Dilemma of Indian Banking

In these times of infl ation and the receding prospect of growth, and in the presence of fi scal laxity and higher government borrowing requirements, Indian banks are fi nding it diffi cult to expand their credit portfolio. Moreover, as returns on their investments tend to be lower than those on their advances, in this present overall context the real challenge is in fi nding the right balance as between liquidity, capital and return.

MONEY MARKET REVIEW

Dilemma of Indian Banking

Liquidity, Capital and Return

EPW Research Foundation

In these times of inflation and the receding prospect of growth, and in the presence of fiscal laxity and higher government borrowing requirements, Indian banks are finding it difficult to expand their credit portfolio. Moreover, as returns on their investments tend to be lower than those on their advances, in this present overall context the real challenge is in finding the right balance as between liquidity, capital and return.

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

1 Introduction

A
t a time when infl ationary pressures have not subsided and the prospects of growth of the Indian economy during the current period is not that bright, the Indian banking system is facing the dilemma of balancing between liquidity, capital and return. The slower deposit growth partly explained by high inflation and substitution of bank deposits by households with infl ation hedging products like gold and real estate has caused a dent in availability of liquid resources to the banking system. Afflicted with growing non-performing loans and higher provisioning requirements inter alia due to pension liabilities, banks have been put under the radar of Basel III requirements at a faster and tighter pace than the agreed international requirements for compliance.

If banks are liquidity or capital constrained due to the above factors, they will automatically be credit constrained, which could adversely infl uence their credit decisions. They may not be able to expand their balance sheets as per the needs of the economy for higher credit growth. There are therefore apprehensions that at least the public sector banks will find it difficult to expand their credit portfolio to any signifi cant extent in the near future.

Furthermore, banks will perforce need to meet the growing appetite of government borrowing. Banks, despite the lower level of Statutory Liquidity Ratio (SLR) of 25% and later 24%, had been investing a much larger part of their deposits in government securities for reasons of higher liquidity and as a safe investment avenue on the face of higher capital standards. While this tendency had been reversed during the period of high growth and fiscal consolidation during 2004 to 2008, of late, because of fiscal laxity and higher government borrowing, banks have turned to investments, crowding out credit flow to the commercial sector. Overall, return on funds may be affected because of this shift in portfolio choice since the return on investments tends to be lower than that on advances.

Against the above backdrop, this note presents some perspectives on the Indian banking scenario in the immediate period ahead, focusing upon the three key aspects of liquidity, capital and return.

1.1 Liquidity

For some time now, the banking system has been in a liquidity bind due to sluggishness in deposit growth. Credit growth, which can spur secondary deposit growth, also remained tardy during 2011-12 (Graph A, p 120). Liquidity in the banking system will depend essentially upon the deposit growth, which, in turn, depends upon the household preference for saving in financial assets like bank deposits. The trend in savings in the recent past has not been encouraging. The domestic savings rate declined in 2010-11 to 32.3% from 33.8% in 2009-10. The decrease in the savings rate was due to slower growth in savings of both the household and the private corporate sectors. The household sector’s savings rate declined to 22.8% in 2010-11, after touching a record high of 25.4% in 2009-10. Within household savings, the financial savings rate declined sharply from 12.9% to 10.0% during the same period. The decline in the net fi nancial savings rate was further explained by the slower growth in households’ savings inter alia in bank deposits.

The declining trend in savings in financial assets in general and bank deposits in particular evidently indicate that the household sector has shifted to inflation hedging assets like real estate and diversion to purchase of gold. This may also be partly due to increase in household debt to meet the needs of consumption on the face of a higher cost of living. With lower interest rates, deposit mobilisation might become diffi cult and hence, deposit rates are not expected to come down significantly. With the easing

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MONEY MARKET REVIEW

Graph A: Y-o-Y Aggregate Deposits, Bank Credit and Investments Growth (%) new regulations under from Rs 1.5 lakh crore to Rs 5.0 lakh

of the policy rate, banks would be expected to reduce their lending rates. Thus, one challenge for the banking system is how to balance between rather sticky deposit rates and a reduction in lending rates.

The Reserve Bank of India (RBI) had been by and large pumping in liquidity to meet the defi cit in the system caused by both structural and frictional factors, but such liquidity injections are likely to be brought under reasonable limits within the comfort zone of the central bank at plus or minus 1% of net demand and time liabilities of the banking system (Graph B). The credit growth is further likely to be crowded out by the huge government borrowing programme that would in turn also adversely impact liquidity conditions.

Overall, banks are expected to face has been advanced to 2018 from 2019, While for private sector and foreign and second, the level of compliance is at banks, raising capital is not reported to least 1 percentage point higher (Table 1). be a serious issue, for public sector banks Different agencies have estimated addi-(PSBs), it may prove to be diffi cult. Since tional capital requirements, which range the beginning of 2004-05, 16 of 19 PSBs

Graph B: Average Net Injection/Absorption (Rs Crore)

Graph B: Average Net Injection/Absorption (Rs Crore) 2,00,000 1,50,000 1,00,000 50,000 0 -50,000 -1,00,000 -1,50,000

two respects: fi rst, the tion compared to other sectors in raising date of compliance funds from the market.

tight liquidity conditions in the coming Table 2: Estimates by Agencies of Capital Requirements and Impact on Return

Agency Estimated Additional Capital Requirements Remarks

months, despite lowering of policy rates

Fitch Rating Up to $50 bn or Rs 2.6 lakh crore of The largest requirement is by State Bank of

by the RBI.

additional equity on top of retained India and its associate banks, followed by the earnings mid-sized and small government banks with

1.2 Capital weaker internal capital generation

Banks in India will be required to aug- The Macquarie Rs 1.5 lakh crore or Rs. 30,000 crore The fund-raising atmosphere is depressed; Group and Crisil a year situation may improve, but return on equity

ment their capital base for their normal

(RoE) levels is likely to fall

business expansion. In the coming years,

ICRA Rs 3.9 to 5.0 lakh crore as capital Out of which common equity requirementsthey should also be able to mobilise and will be Rs 1.3-2 trillion

build up additional capital for meeting the Source: Compiled by EPWRF.

Table 1: Differences between RBI and BIS Norms for Basel III

Minimum Capital Ratios Guidelines# BIS Guidelines# BIS Guidelines# BIS Guidelines# BIS Guidelines# BIS Guidelines# BIS
Jan-13 2013 Mar-14 2014 Mar-15 2015 Mar-16 2016 Mar-17 2017 Mar-18 Jan 19, 2019
Minimum Common Equity Tier 1 (CET1) 4.5 3.5 5 4 5.5 4.5 5.5 4.5 5.5 4.5 5.5 4.5
Capital conservation buffer (CCB) - - 0.625 1.25 0.625 1.875 1.25 2.5 2.5
Minimum CET1+ CCB 4.5 3.5 5 4 6.125 4.5 6.75 5.125 7.375 5.75 8 7
Minimum Tier 1 capital 6 4.5 6.5 5.5 7 6 7 6 7 6 7 6
Minimum Total Capital 9 8 9 8 9 8 9 8 9 8 9 8
Minimum Total Capital +CCB 9 8 9 8 9.625 8 10.25 8.625 10.875 9.25 11.5 10.5
Phase-in of all deductions from CET1 (in %) 20 40 20 60 40 80 60 100 80 100 100

# - Guidelines on Implementation of Basel III Capital Regulations in India issued on 2 May 2012 by RBI. BIS - Bank for International Settlements. Source: Compiled by EPWRF.

may 26, 2012 vol xlviI no 21 EPW Economic & Political Weekly

04/2001

07/2001

04/200108/200112/200104/200208/200212/200204/200308/200312/200304/200408/200412/200404/200508/200512/200504/200608/200612/200604/200708/200712/200704/200808/200812/200804/200908/200912/200904/201008/201012/2010

10/200104/201101/200208/201104/200212/2011

07/200210/200201/200304/200307/200310/200301/200404/200407/200410/200401/200504/200507/200510/200501/200604/200607/200610/200601/200704/200707/200710/200701/200804/200807/200810/200801/200904/200907/200910/200901/201004/201007/201010/201001/201104/201107/201110/201101/201204/2012

04/2012

45
41
37 Bank Credit Investments (SLR)
33
29 Aggregate
25 Deposits
21
17
13
9
5
1

Basel III framed by the RBI on 2 May 2012 which are to be implemented in phases effective from 1 January 2013. The Basel III capital ratios will be fully implemented as on 31 March 2018. The RBI guidelines are tighter compared to international norms in crore (Table 2).

The raising of capital from the market will generally depend upon capital market conditions and how the bankingrelated equity market indices perform vis-à-vis the general equity indices. A comparison of bank-related indices shows that they prominently mimic the general equity indices, though the bank- specifi c indices might vary (Table 3 and Graph C, p 121). In any case, banks are not placed in any disadvantageous posi

MONEY MARKET REVIEW

banks, and this would mean much more capital needs for PSBs.

Since the government’s ability to meet matching requirements will be limited, as per the second Tarapore Committee’s recommendations, the government holding in PSBs needs to be diluted to

Overall, the burden of building up additional capital looms large on the banking system, and it is going to be much more diffi cult for PSBs.

1.3 Return

The return on bank funds depends upon the combined influence of return on advances and return on investments. Since deposit rates are likely to remain sticky for some time, till infl ation rates rule high, and there are pressures to bring down the lending rates, the net interest

Graph C: Major Indices Along With Their Respective Banking Indices (% Growth)

Table 3: Yearly Closing Values of Sensex, Cnx Nifty, BSE-Bankex and CNX – Bank Year BSE NSE -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$ --Close-SENSX Close-Bankex (BSE) Closing Values of CNX Nifty CNX-Bank

Close-SENSX % Growth Close-Bankex % Growth Closing Values % Growth CNX-Bank % Growth margin is likely to come under pressure. (BSE) of CNX Nifty

With tightening of provisioning require

2002 3,377.2800 -1,342.7600 -1,093.5000 -1,226.5000

ments, including capital and liquidity

2003 5,838.9600 72.9 2,799.0400 108.5 1,879.7500 71.9 2,588.7800 111.1 2004 6,602.6900 13.1 3,721.9700 33.0 2,080.5000 10.7 3,497.3600 35.1 requirements under Basel III coming into

2005 9,397.9300 42.3 5,081.7100 36.5 2,836.5500 36.3 4,534.2000 29.6 effect shortly, in the current environ

2006 13,786.9100 46.7 7,085.7300 39.4 3,966.4000 39.8 6,008.7500 32.5

2007 20,286.9900 47.1 11,418.0000 61.1 6,138.6000 54.8 9,863.4500 64.2

2008 9,647.3100 -52.4 5,454.5400 -52.2 2,959.1500 -51.8 5,001.5500 -49.3

2009 17,464.8100 81.0 10,030.8000 83.9 5,201.0500 75.8 9,029.5000 80.5

2010 20,509.0900 17.4 13,379.7300 33.4 6,134.5000 17.9 11,791.4500 30.6

2011 15,454.9200 -24.6 9,153.3900 -31.6 4,624.3000 -24.6 7,968.6500 -32.4

2012$ 16,215.8400 4.9 10,661.6400 16.5 4,907.8000 6.1 9,257.6500 16.2

ment, banks would be encouraged to build up risk-free assets in the form of a government securities portfolio.

The return on advances being generally higher than that on investments (Table 4 and Graph D), the tendency of banks switching to investments will have the consequence of reducing the overall return in the coming months.

Some market estimates show that the return on equity of banks may come under pressure also because of higher funding costs due to additional capital to be raised in the coming years. Kotak Institutional Equities has estimated that for every 100-120 percentage points rise

$ Closing value as on 14 May 2012. Source: Websites of BSE and NSE.

have been reported to be underperforming the Bankex for several years. For PSBs there is an additional diffi culty because of the need for the matching contribution to come from the government. In fact, the government must ensure suffi cient fiscal space to augment its equity participation or give into around one-third from the present level of 51%. In the absence of that, if new bank licences are issued to industrial houses, then the PSBs’ share in total banking system assets will further shrink relative to the gain of private and foreign banks.

Table 4: Cost of Funds and Spread of SCBs

higher order of privatisation. At present the government’s policy is to maintain 51% equity stake in PSBs. In the Union Budget for 2012-13, the fi nance minister has proposed to provide a sum of around Rs 15,000 crore for capitalisation of the PSBs, regional rural banks (RRBs) and other financial institutions. In addition, the government is also examining the possibility of creating a fi nancial holding company which will raise resources to meet the capital requirements of PSBs.

For PSBs, injection of government capital to select banks this year will be just about adequate for maintaining an 8% tier I capital ratio. That means banks

Cost of Cost of Cost of Return on Return on Deposits Borrowings Funds Advances Investments

2001 13.13 11.86 13.06 20.49 20.13

2002 12.92 6.63 12.4 17.89 19.2

2003 11.76 5.74 11.39 18.02 17.56

2004 9.51 4.94 9.25 15.77 15.97

in core equity, return on equity will fall by 1.5-1.8 percentage points. Overall, the

Graph D: Return Structure (%)

22 20

Return on Investments Return on Advances

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

18 2006 4.48 3.3 4.38 8.19 7.65 16 2007 4.93 3.56 4.82 8.93 7.19 14 2008 5.97 3.97 5.8 9.92 7.33 12 2009 6.24 3.37 5.96 10.5 7.01

2005 8.13 3.33 7.73 13.77 14.75

10 2010 5.49 1.7 5.1 9.29 6.54

8 2011 5.01 2.34 4.73 9.18 6.79

6

Source: RBI.

Table 5: Money Market Activity (Volume and Rates)

Instruments April 2012 March 2012 Daily Average Monthly Range of Daily Average Monthly Range of Volume Weighted Weighted Average Volume Weighted Average Weighted Average (Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)

will need additional capital for funding Call Money 19,295 8.65 8.08-9.32 14,429 9.05 8.34-11.77 credit growth. There have been more Notice Money 4,333 8.58 7.77-9.23 3,549 9.52 7.92-13.14

Term Money@ 391 -8.50-10.75 300 -8.40-13.50

additions to non-performing assets (NPAs)

CBLO 38,992 8.20 7.03-8.54 38,557 8.51 7.05-12.04

for PSBs in recent years than for private

Market Repo 18,760 8.32 7.96-8.59 11,493 8.71 7.00-10.98

sector ones. A higher level of NPAs is

@ Range of rates during the month. - not available. ultimately a charge on the capital of Source: www.rbi.org.in. and www.ccilindia.com

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MONEY MARKET REVIEW

return on funds is likely to come under pressure for the banking system.

2 Money, Forex and Debt Markets

The beginning of the financial year 2011-12 proved to be dull for fi nancial markets. However, a surprising 50 basis points (bps) repo rate cut on top of the earlier CRR cuts, aggregating to 125 bps, enthused market outlook to some extent. But, the S&P’s downgrading domestic outlook from stable to negative proved to be a dampener. Foreign investors continued to withdraw funds from the Indian market, spreading an overall bearish outlook. Uncertain global developments coupled with disappointing domestic growth

Table 6: 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
Apr-2012 12,700 92,436

Source: RBI’s Weekly Statistical Supplement.

prospects weakened investor confi dence, in turn, adversely affecting fi nancial markets across the spectrum.

The overall inflows of liquidity improved to about Rs 65,000 crore against meagre inflows of about Rs 12,000 crore during March. In April, the system obtained signifi cant inflows through a fall of Rs 95,000 crore in bank credit. RBI credit to government also increased by Rs 75,000 crore. However, deposit growth fell by Rs 63,500 crore in April, being a major reason for the deficit in the system. This was accompanied by an increase in currency circulation and the government’s market borrowing programme, causing an outflow worth Rs 40,000 crore and Rs 58,000 crore, respectively.

a cut in repo rate by 50 bps in its policy A sharp fall in rates led to heightened review to 8%, money market rates for trading activity in the money market. All various instruments across maturities the short-term money market instruments fell. However, the downward movement reported sizeable increases in their respecwas restrained due to expectations about tive trading volumes during April. The a repetition of similar policy actions in daily trading activity in the overnight the near future. Overnight money market segment had galloped by 34% in April. rates moved downwards from the begin-Volumes in the CBLO market improved ning of the month and weighted average marginally by 1% even as the repo market one-day rates fell below the 9% levels. witnessed a sharp 63% jump in its turn-Call rates softened signi ficantly and nearly over over the period. Overall, there was touched 8% levels towards the end of the a 20% increase in money market turnmonth and settled at 8.08% on 27 April. over over the month (Table 5, p 121). The weighted average call money rates As per the latest available data from fell by a considerable 40 bps compared to the RBI, the issuance of certifi cates of the previous month. Table 7: Foreign Exchange Market: Select Indicators

The notice money mar-Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Index Rate (Last Friday Depreciation (-) (Equity+Debt) (Month-end (Month-end ket also displayed sharp of the Month) of Rs/$ (in %) (in $ million) Closing) Closing)#

declines in its daily rates Oct-2011 48.82 0.21 634 17,705 70.52 Nov-2011 52.17 -6.41 -586 16,123 72.37

and the weighted aver

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

age rates fell by a sub

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

stantial 93 bps to 8.65%

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

in period of one month.

Mar-2012 51.16 -4.09 387 17,404 72.74 Uncertainty over mone-Apr-2012 52.68 -2.89 -927 17,319 72.27

tary easing in the coming #: Nominal Major Currencies Dollar Index. Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov.

months kept the rates of

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

collateralised instruments

Month Merchant Interbank Spot Forward Total

like collateralised borrow

Oct-2011 12.6 -(16.7) 40.0 -(10.6) 26.7 -(9.8) 25.9 -(14.4) 52.6 -(12.1)

ing and lending obliga

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

tions (CBLO) and market

Dec-2011 11.2 -(8.4) 35.6 -(13.2) 22.8 -(14.2) 24.0 -(10.0) 46.8 -(12.1) repo more volatile and the Jan-2012 9.9 -(11.9) 38.7 (8.6) 22.8 -(0.3) 25.8 (7.4) 48.6 (3.7)

rates of both the instru-Feb-2012 11.1 (12.5) 41.3 (6.8) 25.8 (13.4) 26.6 (3.1) 52.4 (7.9)

ments fell by 32 bps and Mar-2012 11.9 (6.6) 41.2 -(0.1) 26.2 (1.4) 26.9 (1.2) 53.1 (1.3)

* Includes trading in FCY/INR and FCY/FCY.

39 bps, respectively, dur-

Figures in brackets are percentage change over the previous month. ing the same period. Source: RBI’s Weekly Statistical Supplement, various issues.

Table 9: 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)

03-Apr-12 8.19% 2020 R 4,000 1.69 319.20 8.76 96.80

8.97% 2030 R 3,000 1.64 875.96 9.00

8.83% 2041 R 3,000 1.48 nil 9.06

13-Apr-12 8.24% 2018 R 4,000 1.96 nil 8.56 98.51

8.79% 2021 R 7,000 1.82 nil 8.47 102.09

8.28% 2027 R 2,000 2.17 nil 8.74

8.33% 2036 R 2,000 3.00 nil 8.80

2.1 Money Market 20-Apr-12 8.19% 2020 9.15% 2024 R R 4,000 7,000 2.14 2.12 nil nil 8.44 8.50 98.60104.97
Money market activity remained cau 8.97% 2030 R 2,000 2.04 nil 8.81 101.85
tious in April with market participants 8.83% 2041 R 3,000 2.49 nil 8.81 100.20
anticipating policy rate cuts either in the 27-Apr-12 8.24% 2018 R 4,000 1.88 nil 8.64 98.16
repo rate or the CRR or both in the Annu 8.79% 2021 R 7,000 2.37 nil 8.63 101.00
al Policy Statement for 2012-13. After 8.28% 2027 R 2,000 3.59 nil 8.82 95.45
reeling under an acute liquidity shortage 8.33% 2036 R 3,000 2.72 nil 8.96 93.82
in the previous month, the system expe- Total for April 2012 65,000 2.06 1195.16 8.70 99.92
rienced some moderation in the fi rst Total for March 2012 12,000 2.17 Nil 8.37 102.14
month of the fi nancial year 2012-13. With R: Reissue. Source: RBI press releases.
122 may 26, 2012 vol xlviI no 21 Economic & Political Weekly
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deposit (CDs) by scheduled commercial banks increased by Rs 16,000 crore in a month and the outstanding amount stood at Rs 4,19,530 crore during the fortnight ending 23 March 2012. Similarly, CPs issued by corporates increased by Rs 12,000 crore, taking the outstanding amount to Rs 1.62 lakh crore for the period ending 29 February 2012. The discount rates for CDs ranged from 9.30% to 11.90%; CP rates ruled in the range of 8.47% to 14.75% for the respective periods.

According to the trading platform, Fixed Income Money Market and Derivatives Association (FIMMDA), CDs turnover halved during April compared to March, while CPs recorded a 5% rise in their average daily traded volume.

After successfully managing the worst ever cash crunch in March, the RBI’s injection of funds through the repo window of LAF fell to relatively moderate levels in April. Ahead of the central bank’s rate decision on 17 April, banks borrowed less form the repo window intentionally as the rate cut was strongly factored in by the markets. However, after the repo rate cut, once again the borrowings by banks crossed Rs 1 lakh crore at a cheaper rate and continued to borrow till the end of the month. Despite an ease in liquidity, bankers borrowed around Rs 92,000 crore from the repo window on a daily average basis in April, well above the RBI’s comfort level. In OMO window also, the RBI purchased securities worth Rs 12,700 crore in April. Bankers also accessed MSF of LAF and borrowed Rs 2,820 crore (Table 6, p 122).

2.2 Forex Market

The performance of the dollar against other currencies remained volatile as global financial markets remained in a risk-averse mode in the beginning of April following renewed fears of an exacerbation of the eurozone’s sovereign debt crisis. Weaker-than-expected US economic data and growing concerns about the eurozone debt crisis prompted the market participants to avoid riskier assets and the dollar gained signifi cance towards the second part of the month.

The US currency, as tracked by the US dollar index, fell by 48 bps [Nominal Major Currencies Dollar Index (March 1973=100)] in a period of one month, while the JP Morgan Asian dollar index (a spot index of emerging Asia’s most actively traded currency pairs valued against the US dollar) improved by 16 bps over March to 117.14 points in April (Table 7, p 122).

The Indian rupee remained weak against almost all the global currencies, including Asian currencies, during April. The domestic currency was undermined by the weakness in the local stock market and huge FII outfl ows. Weaker-thanexpected industrial production data worsened the growth outlook for the economy in the beginning of the month coupled with S&P’s downgrading of the India outlook further depressing market confidence. Moreover, a higher than

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

Descriptions April 2012 Previous Month Three Months Ago Six Months Ago
Last Week (27) First Week (6) Total for the Month (March 2012) (January 2012) (October 2011)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
1 Treasury Bills 8,391 3,608 37,312 40,438 27,473 16,102
A 91-Day Bills 5,585 8.35 2,282 8.82 23,273 8.48 21,206 8.94 10,206 8.50 8,780 8.38
B 182-Day Bills 1,922 8.34 580 8.67 9,236 8.48 7,731 8.81 5,962 8.49 3,258 8.48
C 364-Day Bills 884 8.33 745 8.51 4,804 8.38 11,501 8.64 11,305 8.12 4,064 8.51
2 GOI Dated Securities 67,061 8.61 28,205 8.78 2,60,286 8.55 1,51,957 8.44 4,54,527 8.33 16,8357 8.74
Year of (No of
Maturity Securities)
2012 (2) 315 8.30 195 8.75 1,698 8.47 3,788 9.46 1,146 8.48 2,546 8.61
2013 (1) 50 8.04 240 8.22 345 8.17 136 8.09 730 7.89 56 8.37
2014 (3) 1 8.10 41 7.95 850 8.16 186 8.10 342 8.42
2015 (5) 13 8.18 621 8.21 471 8.30 1,566 8.10 321 8.59
2016 (2) 61 8.36 444 8.43 990 8.42 1,743 8.24 422 8.65
2017 (4) 116 8.48 0 8.65 1,444 8.49 1,963 8.43 3,626 8.28 3,375 8.70
2018 (3) 1,699 8.59 350 8.70 5,395 8.53 7,534 8.47 29,280 8.26 13,088 8.72
2019 (3) 10 8.65 30 8.58 7 8.67 39 8.37
2020 (2) 2,608 8.56 2,589 8.88 13,253 8.57 4,140 8.66 7,519 8.42 970 9.06
2021 (2) 22,398 8.61 8,447 8.70 99,664 8.50 1,02,738 8.39 1,91,675 8.25 1,13,304 8.73
2022 (4) 106 8.64 37 8.76 656 8.65 1,120 8.44 2,949 8.34 26,885 8.73
2024 (1) 37,429 8.61 14,158 8.79 1,26,293 8.58 22,486 8.39 1,92,833 8.39
2027 (3) 431 8.78 252 8.74 2,439 8.70 885 8.57 5,220 8.58 4,827 8.88
2028 (1) 1 9.67 1 9.67 17 8.60 4 8.48
2030 (1) 704 8.82 1,248 8.99 4,165 8.85 2,028 8.64 8,124 8.54
2032 (3) 2 8.64 22 8.64 79 8.55 3,558 8.55 102 8.91
2034 (1) 2 8.86 2 8.86 6 8.45 4 8.56
2036 (1) 387 8.95 1,003 8.83 30 8.69 0 8.85
2040 (1) 6 8.69 162 8.78 690 8.60 1,619 8.57 2,118 8.94
2041 (1) 723 8.81 689 9.04 2,610 8.91 1,988 8.63 2,694 8.57
3 State Govt Securities 1,239 9.14 2,536 9.19 7,926 9.14 7,379 8.84 4,659 8.69 2,353 8.94
Grand total (1 to 3) 76,690 34,349 3,05,525 1,99,775 4,86,660 1,86,812
(-) 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, 2026, 2035 and 2039 are negligible.
Source: Compiled by EPWRF; base data from RBI and CCIL.
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MONEY MARKET REVIEW

expected policy rate cut reduced the attractiveness of rupee-denominated assets while some fall in oil prices helped the rupee to see some gains.

The rupee-dollar exchange rate began the month on a positive note and added 59 paise on the very first day. Hurt by rising crude oil prices hovering above $125 per barrel, the rupee depreciated substantially by 71 paise in the next two trading sessions and rose to Rs 51.28 per dollar on 9 April. After recouping some of its value once again, the rupee fell back on 11 April and shed another 34 paise versus the dollar. Thereafter, the performance of the rupee remained mixed till 18 April. However, its value decelerated significantly by 129 paise till 24 April. With the tardy growth of the Indian economy the local currency was poised to cross the crucial Rs 53 per US dollar mark. But intervention by the RBI kept the rupee value under control from 25 April and the currency managed to gain 27 paise against dollar in the last four trading days of April despite massive portfolio outflows from the Indian market. Overall, in a period of one month the Indian rupee depreciated by 2.9% against dollar and closed at Rs 52.68 on 27 April (Table 7).

The widening current account and fi scal deficits, rising crude oil prices and a passive domestic outlook for the rupee kept the forward premia across three tenures firm throughout April. However, the one-month premia eased by 11 bps in April compared to March, while the three-month and six-month premia hardened by 18 bps and 51 bps, respectively, during the same review period.

The uncertainty in the forex market prompted increased turnover during March. The daily trading in different segments of the forex market improved by 1.3% in March compared to February. The highest rise in turnover was reported in the merchant segment while the spot and forward markets also recorded 1.4% and 1.2% increases over the period. However, inter-bank dealings fell marginally in March (Table 8, p 122).

After showing some revival in trading activity in March, the currency derivatives market once again refl ected a dismal trading volume. The movement of the rupee against other currencies and lesser participation by foreign investors influenced the turnover in April. The domestic exchanges reported a 24% fall in their aggregate turnovers over a period of one month, while the aggregate daily average

their dominance in the futures segment and garnered 94% of market share as in earlier months.

Among the exchanges trading in currency derivatives products, the National Stock Exchange (NSE) reported an 18% fall in trading activity, but sustained its dominance with a 57% market share. Similarly, the Multi-Commodity Exchange (MCX-SX) reported a 27% reduction in its trading and contributed 43% towards the total currency derivatives turnover. United Stock Exchange (USE) registered a huge fall and reported a volume of just Rs 805 crore in April.

2.3 Central Government Securities

Beginning 2012-13, issuances of central government securities heightened while issuances of SDLs and t-bills declined over the month. Corporate bond issuances dried up in April. In the secondary market, turnover of G-secs and SDLs moved up but turnover of treasury bills and corporate bonds dropped. Overall, yields of central government securities and SDLs inched up, while they declined

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

15%. Segment-wise, the Yield April 2012 Previous Three Six Months Spread in bps Last Week First Week Entire Month Month Months Ago Ago

turnover of futures and

1 Year-5 Year 44 43 32 34 39 33

options decreased by 15%

5 Year-10 Year 16 11 16 1 6 3

each during the month, on

10 Year-15 Year 14 -2 5 13 24 15 daily average terms. USD-1 Year-10 Year 60 54 48 35 45 36

INR contracts continued Source: As in Table 10.

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

Descriptions April 2012 Previous Month Three Months Ago Six Months Ago

Last Week (27) First Week (6) Total for the Month (March 2012) (January 2012) (October 2011) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

GOI Dated Securities

7.40 2012 315 8.30 195 8.75 1,688 8.46 3,020 9.22 440 8.55 2,439 8.61

7.17 2015 10 8.20 314 8.17 340 8.25 1,265 8.10 251 8.46

7.59 2016 45 8.37 168 8.34 470 8.32 1,135 8.22 401 8.65

  • 7.99 2017 105 8.49 0 8.65 1,176 8.47 1,714 8.44 3,214 8.29 1,067 8.80
  • 8.07 2017 11 8.39 27 8.51 191 8.35 359 8.22 2,304 8.65
  • 7.83 2018 75 8.48 350 8.70 975 8.53 6,578 8.47 29,270 8.26 13,087 8.72
  • 8.19 2020 2,483 8.49 2,224 8.74 12,703 8.51 3,480 8.47 5,653 8.19
  • 7.80 2021 652 8.63 30 8.76 2,534 8.53 1,144 8.56 6,129 8.30 1,13,304 8.73
  • 8.79 2021 21,746 8.61 8,417 8.70 97,129 8.50 1,01,284 8.39 1,85,454 8.25
  • 8.08 2022 95 8.64 155 8.62 73 8.39 1,465 8.33 13,995 8.71

  • 8.13 2022 6 8.65 37 8.76 496 8.67 1,041 8.44 1,249 8.33 12,885 8.76
  • 9.15 2024 37,429 8.61 14,158 8.79 1,26,293 8.57 22,486 8.39 1,92,833 8.39
  • 8.26 2027 45 8.60 250 8.74 630 8.67 109 8.54 498 8.48 1,785 8.91

    8.28 2027 379 8.80 2 8.75 1,796 8.70 757 8.57 4,704 8.58 3,041 8.87

    8.97 2030 704 8.82 1,248 8.99 4,165 8.86 2,028 8.64 8,124 8.54

    8.28 2032 10 8.55 39 8.50 3,530 8.55 103 8.91

    8.30 2040 6 8.69 162 8.78 690 8.60 1,619 8.57 2,118 8.94

    8.83 2041 723 8.81 689 9.04 2,610 8.91 1,988 8.63 2,694 8.57

    Total (All Securities) 67,061 8.61 28,205 8.78 2,60,286 8.55 1,51,957 8.44 4,54,527 8.33 1,68,357 8.74

    (-) 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.

    may 26, 2012 vol xlviI no 21

    EPW
    Economic & Political Weekly

    MONEY MARKET REVIEW

    Table 13: Details of State Government Borrowings (Amount in Rs crore) yields hardened, which

    Date of Auction Number of Total Bid-Cover YTM at Weighted

    declined afterwards as the

    Participating Amount Ratio Cut-Off Average States Accepted Price (%) Yield (%) annual monetary policy

    10-Apr-12 3 2,850 3.51 9.19 9.19

    approached on 27 April.

    17-Apr-12 1 75 6.36 8.80 8.80

    But a set of securities

    24-Apr-12 5 4,715 2.21 9.23 9.17

    issued in the second and

    Total for April 2012 9 7,640 2.74 9.21 9.17

    again in the fourth auc-

    Total for March 2012 32 21,261 1.74 9.02 8.96

    tion commanded higher

    Source: RBI press releases.

    yields in the latter auction

    Table 14: Auctions of Treasury Bills (Amount in Rs crore)

    (Table 9, p 122).

    Date of Auction Bids Bid-Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Average The RBI took the decision Yield (%) Price (Rs)

    to cut the repo rate by 50

    A: 91-Day Treasury Bills 04-Apr-12 6,000 4.30 8.81 8.81 97.85 97.85bps to 8% on 17 April. In

    11-Apr-12 9,000 3.43 8.77 8.73 97.86 97.87order to provide a greater

    18-Apr-12 9,000 3.37 8.31 8.25 97.97 97.98liquidity cushion the RBI 25-Apr-12 9,000 2.67 8.39 8.33 97.95 97.96 raised the borrowing limit Total for April 2012 33,000 3.36 8.55 8.50 97.91 97.92

    of scheduled commercial

    Total for March 2012 40,000 2.95 9.02 9.00 97.80 97.81

    banks under the marginal

    B: 182-Day Treasury Bills

    standing facility (MSF)

    11-Apr-12 5,000 2.08 8.57 8.55 95.9 95.91

    from 1% to 2% of their net

    25-Apr-12 5,000 2.40 8.38 8.33 95.99 96 Total for April 2012 10,000 2.24 8.48 8.44 95.95 95.96

    demand and time liabilities

    Total for March 2012 12,000 2.91 8.69 8.67 95.85 95.86 (NDTL).

    C: 364-Day Treasury Bills The turnover of central 04-Apr-12 5,000 3.69 8.34 8.32 92.32 92.34

    government securities im

    18-Apr-12 5,000 2.92 8.17 8.12 92.47 92.51

    proved by 71% over the

    Total for April 2012 10,000 3.30 8.25 8.22 92.4 92.43

    month to Rs 2,60,286 crore.

    Total for March 2012 8,000 4.89 8.42 8.41 92.25 92.26

    Overall, yield firmed up by

    Source: RBI’s press releases.

    11 bps to 8.55% over the

    Table 15: Details of Private Placement in Corporate Bonds

    month. The top fi ve securi-

    Institutional Category No of Volume Range of Range of Maturity Issues (Rs Crore) Coupon Rates in Years (y) and ties contributed 93% to the (in %) Months (m)

    total turnover. The highest

    Banks/FIs 1 750 9.60 3

    trade was recorded for

    Corporates 1 350 0 9 Total for April 2012 2 1,100 9.60 3 to 9 9.15% 2024 security worth

    Total for March 2012 45 7,672 9.25-12.00 1.1 to 20 Rs 1,26,293 crore pushing

    Source: www.nseindia.com.

    in the case of treasury bills, thanks to the repo rate cut by the RBI.

    Against only one issue of central government securities in March for Rs 12,000 crore, the borrowing programme for the current fi nancial year commenced in full swing absorbing Rs 65,000 crore through four auctions in April. In the first auction, the pressure of the huge borrowing programme, front loaded for the current financial year, resulted in a hike on the notified amount set for the auction to Rs 18,000 crore, which affected investor sentiments. The auction resulted in devolvement worth Rs 1,195 crore, but afterwards, the remaining three auctions were fully subscribed. Overall, yields inched up to 8.70% over the month with a lower bid-cover ratio of 2.06. A total of eight securities were auctioned during April. At the time of the fi rst auction,

    the 10-year benchmark security 8.79% 2021 to the second position. The remaining three traded securities were 8.19% 2020, 8.97% 2030 and 8.83% 2041 (Table 10, p 123, Tables 11 and 12, p 124). The spread of yields for 10-year maturities over one-year and five-year maturities broadened to 48 bps and 16 bps, respectively, over the month. The hardened yields of longer term maturities resulted in a widening of yield spreads.

    Not only the number of states issuing loans fell over the month but also the amount raised had dwindled by 64% to Rs 7,640 crore. Overall, the cut-off and weighted average yields hardened over the month to 9.21% and 9.17%, respectively, with an improved bid-cover ratio of 2.74 (Table 13). In the secondary market, aggregate turnover during the month was Rs 7,926 crore, showing an increase by about Rs 547 crore over March. Overall, the yield firmed up to 9.14% from 8.84% over the period.

    2.4 Treasury Bills

    Four issuances of treasury bills (TBs) were made in April, when 91-day, 182-day and 364-day TBs mopped funds worth Rs 33,000 crore, Rs 10,000 crore and Rs 10,000 crore, respectively. Unlike the central government securities and state loans, TBs across maturities fetched lower yields over the month. The bid-cover ratio of 91-day TBs improved to 3.36. The notified amount of 91-day TBs in the fi rst auction was revised downward by Rs 3,000 crore to Rs 6,000 crore in the wake of a tepid response received by the first auction of central government securities one day before, on 3 April. The issuance of 91-day TBs and 182-day TBs were reduced by Rs 7,000 crore and Rs 2,000 crore to Rs 33,000 crore and Rs 10,000 crore, respectively, while it was higher by Rs 2,000 crore in the case of 364-day TBs at Rs 10,000 crore (Table 14).

    In the secondary market, total turnover fell by 7% to Rs 37,312 crore during the month. Yield rates across maturities softened; for 91-day bills, yield eased by 46 bps to 8.48%; for 182-day TBs it dropped by 33 bps to 8.48%; and in the case of 364day TBs, it fell by 26 bps to 8.38%. The total traded volume of 91-day TBs was the highest at Rs 23,273 crore, followed by 182-day TBs worth Rs 9,236 crore.

    2.5 Corporate Bonds Market

    There was no public issue in the corporate bonds market during April. Moreover, private placements on the NSE also plummeted sharply by about 86% to Rs 1,100 crore. As against 45 issues in March only two issues were made in April. GMR Infrastructure issued zero coupon bonds with nine years maturity for Rs 350 crore, while the National Housing Bank issued bonds worth Rs 750 crore with 9.60% coupon and of three years maturity (Table 15).

    Turnover in the secondary market recorded a 31% fall in April to Rs 36,038 crore. FIMMDA reported a turnover worth Rs 21,219 crore, followed by NSE reporting a turnover worth Rs 12,155 crore.

    Economic & Political Weekly

    EPW
    may 26, 2012 vol xlviI no 21

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