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Infl ation Traded In

The Reserve Bank of India's monetary policy for 2012-13 has had to be framed at a time when the economy is facing multiple risks - infl ation at an elevated level, a deterioration in the external sector and fi scal laxity. The RBI's aggression in cutting the repo rate by 50 bps is therefore inexplicable. The posture taken by the RBI is fraught with the risk of fuelling infl ation rather than propelling growth, meeting government borrowing at a lower cost rather than providing a fi llip to investment demand and of exacerbating the weaknesses surfacing in the external sector.

MONEY MARKET REVIEW

Inflation Traded In
It is argued here that the policy posture taken by the RBI is fraught with the risk of fuelling inflation rather than propelling growth, meeting the gov-EPW Research Foundation ernment borrowing at a lower cost

The Reserve Bank of India’s monetary policy for 2012-13 has had to be framed at a time when the economy is facing multiple risks – inflation at an elevated level, a deterioration in the external sector and fi scal laxity. The RBI’s aggression in cutting the repo rate by 50 bps is therefore inexplicable. The posture taken by the RBI is fraught with the risk of fuelling inflation rather than propelling growth, meeting government borrowing at a lower cost rather than providing a fi llip to investment demand and of exacerbating the weaknesses surfacing in the external sector.

The EPWRF team led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, V P Prasanth, R Krishnaswamy, Shruti J Pandey, Pallavi Oak and Sharan P Shetty.

Economic & Political Weekly

EPW
april 28, 2012

1 Introduction

T
he monetary policy statement by Reserve Bank of India (RBI) Governor Duvvuri Subbarao for 2012-13 assumes critical significance at this juncture for two reasons. First, it sets the tone of policy for 2012-13 as a whole and will generate expectations that would be difficult to reverse in the short run. Second, the policy has been announced at a time that the Indian economy is facing multiple downside risks, namely, persistent and sticky inflation at an elevated level, a weakening external sector in terms of a widening of the current account defi cit, a depreciating currency and declining reserves position, and fiscal laxity posing the challenge of managing a huge additional borrowing programme.

There seems to be no reason to become complacent about any of the downside risks. The extremely dovish action of cutting the repo rate by 50 basis points (bps) has no doubt pleasantly surprised the market as much as the earlier cumulative cuts in cash reserve ratio (CRR) by 125 bps. The stock market responded favourably immediately after the announcement. Trades in benchmark government securities have shown an easing of rates by above 10-15 bps. This would generate expectations about further rate cuts though the forward guidance indicates that the scope for any more easing of policy rate is limited.

Combining the intensity of CRR cuts and the repo rate cut within a short span of about four months ever since a pause to tightening stance was announced, the stand taken by the RBI should be now termed as no less than an “aggressive easing” of policy. The hawkish posture reflected in the macroeconomic review released a day earlier and also in the assessments of downside risks in the policy statement make the nose-diving and dovish policy action on the repo inexplicable.

vol xlviI no 17

than providing a fillip to credit growth and investment demand and exacerbating the weaknesses surfacing in the external sector.

1.1 The Infl ation Illusion

The real gross domestic product (GDP) growth projection is 7.3% for 2012-13, that is in alignment with the post-crisis trend growth. The post-crisis period was characterised by a very tight stance of monetary policy. If a growth rate of around 7% was sustained in that tight environment, then with an aggressive easing of policy, one should expect the growth to be at least equivalent to the budgetary projection of 7.6%. With infl ation expected to remain sticky around the current levels, then the policy action seems to only trading in inflation for a very modest pickup in growth.

The official wholesale price infl ation data for every month come in the guise of provisional numbers, followed by revised numbers after a lag of about two months, For instance, as of April, only provisional inflation numbers are available for February and March 2012, which stood respectively at 6.95% and 6.89%. This gives an impression that not only has the inflation rate followed a declining trend, but it has also ruled below the psychological level of 7% at the end of the fiscal year. But an examination of the track record of the provisional and actual numbers would reveal that the provisional inflation data have consistently created an illusion of infl ation being milder than what it actually is. This illusion persists over time, since not much publicity is given to these changes, and people focus on current numbers however inaccurate it may be in the light of revised lagged data. While this illusion is not as off the mark as it was in the case of industrial production numbers, the trend shows clearly that there is a consistent downward bias in provisional infl ation numbers.

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Table 1 and Graph A illustrates the 6.5% portending a 50 Graph A: Inflation (Y-o-Y): Actual and Provisional (%)

final (actual) and provisional annual inflation estimates during August-January 2011-12 for which period the comparative figures are available based on the new series (base year 2004-05). If the deviation of the provisional from the actual numbers is purely due to a statistical discrepancy, the normal expectation is that these errors or differences would be randomly and normally distributed with an average of around zero. But this was not the case. The provisional numbers had a downward bias on an average by 23 bps and for the latest period of November 2011 to January 2012 the bias had widened to a range of 27 to 35 bps. Therefore, there is a high probability to believe that the yearend inflation for 2011-12 is not below 7.0%, but is around 7.2% which would become evident only after two months.

The RBI in its recently released monetary policy has projected wholesale price index (WPI) inflation for March 2013 at

Table 1: Y-o-Y Inflation: Actual and Provisional (%)

(Provisional (Actual over Difference over Actual) Actual) (Percentage Points)

Aug-11 9.78 9.78 0
Sep-11 9.72 10 0.28
Oct-11 9.73 9.87 0.14
Nov-11Dec-11Jan-12Feb-12Mar-12 9.11 7.47 6.55 6.95 6.89 9.46 7.74 6.89 0.35 0.27 0.34

Provisional data for 2004-05 (base year) series is available only from August 2010. Source: Compiled by EPWRF.

of an increase in services and other indirect taxes, highly volatile global crude prices and the overhang of suppressed oil infl ation make the projection appear a bit ambitious. The RBI itself has admitted to the sticky nature of inflation at current levels.

1.2 Investments Likely to Crowd Out Bank Credit

As has been acknowledged, there has been a shift in the composition of bank assets from credit to statutory liquidity ratio (SLR) investments. The CRR cuts thus far seemed to have helped the conduct of government borrowing programme rather than increasing the supply of credit. Table 2 shows that between April 2011 and March 2012, banks invested in SLR securities to the extent of 33.8% of incremental deposits. The incremental credit flow also accounted for as much as 96.2% of an increase in aggregate deposits. The incremental credit and investment deposit ratio worked out to a very high 126.8%. This indicates that obviously the incremental investments and credit by banks were

Table 2: Projected Bank Credit and Investments (Amount in Rs crore)

11

bps reduction over a year-end infl ation of

10

7% for March 2012. However, the down-9 side risks such as the 8 current upward pressure on food and min-7 eral prices, the impact 6 met out of borrowed funds, in particular from the RBI through its Liquidity Adjustment Facility (LAF) which was rather passively operated practically without any prudential limit whatsoever.

Provisional over actual Actual over actual

8/2011 9/2011 10/2011 11/2011 12/2011 1/2012 2/2012 3/2012

A tentative projection of an incremental basis, based upon the assumptions of the RBI on deposit and credit growth and investment in SLR in the same proportion as in 2011-12, and with no net investment in non-SLR assets, the incremental credit and investment to deposit ratio would work out to 117.8% for 2012-13. This may not be technically feasible without a continued open LAF window supplemented by open market purchases, to support credit and investment growth. A continued and passive accommodation of the banking system under LAF at a lower cost is fraught with the risk of expanding liquidity beyond reasonable limits with attendant risks of adding to infl ationary pressures.

With lower interest rates, deposit accretion might further slow down. Banks would prefer to invest in government securities in an environment of

Bank Credit Aggregate Deposit Investments (SLR) Non -SLR Total Bank Credit + southward moving interest rates for Total Investments

trading profits. With tightening of provi-

Outstanding Amount 2010-11 39,42,083 52,07,969 15,01,619 1,93,660 56,37,362sioning requirements, including capital

2011-12 46,11,630 59,03,660 17,36,640 1,71,520 65,19,790 and liquidity requirements under Basel

Incremental over 2010-11 6,69,547 6,95,691 2,35,021 -22,140 8,82,428III coming into effect shortly, banks

(96.2) (33.8) (126.8)

would be further encouraged to build up

2012-13* 54,04,830 68,48,246 19,16,000 -73,20,830

risk-free assets in the form of a govern-

Incremental over 2011-12 7,93,200 9,44,586 3,19,270 -11,12,470

(84.0) (33.8) (117.8) ment securities portfolio. The worsening

Figures in brackets are percentage to aggregate deposits. SLR: Statutory Liquidity Ratio.

non-performing credit portfolio would

* Projected by EPWRF.

strengthen this tendency.

Table 3: Money Market Activity (Volume and Rates)

Instruments March 2012 February 2012 Daily Average Monthly Range of Daily Average Monthly Range of 1.3 Complacency about External Volume Weighted Weighted Average Volume Weighted Average Weighted Average

Sector Vulnerability

(Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)

Call Money 14,429 9.05 8.34-11.77 10,321 8.90 8.45-9.15 As the RBI governor has mentioned,

Notice Money 3,549 9.52 7.92-13.14 3,121 8.79 7.50-9.20 today’s situation is no doubt different Term Money @ 300 -8.40-13.50 289 -8.00-10.75

from the 1991 crisis period and the coun-

CBLO 38,557 8.51 7.05-12.04 32,392 8.41 7.09-8.69

try is much more resilient. But it does not

Market Repo 11,493 8.71 7.00-10.98 11,698 8.56 8.31-8.65

dilute the real gravity of the situation.

@: Range of rates during the month. - : not available. Source: www.rbi.org.in. and www.ccilindia.com Graph B (p 111) juxtaposes the trends in

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MONEY MARKET REVIEW

the current account defi cit, infl ation rate and the fi scal deficit of the central government during 1986-87 to 1992-93 and during 2006-07 to 2012-13. The similarity of the situation and the build-up of vulnerability is rather striking. In some respect, the current situation seems to be slightly worse. The improvement in some indicators around 1991 was due to the International Monetary Fund (IMF) loan. How resilient India will be in the current situation to overcome adverse trends, only time will tell.

1.4 In Sum

Overall, given the downside risks, and the kind of bullish expectations an aggressive easing of policy stature is likely to create in financial markets, a rate cut of 50 bps at this juncture does appear premature.

2 Money, Forex and Debt Markets

The last month of the fi nancial year 2011-12 proved to be rather stiff one for financial markets after they recouped in February on the back of optimistic global developments. March began with a sudden spurt in oil prices overseas hurting domestic market sentiments and exerting inflationary pressures. However, encouraging industrial production numbers for January at 6.8% (which have since proved to be a false signal later after they were revised to a shocking 1.1%) raised hopes for renewal in investment growth. The surprising 75 bps cut in CRR encouraged market participants to hope for more softening measures from the RBI. Still, dismal advance tax payments by corporates for the last quarter of 2011-12 once again underpinned market sentiments. In the second half of the month, the budget announcement did not change the cynical outlook about the domestic economic prospects. Moreover, the proposed General Anti-Avoidance Rule (GAAR) in the budget alarmed foreign investors and they began to unwind their exposures in the Indian market fearing tax liability for capital gains.

Overall, the system faced a liquidity outflow of around Rs 94,000 crore in March. Bank credit expanded by around Rs 3 lakh crore while an increase in the same amount of aggregate deposits during

Economic & Political Weekly

EPW
april 28, 2012

March adequately leveraged Graph B: External Vulnerability – Illustrated

4.70

the situation. However, RBI credit to government and 4.20 central government is cash balances with RBI caused an 3.20 outflow of Rs 48,000 crore each during the month. In 2.20 addition, the government’s market borrowing continued

1.20

in the last month of the fi scal and absorbed Rs 26,000

crore while banker’s depos-0.20

14

its with the RBI took out

13

Rs 33,650 crore. However, inflows through net for-11 eign assets by more than Rs 56,000 crore relieved 9 the system to some extent.

7

2.1 Money Market

5

Despite a 125 bps cut in CRR in two tranches in 2012, the 3 liquidity situation in the

1

system remained tight owing

to advance tax outfl ows in 9 mid-March. The situation

8

worsened further with the fiscal year approaching a 7 close. Widespread liquidity 6 shortage in the system put

5

a huge burden on shortterm money market rates 4 in March and overnight 3 money market rates moved

2

upwards from the beginning of the month and weighted average one-day rates stayed above the repo rate of 8.50%. Towards the end of March, call rates hardened signifi cantly and crossed 9% levels and touched their high of 11.77% on 30 March. During March, the weighted average call money rates hardened by 15 bps to 9.05% compared to the previous month.

Similarly, the notice money market displayed a sharp rise in its daily rates and the weighted average rates increased by a substantial 72 bps to 9.52% in a period of one month. Renewed uncertainty over monetary easing and crucial liquidity stress kept the rates in collateralised instruments like collateralised borrowing and lending obligations (CBLOs) and market repo more volatile and they ruled in an upper range during the same period. Weighted average daily rates of CBLO

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December 11 Current account deficit (%) 1986-87 to 1992-93 2006-07 to 2012-13
WPI inflation (%) RBI’s projection 2012-13 1986-87 to 1992-93 2006-07 to 2012-13
2006-07 to 2012-13 Fiscal deficit (%)

1986-87 to 1992-93Budget 2012-13

and market repo increased by 10 bps and 14 bps, respectively, over the review period.

Following heightened dependence over short-term money market instruments in March, the daily trading activity in the overnight segment galloped 40% compared to the previous month. The daily traded turnover in notice and the termmoney segment also increased by 14% and 4%, respectively during March over February. The volumes in the CBLO market also increased by 19% over the period while, owing to a sharp rise in the weighted average rates, the market repo segments showed a marginal decline in its daily turnover (Table 3, p 110).

As per the latest available data from the RBI, the issuance of certificates of deposit (CDs) by scheduled commercial banks increased during the fortnight ending 24 February 2012 and amounted to

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Rs 38,800 crore. The outstanding amount crossed Rs 4 lakh crore in February after a span of three fortnights. However, CPs issued by corporates amounted to Rs 31,420 crore for the fortnight ending 15 February 2012 but the outstanding amount declined by more than Rs 44,000 crore to Rs 1.05 lakh crore for the same fortnight. The discount rates for CDs ranged between 9.30% and 10.65% while CPs rates ruled between 7.15% and 12.30% in the respective review periods.

According to the trading platform – Fixed Income Money Market and Derivatives Association (FIMMDA) – CDs recorded a twofold rise in the average daily traded volume during March over February. However, the daily trading activity in CPs declined 27% during the same review period.

The passive approach of the RBI to inject funds through its LAF repo window resulted in banks borrowing more than Rs 1.55 lakh crore on a daily average basis in March. The RBI injected the highest ever Rs 2.02 lakh crore on 30 March. In addition, it conducted additional repo on 30 and 31 March. Furthermore, RBI continued with its purchase of securities in its OMO window and released Rs 35,600 crore in March. Despite all this, borrowers also availed

Table 4: RBI’s Market Operations (Amount in Rs crore)

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

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 20,690 1,33,547
Mar-2012 35,600 1,55,162

Source: RBI’s Weekly Statistical Supplement.

of the marginal standing facility (MSF) during several days in March and borrowed more than Rs 24,000 crore in aggregate (Table 4).

2.2 Forex Market

The United Sates (US) dollar strengthened against most currencies from the beginning of March as rising US Treasury yields backed by signs of a strengthening economy enhanced its safe haven appeal. Following an overall recovery in the US currency, the US dollar index [Nominal Major Currencies Dollar Index (March 1973=100)] improved by 60 bps during the month and ended at 72.74 points on 30 March.

Despite Fitch downgrading the outlook of UK’s sovereign rating to negative, the pound sterling advanced by 1.4% against the dollar while, rising hopes of recovery in the euro area kept the euro positive versus dollar. Asian currencies exhibited mixed performances, while most of them depreciated against the dollar, hurt by rising crude oil prices. This was also reflected in the 67 bps fall in the JP Morgan Asian dollar index (a spot index of emerging Asia’s most actively traded currency pairs valued against the US dollar) in March (Table 5).

On the domestic front, market participants welcomed the liquidity-boosting 75-bps CRR cut. The focus on the infl ation data, especially after the recent spikes in global crude oil prices, prompted the central bank to withhold key policy rate cuts in March. Budget 2012-13, keenly awaited by local and foreign investors alike, which was announced on 16 March also had some adverse impact as the finance minister proposed GAAR which dampened the senti

account deficit has also gone up on the back of higher oil prices this fi scal year. These twin deficits, combined with high inflation, have drastically affected investors’ appetite for Indian assets, especially equities. Thus, domestic equity markets turned bearish and the BSE Sensex lost 348 points in one month. Following all these negative developments, the Indian rupee depreciated by a harsh 4% against the US dollar during March over February.

The rupee-dollar exchange rate began the month on a very negative note hurt with rising crude oil prices hovering above $125 per barrel. Fearing a tardy growth of the Indian economy on the back of a massive setback to the Congress Party in crucial state elections, the rupee depreciated continuously for five days in a row showing a 3.27% fall and slid below Rs 50.57 versus the dollar on 7 March. Persistent dollar demand from oil importers coupled with weak local share market also weighed on the rupee. Thereafter, the local currency suddenly bounced back from 9 March, propelled by

Table 5: Foreign Exchange Market: Select Indicators

ments of portfolio inves-

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

record funds in past

Oct-2011 48.82 0.21 634 17,705 70.52 three months, the over-Nov-2011 52.17 -6.41 -586 16,123 72.37

seas investors turned Dec-2011 53.26 -2.05 4,195 15,455 73.33

cautious in Indian equity Jan-2012 49.68 7.20 5,087 17,194 72.60

and debt markets and Feb-2012 49.07 1.26 7,164 17,753 72.14

Mar-2012 51.16 -4.09 387 17,404 72.74

invested just $387 mil

#: Nominal Major Currencies Dollar Index.

lion in March, compared

Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov.

to $7,164 million invested

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

in February. Investors

Month Merchant Interbank Spot Forward Total

have also been worried

Sep-2011 15.1 -(11.2) 44.8 -(3.8) 29.6 -(2.3) 30.3 -(9.0) 59.8 -(5.8)

about the loss of the

Oct-2011 12.6 -(16.7) 40.0 -(10.6) 26.7 -(9.8) 25.9 -(14.4) 52.6 -(12.1) growth momentum as Nov-2011 12.3 -(2.2) 41.0 (2.5) 26.6 -(0.3) 26.7 (3.07) 53.3 (1.4)

well, with the investment Dec-2011 11.2 -(8.4) 35.6 -(13.2) 22.8 -(14.2) 24.0 -(10.0) 46.8 -(12.1)

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

to policy uncertainty Feb-2012 11.1 (12.5) 41.3 (6.8) 25.8 (13.4) 26.6 (3.1) 52.4 (7.9) *: Includes trading in FCY/INR and FCY/FCY.

and a widening fi scal

Figures in brackets are percentage change over the previous month. deficit. The current Source: RBI’s Weekly Statistical Supplement, various issues.

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

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)

09-Mar-12 8.24% 2018 R 3,000 2.29 nil 8.34 99.51

8.79% 2021 R 6,000 1.86 nil 8.27 103.42

8.83% 2041 R 3,000 2.68 nil 8.62 102.22

Total for March 2012 12,000 2.17 nil 8.37 102.14

Total for February 2012 49,000 2.08 nil 8.33 103.2

R: Reissue. Source: RBI press releases.

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RBI’s liquidity boosting 75 bps CRR cut and the release of better than expected IIP data for January. However, the euphoria in the forex market was shortlived as the rupee once again took the depreciating counter from 14 March as importers’ demand for the greenback exerted additional pressure. After the budget on 16 March, the domestic rupee recovered by 19 paise, but sharply reversed its gains and depreciated continuously until 30 March, except on 27 March. The proposed GAAR issue by the finance minister in the budget had an effect on portfolio investors’ sentiments and the rupee shed more than 100 paise against the dollar from 20 March onwards. The market ignored the eased norms and some tax concessions to access foreign capital through external commercial borrowings (ECBs) and ended at Rs 51.16 per dollar as on 30 March showing a 4.39% depreciation over February.

Following a sharp rise in crude oil prices and the widening current account and fi scal deficits, the forward premia across three tenures hardened substantially during the beginning of March. The grim external outlook had an adverse impact on premia and the near-month premia spiked to the highest 11.69% on 26 March. However, the one-month premia eased towards the end of the month and ended at 8.68% on 30 March showing a 1.5 percentage point fall over 29 February. Similarly, the three-month and six-month premia also hardened from the beginning of the month, tracking the steady fall in the rupee but softened significantly towards the end. Both the tenures moved in tandem and eased by 125 and 76 bps and ended at 8.91% and 7.56%, respectively on 30 March.

The uncertainty in the forex market prompted a hgher turnover during February. The daily trading in different segments of the forex market improved by 8% in February compared to the previous month. The highest rise in turnover was reported by merchant and spot markets while inter-bank and forward transactions also recorded 6.8% and 3.1% improvements in turnover over the period (Table 6, p 112).

The revival in trading activity was observed in the currency derivatives market during March, following uncertainty prevailing on the external front. The movement in the rupee against other currencies also influenced a volatility in the forex market. The domestic exchanges reported a 15% rise in their aggregate turnover over one month while the aggregate daily average turnover crossed Rs 30,000 crore during March. Segment-wise, futures turnover increased by 15% while, options trading improved by 6% during the month on daily average terms. USD-INR contracts continued

Table 8: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)
Descriptions March 2012 Previous Month Three Months Ago Six Months Ago
Last Week (30) First Week (2) Total for the Month (February 2012) (December 2011) (September 2011)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
1 Treasury Bills 14,047 10,730 40,438 17,780 35,227 27,761
A 91-Day Bills 4,290 8.99 5,487 9.02 21,206 8.94 9,462 8.84 13,588 8.54 21,065 8.31
B 182-Day Bills 2,937 8.90 3,128 8.78 7,731 8.81 763 8.81 9,918 8.51 2,787 8.35
C 364-Day Bills 6,820 8.59 2,115 8.74 11,501 8.64 7,555 8.53 11,721 8.41 3,909 8.348
2 GOI Dated Securities 43,655 8.60 18,168 8.27 1,51,957 8.44 3,08,879 8.26 4,42,147 8.58 2,45,522 8.35
Year of (No of
Maturity Securities)
2012 (4) 1,739 9.77 186 9.09 3,788 9.46 965 8.77 3,805 8.62 1,003 8.32
2013 (2) 70 8.07 136 8.09 520 8.16 80 8.37 822 8.27
2014 (8) 5 8.24 200 8.08 850 8.16 105 8.06 265 8.23 266 8.26
2015 (6) 264 8.34 65 8.23 471 8.30 486 8.13 984 8.44 1,067 8.32
2016 (3) 291 8.61 241 8.32 990 8.42 1,460 8.24 976 8.42 997 8.33
2017 (4) 401 8.60 22 8.32 1,963 8.43 687 8.23 2,304 8.51 5,405 8.33
2018 (5) 2,101 8.58 938 8.35 7,534 8.47 18,020 8.25 41,070 8.47 12,051 8.34
2019 (2) 6 8.72 0 8.43 7 8.67 17 8.29 130 8.46 25 8.34
2020 (4) 1,519 8.69 50 8.29 4,140 8.66 13,429 8.42 7,805 9.59 1,590 8.97
2021 (4) 29,865 8.54 9,813 8.21 1,02,738 8.39 1,48,850 8.19 1,99,127 8.50 1,74,377 8.32
2022 (3) 159 8.58 57 8.37 1,120 8.44 571 8.29 9,490 8.55 42,386 8.41
2023 (2) 1 8.58 2 8.51 0 8.41 1 8.65
2024 (1) 5,714 8.56 5,818 8.30 22,486 8.39 1,11,538 8.30 1,52,133 8.63
2027 (3) 378 8.63 71 8.51 885 8.57 2,088 8.49 3,938 8.86 4,218 8.57
2028 (2) 0 8.60 17 8.60 1 8.62 1 8.51
2030 (1) 730 8.71 398 8.59 2,028 8.64 7,387 8.57 11,096 8.75
2032 (2) 7 8.55 21 8.48 79 8.55 436 8.52 113 8.65 231 8.58
2034 (1) 1 8.15 3 8.57 6 8.45 1 8.55 2 8.49 4 8.51
2035 (1) 2 8.57 2 8.57 0 8.46 2 8.92
2040 (1) 93 8.67 166 8.57 690 8.60 418 8.55 4,514 8.94 1,076 8.63
2041 (1) 311 8.69 113 8.59 1,988 8.63 1,895 8.56 4,315 8.74
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 2026, 2036 to 2039 are negligible.
Source: Compiled by EPWRF; base data from RBI and CCIL.
Economic & Political Weekly april 28, 2012 vol xlviI no 17 113
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their dominance in the futures segment and garnered 96% of the market share as in earlier months. The turnover in other three products remained negligible.

Among the exchanges trading in currency derivatives products, the National Stock Exchange (NSE) witnessed similar trading activity as recorded in the previous month but sustained its dominance with a 53% market share. However, the Multi-Commodity Exchange (MCX-SX) reported a 20% jump in its trading and contributed 46% towards the total currency derivatives turnover, influenced by the recent Bombay High Court judgment favouring MCX-SX over SEBI relating to the equity trading issue. The United Stock Exchange (USE) also reflected revival in trading and reported a 29% increase in turnover but managed to garner just 1% of market share during March.

2.3 Central Government Securities

The borrowing programme for the new financial year began on 3 April with devolvement for two securities out of four set for a Rs 18,000 crore auction. OMO auctions were conducted twice, on 2 March and 9 March, purchasing government securities worth Rs 10,776 crore and Rs 11,554 crore, respectively. With completion of the borrowing programme, no further OMO was anticipated. But, ahead of tight liquidity conditions the RBI conducted one more OMO auction on 30 March purchasing securities worth Rs 4,528 crore though the aggregate ceiling was worth Rs 10,000 crore. Prevalent tight liquidity conditions however pushed cut-off yields up in each segment of the primary market, viz, central government securities, State Development Loans (SDLs) and TBs.

In March, the one and the last auction for 2011-12 was scheduled on April 9, reissuing three securities, namely, the 8.24% 2018, 8.79% 2021 – the 10-year benchmark security – and 8.83% 2041 for Rs 12,000 crore. The auction secured a bid cover of 2.17 times the notifi ed amount in aggregate and overall, the yield moved up marginally by 2 bps to 8.37% (Table 7, p 112).

Higher than expected gross borrowing for 2012-13, kept secondary market yields firmed up in the first half of March. In the second half also, yields remained firm against the

calendar also notified a higher aggregate amount of borrowing for each auction throughout the first half of 2012-13.

Total traded volume on the NDS and NDS-OM during the period had declined by 50% to Rs 1,56,922 crore over the month. Overall yield increased by 17 bps to 8.44% over the month. The top fi ve securities contributed 89% towards total turnover. Those securities were 8.79% 2021, 9.15% 2024, 7.83% 2018, 8.19% 2020 and 8.97% 2030. About 67% or Rs 1,01,284 crore of turnover had come from the 8.79% 2021-10-year benchmark security alone (Table 8, p 113 and Tables 9 and 10).

During the month, in all, 20 states issued SDLs for an aggregate amount of Rs 21,261 crore with a higher bid cover at 1.77 times and also higher overall cut-off and weighted yields. Andhra Pradesh, Haryana, Kerala, Bihar, Jammu and Kashmir and Nagaland issued state loans twice while Gujarat and Punjab tapped the market thrice. Except

Table 10: Yield Spreads (Weighted Average) – Central Government

backdrop of a front loaded

Securities (basis points)

borrowing programme Yield March 2012 Previous Three Six Months Spread in bps Last Week First Week Entire Month Month Months Ago Ago

during the first half of

1 Year -5 Year 53 -34 7 14 6

2012-13, to the extent of

5 Year-10 Year -2 5 1 6 4 8

64%, announced by RBI

10 Year-15 Year 5 14 13 20 31 16

in consultation with the

1 Year-10 Year 51 -34 13 18 14 central government. The Source: As in Table 8.

Table 9: Predominantly Traded Government Securities (Amount in Rs crore)

Descriptions March 2012 Previous Month Three Months Ago Six Months Ago Last Week (30) First Week (2) Total for the Month (February 2012) (December 2011) (September 2011) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

GOI Dated Securities

  • 6.85 2012 375 11.46 27 8.97 745 10.41 236 8.74 2,235 8.67 639 8.35
  • 7.17 2015 164 8.25 60 8.22 340 8.25 486 8.13 824 8.44 991 8.28
  • 7.59 2016 180 8.31 470 8.32 1,379 8.24 964 8.42 970 8.31

  • 7.99 2017 399 8.61 20 8.33 1,714 8.44 575 8.23 1,011 8.50 2,477 8.36
  • 8.07 2017 0 8.41 0 8.40 191 8.35 72 8.21 1,103 8.54 2,802 8.32
  • 7.83 2018 2,100 8.58 638 8.31 6,578 8.47 17,245 8.24 41,023 8.47 12,041 8.34
  • 8.19 2020 1,349 8.58 50 8.29 3,480 8.47 11,842 8.25
  • 7.80 2021 556 8.68 108 8.31 1,144 8.56 1,228 8.26 19,154 8.49 1,74,374 8.32
  • 8.79 2021 29,309 8.54 9,705 8.21 1,01,284 8.39 1,47,521 8.19 1,39,600 8.55
  • 8.08 2022 10 8.59 37 8.37 73 8.39 152 8.30 5,370 8.53 9,931 8.40

  • 8.13 2022 143 8.58 20 8.36 1,041 8.44 419 8.29 4,105 8.58 32,390 8.41
  • 9.15 2024 5,714 8.56 5,818 8.30 22,486 8.39 1,11,538 8.30 1,52,133 8.63
  • 8.26 2027 25 8.67 28 8.52 109 8.54 486 8.48 722 8.87 562 8.57

    8.28 2027 353 8.63 37 8.50 757 8.57 1,590 8.50 3,197 8.86 3,656 8.57

    8.97 2030 730 8.71 398 8.59 2,028 8.64 7,387 8.57 11,096 8.75

    8.28 2032 7 8.55 21 8.47 39 8.50 424 8.52 113 8.65 218 8.58

    8.30 2040 93 8.67 166 8.57 690 8.60 418 8.55 4,514 8.94 1,076 8.63

    8.83 2041 311 8.69 113 8.59 1,988 8.63 1,895 8.56 4,315 8.74

    Total (All Securities) 43,655 8.60 18,168 8.27 1,51,957 8.44 3,08,879 8.26 4,42,147 8.58 2,45,522 8.35

    (-) 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 8.

    april 28, 2012 vol xlviI no 17

    MONEY MARKET REVIEW

    Table 11: Details of State Government Borrowings (Amount in Rs crore) In contrast to dated securities, due to
    Date of Auction 06-Mar-12 Number of Participating States 10 Total Amount Accepted 11,067 Bid-Cover Ratio 1.72 YTM at Cut-Off Price (%) 8.95 Weighted Average Yield (%) 8.90 demand for short-term securities in the market, the traded volume of TBs across
    13-Mar-12 5 2,610 2.88 8.98 8.95 maturities jumped up more than twice at
    20-Mar-12 5 1,216 2.26 9.03 9.01 Rs 40,438 crore over the last month. The
    29-Mar-12 12 6,368 1.21 9.17 9.07 major contribution in this leap was from
    Total for March 2012 32 21,261 1.74 9.02 8.96 182-day TBs, followed by 91-day TBs. The
    Total for February 2012 16 15,088 1.44 8.74 8.71 yield hardened for 91-day and 364-day
    Source: RBI press releases. maturities to 8.94% and 8.64%, respec-
    Table 12: Auctions of Treasury Bills (Amount in Rs crore) tively, while it remained unchanged for
    Date of Auction Bids Bid-Cover Cut-off Weighted Cut-off Weighted 182-day TBs at 8.81%.
    Accepted Ratio Yield (%) Average Yield Price (Rs) Average Price
    (%) (Rs)
    A: 91-Day Treasury Bills 2.5 Corporate Bonds Market
    29-Feb-12 8,000 2.15 9.06 9.06 97.79 97.79
    07-Mar-12 8,000 3.26 9.06 9.02 97.79 97.80issues on the NSE plunged by 64% dur
    14-Mar-12 8,000 3.68 8.98 8.94 97.81 97.82ing the period to Rs 7,672 crore. A total
    21-Mar-12 8,000 3.12 8.98 8.98 97.81 97.81of 45 issues struck the market against
    28-Mar-12 8,000 2.56 9.02 8.98 97.80 97.81
    Total for March 2012 40,000 2.95 9.02 9.00 97.80 97.81 69 in February. Central government
    Total for February 2012 44,000 2.00 8.94 8.91 97.82 97.83 undertakings dominated the issuance
    B: 182-Day Treasury Bills volume, raising Rs 4,976 crore with
    29-Feb-12 4,000 2.57 8.75 8.73 95.82 95.83coupons ranging from 9.25% to 9.72%.
    14-Mar-12 4,000 3.11 8.66 8.64 95.86 95.87 Three central government undertakings,
    28-Mar-12 4,000 3.06 8.66 8.64 95.86 95.87 namely, NTPC, NHPC and Power Finance
    Total for March 2012 12,000 2.91 8.69 8.67 95.85 95.86 Corporation tapped the market. The

    The amount raised by privately placed

    Total for February 2012 12,000 2.70 8.69 8.66 95.85 95.86
    C: 364-Day Treasury Bills
    07-Mar-12 4,000 4.93 8.45 8.42 92.23 92.25
    21-Mar-12 4,000 4.85 8.40 8.40 92.27 92.27
    Total for March 2012 8,000 4.89 8.42 8.41 92.25 92.26
    Total for February 2012 8,000 4.43 8.51 8.49 92.18 92.19
    Source: RBI’s press releases.
    Table 13: Details of Private Placement in Corporate Bonds
    Institutional Category No of Issues Volume in Range of Range of Maturity in
    Rs Crore Coupon Rates (in %) Years
    Banks/FIs 6 2,309 9.50-11.00 3 to 10
    Central undertakings 34 4,976 9.25-9.72 3 to 20
    Corporates 5 387 11.50-12.00 1.1 to 10
    Total for March 2012 45 7,672 9.25-12.00 1.1 to 20
    Total for February 2012 69 21,332 9.00-11.60 1 to 10

    highest coupons were paid by corporates in a narrow range of 11.50% to 12% (Table 13).

    The Rural Electrifi cation Corporation tapped the market through a public issue of tax free, secured, redeemable, non-convertible bonds for an amount of Rs 1,500 crore with the option to retain over-subscription up to an aggregate

    Source: www.nseindia.com.

    Punjab, which witnessed a lower cut-off yield in the second auction, all other states witnessed increased cut-off yields in successive auctions. Absence of the central government in primary auctions after the initial few days in the month provided the added space for states during the month. Cut-off yields ranged from 8.92% to 9.49%. The accepted amount was the lowest at Rs 5 crore for Nagaland while the highest amount was raised by Maharashtra for Rs 2,424 crore. In the auction on 29 March, state loans of three states, namely, Bihar, Manipur and Sikkim remained unsold (Table 11). Turnover of SDLs had gone up by 69% to Rs 7,379

    Economic & Political Weekly

    EPW
    april 28, 2012

    crore with higher yield at 8.84%, over February.

    2.4 Treasury Bills

    A continuous build-up of pressure on yields of 91-day treasury bills (TBs) was witnessed during the month. For 182day maturity, the overall yield remained flat while it dropped in the case of 364day maturities. The total amount raised though 91-day TBs was worth Rs 40,000 crore during the month, whereas the issuance amount remained the same for 182-day and 364-day TBs at Rs 12,000 and Rs 8,000 crore each, respectively. The bid cover improved across maturities, over the period (Table 12).

    vol xlviI no 17

    amount Rs 3,000 crore. This issue opened on 6 March and closed on 12 March. These bonds were divided into two series, series one with 10-year maturity and 7.93% coupon, and second series with 15-year maturity and 8.12% coupon.

    A public issue by Muthoot Finance for an aggregate amount of Rs 500 crore opened on 2 March and closed on 17 March. These are secured, non-convertible debentures. For these bonds, four different maturities were available, for two-year maturity the coupon was 13%, for three-year and fi ve-year maturities the coupon offered was 13.25% and for a maturity of 5.6 years, 13.43% coupon was offered.

    Turnover in the secondary market was recorded at Rs 53,440 crore during the month. FIMMDA reported turnover worth Rs 25,316 crore closely followed by the NSE reporting turnover worth Rs 24,667 crore.

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