on YTM at Cut-off Cutt-off Price Primary Dealers Price (in %) (Rs)

from the second week of February on the

3-Feb-12 7.83% 2018 R 3,000 2.08 Nil 8.18 98.29back of relatively comfortable liquidity 8.79% 2021 R 7,000 1.54 Nil 8.15 104.20

in the system. There after the movements 8.83% 2041 R 3,000 2.04 Nil 8.55 103.00

in rates remained very wobbly with the system experiencing the worst ever funds shortage. Still, the rates eased notably towards the end of the month on the back of a notable fall in January infl ation figures. Overall, in a period of one

10-Feb-12 8.19% 2020 R 3,000 1.96 Nil 8.28 99.47

9.15% 2024 R 6,000 2.29 Nil 8.32 106.41

8.97% 2030 R 3,000 1.98 Nil 8.62 103.22

17-Feb-12 8.24% 2018 R 3,000 2.32 Nil 8.31 99.65

8.79% 2021 R 6,000 2.25 Nil 8.20 103.85

8.83% 2041 R 3,000 2.55 Nil 8.60 102.44

24-Feb-12 8.19% 2020 R 3,000 1.84 Nil 8.30 99.37

month, the call money rates hardened a 9.15% 2024 R 6,000 1.98 Nil 8.31 106.52

bit and averaged 8.90% for February. 8.97% 2030 R 3,000 2.54 Nil 8.59 103.51 Total for February 2012 49,000 2.08 Nil 8.33 103.20

Mixed signs of monetary easing kept

Total for January 2012 55,000 2.27 Nil 8.37 –

the remaining short-term money market

R: Re-issue. @ Coupon decided in the auction at the cut-off yield. rates more volatile. Notice money rates Source: RBI press releases.

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MONEY MARKET REVIEW

Mutual funds are the major investors in these instruments and the new norms may prevent them from participating in these markets.

Core liquidity signifi cantly remained under deficit mode, evident from the huge injection of funds by the RBI in its liquidity adjustment facility (LAF) repo window during February. The borrowed amount by banks remained above Rs 1.25 lakh crore in the first week. However, the situation got somewhat eased during the second week, but immediately turned to the earlier mode. In the second reporting fortnight, the situation got aggravated and bank borrowing averaged to Rs 1.4 lakh crore. Towards the end of the month, the liquidity situation of banks further worsened with RBI infusing more than Rs 1.8 lakh crore on a daily average basis. Besides, the central bank released funds worth Rs 20,590 crore through the OMO window during the month. Despite RBI’s intense efforts like cut in CRR and release of funds through OMO, pressure on the liquidity front remained throughout the month. Borrowers, however, did not take recourse to the marginal standing facility (MSF) during February. The cash crunch is expected to aggravate further in March owing to advance tax payments by corporates for the last quarter and the fi scal year end resource needs of banks (Table 6, p 67).

2.2 Forex Market

Rising hopes of global economic recovery and positive developments in the euro area kept the forex market sentiment positive. The investor appetite for riskier assets sustained conversely diminishing safe haven demand for the dollar. However, the bullish US jobs data supported the greenback. Overall weakness in the greenback against major global currencies was reflected in a 46 bps fall in the dollar index [Nominal Major Currencies Dollar Index (March 1973=100)] during a period of one month to 72.14 points as on 29 February.

The euro recuperated against most of the major currencies with easing worries over Greece after the approval of bailout funds. On the other hand, the Japanese yen has weakened sharply against the greenback by more than 5% in February owing to monetary easing in Japan. Strong investor risk appetite for emerging market assets supported Asian currencies too; a sharp increase in crude oil prices in the world market however restricted them from appreciating further. The broad recovery of Asian currencies was reflected in the J P Morgan Asian dollar index (is a spot index of emerging Asia’s most actively traded currency pairs valued against the dollar) rising by 50 bps over the month and ending at

117.65 points as on 29 February.

Propelled by a strengthening euro and other Asian currencies, the Indian rupee also advanced during the month. Portfolio capital inflow, which reached its highest monthly peak of this fi scal to a massive $7.16 billion in February, also buoyed markets. Still, subdued stock market activities and spiking crude oil prices limited rupee gains to some extent.

The rupee began the month on a very promising note and appreciated by more than 2% against the greenback in four

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

Descriptions February 2012 Previous Month Three Months Ago Six Months Ago
Last Week (24) First Week (3) Total for the Month (January 2012) (November 2011) (August 2011)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
1 Treasury Bills 5,343 2,826 17,780 27,473 13,548 15,476
A 91-Day Bills 3,644 8.94 1,621 8.69 9,462 8.84 10,206 8.50 5,258 8.69 10,429 8.17
B 182-Day Bills 140 8.93 280 8.61 763 8.81 5,962 8.49 3,680 8.80 2,514 8.32
C 364-Day Bills 1,559 8.43 924 8.48 7,555 8.53 11,305 8.12 4,610 8.72 2,533 8.28
2 GOI Dated Securities 42,145 8.26 1,21,726 8.26 3,08,879 8.26 4,54,527 8.33 1,88,411 8.92 2,87,935 8.31
Year of (No of
Maturity Securities)
2012 (2) 105 8.90 588 8.71 965 8.77 1,146 8.48 1516 8.76 783 8.58
2013 (1) 520 8.16 520 8.16 730 7.89 25 8.59 490 8.27
2014 (4) 1 8.21 105 8.06 186 8.10 230 8.66 212 8.23
2015 (2) 39 8.17 210 8.10 486 8.13 1,566 8.10 337 8.65 456 8.15
2016 (3) 245 8.26 416 8.20 1460 8.24 1,743 8.24 421 8.84 3,623 8.22
2017 (3) 75 8.32 405 8.20 687 8.23 3,626 8.28 2,202 8.87 2,535 8.25
2018 (4) 2,033 8.31 8,528 8.22 18,020 8.25 29,280 8.26 22,669 8.87 18,507 8.29
2019 (2) 10 8.29 17 8.29 39 8.37 50 8.93 0 8.30
2020 (2) 1,063 8.62 6,463 8.50 13,429 8.42 7,519 8.42 1,364 9.25 1,920 8.07
2021 (4) 24,898 8.19 52,673 8.18 1,48,850 8.19 1,91,675 8.25 1,04,712 8.89 1,85,767 8.87
2022 (2) 31 8.34 448 8.28 571 8.29 2,949 8.34 22,117 8.96 66,939 8.28
2024 (1) 11,163 8.30 46,887 8.30 1,11,538 8.30 1,92,833 8.39 27,914 9.01
2027 (3) 366 8.49 945 8.49 2,088 8.49 0 8.34 2,374 9.07 4,271
2028 (2) 0 8.54 1 8.62 5,220 8.58 1 9.27 4 8.56
2030 (1) 1,081 8.58 3,270 8.57 7,387 8.57 4 8.48
2032 (3) 92 8.53 270 8.52 436 8.52 8,124 8.54 1 9.17 1,120 8.38
2040 (1) 128 8.57 70 8.57 418 8.55 1,619 8.57 2,472 9.21 1,284
2041 (1) 305 8.58 544 8.55 1,895 8.56 2,694 8.57 8.64
3 State Govt Securities 1,478 8.74 879 8.61 4,364 8.67 4,659 8.69 2,337 9.15 2,328 8.57
Grand total (1 to 3) 48,967 1,25,431 3,31,022 4,86,660 2,04,295 3,05,738
(-) 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, 2034 to 2039 are negligible.
Source: Compiled by EPWRF; base data from RBI, CCIL.
Economic & Political Weekly march 31, 2012 vol xlviI no 13 69
EPW

MONEY MARKET REVIEW

straight trading days, propelled by substantial amount of foreign infl ows coming into domestic equity and debt markets. The situation suddenly turned adverse from 7 to 10 February and the domestic currency lost all its gains. From 13 February onwards, the rupee witnessed a see-saw movement as a sudden spurt in crude oil prices undermined the market outlook, but uninterrupted portfolio inflows lifted the confi dence. Except for some intermittent losses, the rupee gradually moved upwards and added 70 paise versus the dollar in 12 market days. Overall, in a period of one month, the Indian rupee fell below the psychological Rs 49 mark and appreciated by 1.5% against the greenback to end at Rs 48.94 per dollar on 29 February (Table 7, p 68).

The forward premia across tenures hardened substantially during February as uncertain currency movements and a miserable external outlook owing to a sudden spurt in crude oil prices generally made an adverse impact on premia. The near-month premia hardened considerably and touched nearly a fi ve-year high of 10.62% on 28 February. The premia ended the month at 10.18% on 29 February showing a 1.36 percentage point rise over the previous month-end. However, the three-month and sixmonth premia limited their hardening trend, tracking a steady rise in the rupee in February. Both the premia moved in tandem and hardened by 46 bps and 25 bps over the month and ended at 8.91% and 7.56%, respectively on 29 February.

In January 2012, the forex market daily turnover increased by 3.7% over the previous month. The inter-bank and forwards transactions led the rise and they reported an 8.6% and 7.4% improvement in turnover. However, merchant and spot dealings plummeted by 11.9% and 0.3% respectively during January compared to December (Table 8, p 68).

The currency derivatives market continued with its subdued trading behaviour, domestic exchanges reporting a 13% reduction in total turnover during February compared to the previous month. The aggregate daily average turnover also remained below Rs 30,000 crore. Segment-wise, futures turnover reported a 5% fall, while options trading recorded a 16% fall during the month. In the futures segment, USD-INR contracts garnered 96% of the market share as in earlier months. Turnover of the remaining products continued to be insignifi cant.

Among the exchanges trading in currency derivatives products, the National Stock Exchange (NSE) witnessed a 17% reduction in total trading but sustained its dominance with 57% market share, while the Multi-Commodity Exchange (MCX-SX) contributed 42% towards the total currency derivatives turnover.

However, United Stock Exchange (USE) managed to garner just 1% of overall turnover during the month.

2.3 Central Government Securities

Four issuances of central government securities were held in raising Rs 49,000 crore in the aggregate as compared to Rs 55,000 crore in January, completing more than 98% of the total government borrowing for the financial year 2011-12. Seven securities were issued in the month, five securities issued twice, namely, 8.19% 2020, 8.79% 2021, 8.83% 2041, 8.97% 2030 and 9.15% 2024. Overall, yield softened by 4 bps over the period to 8.33%, while the bid cover ratio also declined to 2.08 times (Table 9, p 68).

During the month, through three auctions the RBI purchased government securities worth Rs 30,517 crore. The turnover of central government securities had plunged by 32% over the month, at Rs 3,08,878 crore. Overall yield had eased by 7 bps to 8.26%, over the month. Trade in special securities like OIL MKT-NCO BOND was worth Rs 1,329 crore in February. The top five securities contributing to almost 96% of the total turnover were 8.79% 2021, 9.15% 2024, 7.83% 2018, 8.19% 2020 and 8.97% 2030. The highest turnover came from 8.79% 2021 worth Rs 1,47,521 crore followed by 9.15% 2024 with contribution of Rs 1,11,538 crore. The softened yield of 10-year

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

Descriptions February 2012 Previous Month Three Months Ago Six Months Ago

Last Week (24) First Week (3) Total for the Month (January 2012) (November 2011) (August 2011) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

GOI Dated Securities

  • 6.85 2012 5 8.85 177 8.73 236 8.74 691 8.44 846 8.81 265 8.30
  • 7.17 2015 39 8.17 210 8.10 486 8.13 1,265 8.10 287 8.64 438 8.22
  • 7.59 2016 201 8.25 416 8.20 1,379 8.24 1,135 8.22 406 8.84 3,588 8.25

  • 7.99 2017 55 8.33 340 8.20 575 8.23 3,214 8.29 1,573 8.89
  • 8.07 2017 65 8.21 72 8.21 359 8.22 626 8.82 2,348 8.28
  • 7.83 2018 1,440 8.29 8,527 8.22 17,245 8.24 29,270 8.26 22,663 8.87 18,502 8.30

  • 7.80 2021 10 8.31 777 8.26 1228 8.26 6,129 8.30 40,172 8.92 1,85,762 8.28
  • 8.79 2021 24,878 8.19 51,896 8.18 1,47,521 8.19 1,85,454 8.25 64,540 8.87
  • 8.08 2022 30 8.34 78 8.27 152 8.30 1,465 8.33 4,214 8.97 26,559 8.38

  • 8.13 2022 1 8.34 370 8.29 419 8.29 1,249 8.33 17,903 8.96 40,380 8.37
  • 9.15 2024 11,163 8.30 46,887 8.30 1,11,538 8.30 1,92,833 8.39 27,912 9.01
  • 8.26 2027 201 8.49 28 8.46 486 8.48 498 8.48 643 9.04 897 8.60

    8.28 2027 162 8.50 916 8.49 1,590 8.50 4,704 8.58 1,692 9.09 3,363 8.55

    8.97 2030 1,081 8.58 3,270 8.57 7,387 8.57 8,124 8.54

    8.28 2032 80 8.52 270 8.52 424 8.52 3,530 8.55 1 9.17 1,119 8.58

    8.30 2040 128 8.57 70 8.57 418 8.55 1,619 8.57 2,472 9.22 1,284 8.64

    8.83 2041 305 8.58 544 8.55 1,895 8.56 2,694 8.57

    Total (All Securities) 42,145 8.26 1,21,726 8.26 3,08,879 8.26 4,54,527 8.33 1,88,411 8.92 2,87,935 8.31

    (-) 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.

    march 31, 2012 vol xlviI no 13

    MONEY MARKET REVIEW

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

    Yield February 2012 Previous Three Six Months Spread in bps Last Week First Week Entire Month Month Months Ago Ago

    1 Year-5 Year 16 - 7 39 28 -2
    5 Year-10 Year 2 8 6 6 9 3
    10 Year-15 Year 15 21 20 0 11 -
    1 Year-10 Year 18 - 13 45 37 15

    Source: As in Table 10.

    Table 13: Details of State Government Borrowings (Amount in Rs crore)

    Date of Auction Number of Total Bid-Cover YTM at Weighted
    Participating Amount Ratio Cut-Off Average
    States Accepted Price (%) Yield (%)

    07-Feb-12 7 6,410 1.60 8.70 8.67

    21-Feb-12 9 8,678 1.32 8.77 8.73

    Total for February 2012 16 15,088 1.44 8.74 8.71

    Total for January 2012 22 20,128 1.83 8.67 8.64

    Source: RBI press releases. Table 14: Auctions of Treasury Bills (Amount in Rs crore)

    Date of Auction Bids Bid-Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs)

    A: 91-Day Treasury Bills 01-Feb-12 9,000 1.97 8.81 8.77 97.85 97.86

    08-Feb-12 9,000 1.83 8.90 8.86 97.83 97.84

    15-Feb-12 9,000 2.18 8.94 8.90 97.82 97.83

    22-Feb-12 9,000 1.89 9.02 8.98 97.80 97.81

    29-Feb-12 8,000 2.15 9.06 9.06 97.79 97.79

    Total for Feb 2012 44,000 2.00 8.94 8.91 97.82 97.83

    Total for Jan 2012 24,000 2.25 8.61 8.57 97.90 97.91

    B: 182-Day Treasury Bills 01-Feb-12 4,000 2.35 8.66 8.62 95.86 95.88

    15-Feb-12 4,000 3.19 8.66 8.64 95.86 95.87

    29-Feb-12 4,000 2.57 8.75 8.73 95.82 95.83

    Total for Feb 2012 12,000 2.70 8.69 8.66 95.85 95.86

    Total for Jan 2012 8,000 2.80 8.49 8.42 95.94 95.97

    C: 364-Day Treasury Bills 08-Feb-12 4,000 3.95 8.51 8.49 92.18 92.19

    22-Feb-12 4,000 4.91 8.51 8.49 92.18 92.19

    Total for Feb 2012 8,000 4.43 8.51 8.49 92.18 92.19

    Total for Jan 012 8,000 2.65 8.34 8.27 92.33 92.39

    Source: RBI’s press releases.

    Table 15: Details of Private Placement in Corporate Bonds on NSE

    Institutional Category No of Volume in Range of Range of Maturity
    Issues Rs Crore Coupon Rates in Years (y) and
    (in %) Months (m)
    Banks/FIs 26 9,779 9.00-11.50 1 to 10
    Central undertakings 2 3,021 9.28-9.33 5
    Corporates 11 2,838 11.25-11.60 1 to 9
    NBFCs 30 5,693 9.43-10.35 1 to 7
    Total for February 2012 69 21,332 9.00-11.60 1 to 10
    Total for January 2012 23 9,999 9.00-9.83 1 to 1

    Source: www.nseindia.com.

    maturities over the month from 8.25% to 8.19% as compared to the fi ve-year maturities took the spread of 10-year maturities over fi ve-year maturities into a negative zone at -4 bps and the spread of 10-year maturities over one-year maturity was 3 bps in February (Table 10, p 69, Table 11, p 70 and Table 12).

    Two issuances of state loans held on 7 and 21 February mopped up Rs 6,410 crore and Rs 8,678 crore, respectively. Overall, cut-off and weighted average

    Economic & Political Weekly

    EPW
    march 31, 2012

    yields moved up to 8.74% and 8.71%, respectively over the month. Both yields firmed in the second auction over the fi rst auction. The bid cover ratio declined to 1.44 times from 1.83 times in the previous month. Twelve state governments participated in these auctions, while Karnataka, Kerala, Punjab and Tamil Nadu approached the market twice. From the second auction, Tamil Nadu and Maharashtra have raised Rs 300 crore and Rs 500 crore, over and above their respective notified amount (Table 13).

    In the secondary market, aggregate turnover during the month was Rs 4,364 crore, falling by Rs 295 crore from January. Overall, yield declined to 8.67% from 8.69% over the period. State loans of Tamil Nadu worth Rs 727 crore were traded the most in the month followed by Maharashtra worth Rs 620 crore and West Bengal Rs 461 crore.

    5 Treasury Bills

    Five issuances of TBs were conducted in February, when 91-day, 182-day and 364-day TBs mopped funds worth Rs 44,000 crore, Rs 12,000 crore and Rs 8,000 crore, respectively. Issuance of 91-day

    and 182-day TBs was higher by 83% and 50%, respectively over the period. Better bid cover was realised by 364-day TBs at

    4.43 times, which declined for the rest of the two maturities. Cut-off and weighted yields firmed up across maturities. For 91-day TBs cut-off and weighted yields jumped over successive auctions during the month. The same was the case for 182-day maturity, but for 364-day TBs, both yields remained unchanged (Table 14).

    vol xlviI no 13

    In the secondary market, total turnover fell by 35% to Rs 17,780 crore during the month. Yield rates across maturities moved up. For 91-day bills, yield fi rmed up by 34 bps to 8.84%; for 182-day bills it strengthened by 32 bps to 8.81% and in the case of 364-day bills it inched up the highest by 41 bps to 8.53%. Total traded volume of 91-day bills was the highest, worth Rs 9,462 crore followed by 364day TBs worth Rs 7,555 crore.

    6 Corporate Bonds Market

    A whopping increase in private placements on NSE was seen during the month at Rs 21,332 crore from Rs 9,999 crore in January. Banks and fi nancial institutions raised the highest amount worth Rs 9,779 crore, through 26 issues offering coupons in the range of 9%-11.50%. Non-Bank Financial Companies (NBFCs) garnered Rs 5,693 crore by 30 issues paying coupons in the range of 9.43% to 10.35%. The highest coupon was offered by corporates in the range of 11.25%11.60% for raising Rs 2,838 crore. Central Undertakings, Rural Electrifi cation Corporation and Power Finance Corporation also approached market by the way of private placement issues raising Rs 3,021 crore and offered the lowest coupon range of 9.28% and 9.33%. Overall, coupon rates firmed up in February at 9% to 11.60% from 9% to 9.83% in January. During the month, out of a total 69 issues as many as 28 issues were of zero coupon bonds by all issuers except central government undertakings (Table 15).

    Two public issues by Indian Railway Finance Corporation and Housing and Urban Development Corporation closed in the first half of February, after raising Rs 6,300 crore and Rs 4,685 crore, respectively against their base issue sizes of Rs 3,000 crore and Rs 2,000 crore, respectively.

    Turnover of corporate bonds in the secondary market has increased by about 32% to Rs 67,909 crore from Rs 51,494 crore during the month. Turnover increased across trading platforms while the highest turnover was recorded by FIMMDA, worth Rs 33,696 crore, followed by NSE reporting a turnover of Rs 29,367 crore in February.

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    march 31, 2012 vol xlviI no 13

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