Money market
Will Basel II Norms Slow Financial Inclusion?
The Basel II norms, which will cover all banks by March 2009, will introduce tightly controlled and comprehensive coverage of risks that could militate against financial inclusion. The norms may not per se be against the spread of bank lending to those who are now excluded, but with the inherent biases in the functioning of the banking system, banks will seek cover under the norms to half-heartedly move towards inclusion. With serious inter-regional, inter-class and inter-sectoral disparities in banking services in India, the approach should be based on a calibrated balancing of prudential norms and the provision of genuinely inclusive as well as regionally and functionally well-spread services.
EPW RESEARCH FOUNDATION
I Basel Norms and Inclusion: Is It a Happy Combination?
T
The Reserve Bank of India is committed to the adoption of Basel II norms for the banks; it has only extended the date of adoption from March 31, 2007 for all commercial banks to March 31, 2008 for foreign banks operating in India and Indian banks having presence outside India; all other scheduled commercial banks have to migrate to the essential approaches of Basel II – the standardised approach for credit risk and the basic indicator approach for operational risk – “in any case not later than March 31, 2009”. The Basel II system is a tightly controlled system of regulation to enforce comprehensive coverage of risks with high risk sensitivity of capital requirements. Of the three pillars embodying Basel II, Pillar I specifies that banks maintain adequate capital to cover three types of risks – credit risk, operational risk and market risk. While Pillar II strengthens the regulatory tools, Pillar III completes the market gauge on a bank in regard to its overall risk position and “allows the counterparties of the bank to price and deal appropriately” [Sisodiya and De 2006]. Thus, apart from shoring up of huge additional capital funds, the commercial banks will be overwhelmingly sensitive to what the market perceives to be their risk position. Consequently, the focus will further shift from development-orientation to marketorientation and risk fetish, which will not allow the banks to execute innovative ideas of credit delivery to cover the hitherto excluded vast sections of society.
Basel II norms may be relevant for multinational banks operating in overseas markets in impersonal ways without any relationship banking as a core activity. On the other hand, domestic banks that
Table 1: Money Market Operations (RBI’s Daily Data)
| Average | February 2007 | Average | January 2007 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Items | for Four | for Four | ||||||||
| Weeks | 23 | 16$ | 9 | 2(RF) | Weeks | 26$ | 19(RF) | 1 2 | 5(RF) | |
| No of working daysCall Money Weighted average of call rates:per cent (weekly range) per annum Daily averages (Rupees crore)Total call market borrowings Notice Money Weighted average of notice money rates:per cent (weekly range) per annum Daily averages (Rupees crore)Total notice market borrowings Turnover in term money market (borrowings) $$ | 2 0 6.18-8.08 10277 5.75-8.22 2971 339 | 6 6.18-8.08 11011 5.75-8.00 4170 415 | 5 6.51-7.81 (7.81)10434 (380) 6.30-8.22 (8.09)2590 (14942)217 (215) | 6 6.28-7.83 10849 6.63-8.21 3054 413 | 3 7.63-7.76 (7.63)8119 (331) 7.73-7.91 (7.87)2483 (15238)269 (300) | 2 2 6.64-12.96 10117 6.89-13.78 2623 270 | 5 7.48-7.93 9633 7.18-7.95 2758 9 1 | 6 7.77-8.12 (7.77)9756 (372) 7.41-8.59 2041 (12066)497 | 6 7.68-8.35 10740 6.99-8.14 2581 154 | 5 6.64-12.96 (7.46)10286 (463) 6.89-13.78 3235 (14388)318 |
* Data for reporting Fridays are given within brackets and they are also included in the weekly range/daily averages. $$ No of reporting/traded days is fewer than given above. $ Thursday data.
Economic and Political Weekly March 17, 2007
Graph A: Trends in WeightedGraph B: Spot Quotations foronly 5 per cent are covered by institutionalAverages of Call Rates, Repo Rates,the US Dollar in the Domestic
credit thus revealing that about 45 million
CBLO Rates and Call Money Inter-Bank Market
Borrowing – February 2007 micro enterprises remain excluded from
50.0
17
46.0il iMonthly Averages (Jan 2001 to Jan 2007) (Daily Working Days February 2007)
16.5 16
serious inter-regional, inter-class and in
15.5 15
ter-sectoral disparities in banking services
14.5
20.5
in India. And the enforcement of Basel II
48.0
Weighted Average (Per Cent)
(Rupees Thousand Crore)
13.5 13
norms is sure to come in the way of
correcting any of these imbalances. No
doubt, as a result of social pressures and
governmental interventions, the RBI and
the banking system have begun to imple
12.5 12 15.5
11.5 11
10.5 10
9.5 9 10.5
8.5
8
7.5
ment new policy guidelines; these cover
doubling of credit flow for agriculture in
7
5.5
6.5
44.0
6
5.5 5
4.5 4 0.5
February 2007
three years and that for small and medium
enterprises (SMEs) in five years; and now,
Call Money Volume (Rs Cr)
a system of “financial inclusion” with
Call Rates
facilities of hassle-free deposit accounts leverage household deposits have to meet as many as 74 million remain excluded from and a system of voluntary general credit the credit needs of vast sections of farmers credit delivery system of banks. And of the cards (GCC). All of these will be sought and unorganised enterprises with standard estimated 50 million micro enterprises, to be achieved by banks in a half-hearted provisions for credit and market risks. Much
Table 2: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum:
the larger part of the risk calculations under
Simple Statistical Characteristics
Basel II may turn out to be artificial in character arising out of the organisational Month/Week Simple Standard Coefficient Simple Standard Coefficient Mean* Deviation of Variation Mean* Deviation of Variation
biases of bank managements against infor
(Percentages)$ (Percentages)$
mal sectors and small borrowers. In any
Call Money Notice Money**
case, huge amounts of capital to be raised January 2007from the market at competitive rates of All four weeks 8.30 1.47 17.73 8.13 1.66 20.47
25 7.79 0.19 2.41 7.67 0.34 4.43
interest would have serious opportunity
19 (RF)* 8.01 0.14 1.70 7.87 0.41 5.21 costs in the sense of diverting capital funds 12 8.11 0.27 3.30 7.62 0.41 5.37 5 (RF)* 9.38 3.04 32.47 9.50 3.30 34.72
from manufacturing, infrastructures and
February 2007other real sector activities. All four weeks 7.34 0.64 8.65 7.31 0.75 10.32 Still greater opportunity costs will be in 23 7.37 0.82 11.16 6.98 0.87 12.44
16 (RF)* 6.92 0.55 7.97 7.16 0.93 12.94
the form of commercial banks dilly-dallying 9 7.43 0.62 8.39 7.45 0.67 9.04
on serving the neglected sections of society 2 (RF)* 7.72 0.06 0.81 7.81 0.09 1.17
when under the influence of Basel II norms. ** Separate reportings began on March 15, 2005.The norms and guidelines per se may not * Including data for reporting Fridays (RF). $ Based on original unrounded figures. Source: RBI.
be against bank lending in favour of such sections; it is the inherent biases in the Table 3: Comparison of Call, Overnight CBLO and Repo Rates
functioning of the banking system, without Week-Ending Weighted Average Rates Daily Average Volumes vigorous monitoring, that hinder such (in Per Cent) (Rs crore) lending. We have vast experience in the Call Overnight CBLO Repo Call Overnight CBLO Repo
way the commercial banks have conducted 5-Jan-07 8.68 6.43 7.25 13520 15052 6794 12-Jan-07 8.24 7.27 7.40 13321 16371 5976
themselves in the post-reform period. Take
19-Jan-07 8.01 7.23 7.31 11797 16230 6944the example of branch banking; when the 25-Jan-07 7.84 7.25 7.31 12390 14755 5981 RBI gave up its branch licensing policy and 2-Feb-07 7.79 7.35 7.45 10200 12750 5584
9-Feb-07 7.42 6.83 7.10 13284 19848 8030
gave bank boards the freedom to decide on 15-Feb-07 7.08 6.76 6.77 13685 18674 7593 branch expansion, the banks not only stopped 23-Feb-07 7.37 6.80 6.98 13414 19932 7812
opening rural branches but also tended to Source: The Clearing Corporation of India (CCIL).reduce the number of bank branches operat-
Table 4: Details of Central Government Market Borrowing
ing in rural areas. As a result, the average (Amount in rupees crore)population covered per rural branch has shot
Date of Nomenclature Notified Competitive Competitive Indicative Devolvement
up from 13,462 in 1991 to 15,667 in 2001 and
Auction of Loan Amount Bids Bids YTM at on Primary further to 16,650 in 2005. The urban coverage, Received Accepted Cut-off Dealers Price (in (Rs Crore)
on the other hand, has fallen from 14,484
Number Amount Number Amount (Per Cent)
to 14,137 and to 13,619, respectively.
9-Feb-07 7.37 per cent 6000 170 10049 82 5983 7.88
As per a recent NSSO survey, of the
2014 (Rs 97.25) Nil estimated 89 million farm households, as 9-Feb-07 8.33 per cent 3000 220 8754 90 2998 8.19 many as 46 million (51 per cent) do not 2036 (Rs 101.53) Nil have any borrowing arrangements; in fact, Source: RBI Press Releases.
Economic and Political Weekly March 17, 2007
Graph C: Annualised Forward Premia in Graph D: Yield Curves for Datedgilt-edged markets cautious. With infla-Percentage for the US Dollar in theSecurities – Weighted Average for
tion surging continuously from 6.11 per
Domestic Inter-Bank Market and WeightedWeeks of February 2007
cent to 6.58 per cent and further touching a peak of 6.73 per cent accompanied by firmness in international crude oil prices,
the authorities began assuring that the
Averages of Call Rates for February 2007 Yield (per cent per annum)Per cent per annum -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 2.0 4.0 6.0 8.0 10.0 12.0 14.0 --i ll i i Weighted Averages of Call Rates (Right Axis) 1-month 3-month 6-month 6.5 7 7.5 8 8.5 9 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 21 22 23 27 29 1st Week 2nd Week 3rd Week 4th Week measures to arrest inflationary expecta
tions and to contain inflation would be put
in place. Thus, the RBI announced a hike
in CRR of 50 bps to 6 per cent, effective
in two phases of 25 bps each on February
17 and March 3, thereby impounding about
Rs 14,000 crore; earlier CRR was similarly
raised in two phases from 5 per cent to 5.50
per cent in December/January 2007. On
Working Days
manner, that is, without there being sufficient spread of branch banking, and where there are branches, without there being sufficient bank staff and other infrastructure. All these would be further constrained when the banks are operating under the threat of Basel II norms.
And when the banks do expand their credit base for farmers and other informal sectors without the support of a welldesigned institutional structure in the form of bank branches and staff, the probability of such bank loans becoming NPAs is indeed high. And when that happens, there would be yet another bout of reforms, the consequences of which would be further exclusion of still larger sections of informal sectors. One is, therefore, not surprised that when SMEs become the focus of fresh credit delivery arrangements, small enterprises amongst the SMEs get neglected and only the medium ones get attention.
Years to Maturity
Overall, the heart of the policymaking system is in reform processes and processes of international market-dominating Basel II norms. Any provision for “financial inclusion” is an esoteric and half-hearted response to social pressures. From the genuine yardstick of a healthy and egalitarian pattern of economic development, this whole approach should be based on a calibrated balancing of prudential norms and more genuinely inclusive as well as regionally and functionally well-spread banking services.
II Money, Gilt-Edged and Forex Markets
The month of February saw interplay of policy responses in view of inflation as well as interest rate and exchange rate dynamics, thereby impinging on market sentiments and making the money and
Table 5: Auctions of 91-Day Treasury Bills
(Amount in rupees crore)
both the occasions, the immediate fallout was an all-round hike in benchmark prime lending rates (PLRs) across banks but the impact on the latest occasion in terms of PLR increases and also firmness in overnight and gilt-edged rates, has been much steeper. There has been turmoil in money and gilt-edged markets with the yield curve shifting upwards across the maturity spectrum. But, following the cut in fuel prices, the market began anticipating that along with monetary measures, cut in fuel prices and import duty cuts, inflation would remain under control. Simultaneously, the authorities had to shift their exchange rate policy stance, of allowing the rupee to strengthen so as to fight inflation; as strengthening of the rupee led to an apparent erosion of the economy’s export competitiveness, the RBI began to intervene in the forex market to arrest the rupee value but this has been an arduous task given a number of pointers – primarily the massive inflow of foreign exchange assets – pushing
| Date of Auction | Notified Amount | Bids Tendered | Bids Accepted | Subscription Devolved | Cut-off Price | Cut-off Yield Rate | Amount Outstanding on the Date of Issue | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (1) | (2) | No (3) | Face Value (Amount)(4) | No (5) | Face Value (Amount) (6) | on PDs (Amount) (7) | (Rupees) (8) | R ate (Per Cent) (9) | Total (10) | With RBI (11) | Outside RBI(12) |
| 2006 | |||||||||||
| Feb 1 | 500.00 | 4 7 | 2481.16 | 8 | 500.00 | 0.00 | 98.39 | 6.56 | 12245.48 | 0.00 | 12245.48 |
| Feb 8 | 500.00 | (3) 3 4 | (206.54)1453.47 | (3) 9 | (206.54)500.00 | 0.00 | [98.39]98.39 | [6.55]6.56 | 12246.96 | 0.00 | 12246.96 |
| Feb 15 | 500.00 | (2) 3 9 | (1.48)1095.22 | (2) 2 0 | (1.48)500.00 | 0.00 | [98.40]98.36 | [6.50]6.68 | 12812.75 | 0.00 | 12812.75 |
| Feb 22 | 500.00 | (4) 3 4 | (787.44)1048.74 | (4) 2 0 | (787.44)500.00 | 0.00 | [98.37]98.36 | [6.63]6.68 | 13464.75 | 0.00 | 13464.75 |
| Mar 1 | 500.00 | (3) 3 7 | (652.00)1479.10 | (3) 2 2 | (652.00)500.00 | 0.00 | [98.36]98.36 | [6.67]6.68 | 13563.57 | 0.00 | 13563.57 |
| 2007 | (2) | (461.82) | (2) | (461.82) | [98.37] | [6.63] | |||||
| Feb 7 | 2000.00 | 8 8 | 4361.96 | 3 3 | 2000.00 | 0.00 | 98.16 | 7.52 | 30665.65 | 0.00 | 30665.65 |
| Feb 14 | 2000.00 | (1) (2000.00) 6 7 2322.77 | (1) 5 9 | (2000.00) 2000.00 | 0.00 | [98.17] 98.02 | [7.48] 8.10 | 30445.57 | 0.00 | 30445.57 | |
| Feb 21 | 2000.00 | (4) (705.44) 128 7019.30 | (4) 3 3 | (705.44) 2000.00 | 0.00 | [98.09] 98.10 | [7.81] 7.77 | 29595.57 | 0.00 | 29595.57 | |
| Feb 28 | 2000.00 | (4) (1900.00) 103 6127.05 | (4) 3 1 | (1900.00) 2000.00 | 0.00 | [98.12] 98.17 | [7.69] 7.48 | 33282.57 | 0.00 | 33282.57 | |
| (3) (4250.00) | (3) | (4250.00) | [98.19] | [7.39] |
Figures in parentheses in cols 3 to 6 represent numbers and amounts of non-competitive bids which are not included in the total.Figures in the square brackets under cols 8 and 9 represent weighted average price and respective yield.
Economic and Political Weekly March 17, 2007
the rupee to appreciate. Consequently, these sterilisation activities resulted in improved rupee liquidity, thus negating the impact of the CRR hike and resulting in sharp declines in repo bids; in fact, no repo bids were being tendered in the last week of the month, and call rates returned gradually to the repo-reverse repo corridor and gilt yields eased across maturities. With the growth scenario continuing to remain buoyant and liquidity improving, the market participants remained cautious, as they were suspicious of further monetary tightening. However, a dampener was the announcement of conversion of recapitalisation bonds into regular securities. But, the RBI notifying that the interest on eligible CRR balances would be paid with retrospect effect buoyed market sentiments. In addition, the easing of inflation rate in the last week of the month supported these positive sentiments. With the improved tax collections, the market began expecting slightly lower borrowings in the next fiscal year. Also, following the budget announcements, yields rose across maturities as government borrowings were placed only marginally higher than in the current fiscal year. Apart from central and state governments tapping the market, Orissa and Rajasthan undertook debt buyback of their past debt issuances. Despite the CRR hike, the state auctions were fully subscribed.
Call Money Market
After a month and a half of high volatility in overnight rates (Tables 1 and 2), February saw rates hovering within the repo-reverse repo corridor for the most part of the month, though after ruling above the repo rates in the beginning of the month and following the CRR hike. The month began with the high call rates easing from
7.76 per cent on January 31 to 7.63 per cent on February 2, month’s first reporting Friday. The weighted average of call rates rose to 7.87 per cent on February 5 given the demand in the beginning of the new fortnight. As the liquidity situation improved, the call rates eased consistently to
7.13 per cent on February 8. Despite the outflows towards dated securities auction, the call rate eased to 6.28 per cent on February 9. Thereafter, the overnight rate edged up in a range of 6.51-6.59 per cent. However, following the announcement of the CRR hike on February 13, the rate began firming up and rose to 7.10 per cent on February 14 and then to 7.81 per cent on the next day. On the second reporting 7 per cent for most part of the month and Friday, February 17, the rate eased to 7.68 in the last week, they also ruled below per cent despite the increased CRR rates, 6 per cent while the call rate generally but jumped to a peak of 8.08 per cent on remained relatively firm (Table 3). February 19. Thereafter, the call rates eased continuously to touch a low of 6.08 per
Forex Market
cent on February 28, due to improved liquidity on account of retrospect interest The authorities’ about-turn in exchange on CRR balances (Graph A). rate management has been a distinct aspect
Among the three short-term rates, the of the forex market in February. Essen-CBLO and market rates began ruling below tially as an instrument of fighting inflation,
Table 6: Auctions of 182-Day Treasury Bills
(Amount in rupees crore)
Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue
2006 Feb 8 500.00 25 813.00 All bids rejected 11137.23
(2) (66.50) Feb 22 500.00 29 1253.00 7 500.00 0.00 96.75 6.73 10137.23
2006 Feb 7 1500.00 57 3790.00 12 1500.00 0.00 96.34 7.62 20112.83
(0) (0.00) (0) (0.00) [96.36] [7.58] Feb 21 1500.00 55 3903.00 8 1500.00 0.00 96.29 7.73 19612.83
(0) (0.00) (0) (0.00) [96.32] [7.66
Figures in the square brackets represent weighted average price and the respective yield. Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.
Table 7: Auctions of 364-Day Treasury Bills
(Amount in rupees crore)
Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue
2006 Feb 1 1000.00 48 2486.00 17 1000.00 0.00 93.70 6.74 46110.43
[93.67] [6.76]
2007 Feb 14 2000.00 69 8065.50 5 2000.00 0.00 92.75 7.84 49758
(1) (96.00) (1) (96.00) [92.77] [7.81] Feb 28 2000.00 65 4575.00 28 2000.00 0.00 92.84 7.73 50758
(0) (0.00) (0) (0.00) [92.91] [7.65]
Figures in the square brackets represent weighted average price and the respective yield. Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.
Table 8: Profile of Major Commercial Bond Issues during February 2007
Sl Issuing Company/Rating Nature of Coupon in Per Cent Per Annum Amount in No Instrument and Tenor Rs Crore
FIs/Banks
1 Housing Development Bonds 9.2 per cent for 5 years 200 Finance Corp AAA by Crisil, Icra
2 Small Industries Bonds 9.60 per cent for 10 years 1000 (500) Development Bankof India AAA by Care
3 Bank of Maharashtra Bonds 9.90 per cent for 15 years 200(100) AA & AA- by Crisil & Care4 Syndicate Bank Upper Tier II 9.30 per cent for 15 years & step-up of 240(140) AA+ & AA by Crisil & Care Bonds 50 basis points if call is not exercisedat the end of 10th year
Central Undertaking
1 Power Grid Corporation Ltd Bonds 8.65 - 9.25 per cent for 10 years 600 AAA by Crisil & Icra Total 2042 Total for February-06 (a year ago): Rs 3,265 crore. Total for January-07(a month ago): Rs 2,155 crore
Note: The amount shown in brackets above denotes the greenshoe option of the issue. Source: Various media sources.
Economic and Political Weekly March 17, 2007 the rupee has been allowed to appreciate during the past six months in particular, between August 2006 and the first week of February it gained about Rs 2.50 per US dollar. The latest data on REER (base:2004-05=100) suggests that the rupee stands appreciated by 7 per cent against six major currencies during the period. Even against the wider basket of 36 currencies, the rupee stands to have gained in real terms. The relatively high level of the country’s inflation is providing strength to the rupee resulting in erosion in the economy’s export competitiveness. The IT companies have reported erosions in their profitability compared with their potential due to the strengthening of the rupee and higher domestic costs. These have prompted the authorities to reconsider their policy stance, to intervene in the forex market and to achieve measured rupee depreciation. But, it has been a hard task for the RBI to achieve this, for all fundamentals have favoured the rupee’s continued strengthening: buoyancy in the domestic stock market and many attractive public offerings during the month, large foreign currency borrowings, healthy performance of the macroeconomy leading to the recent ratings upgrade by Standards & Poor’s and all of these resulting in increased inflow of foreign currency assets at around $ 14,144 million, the highest in any month of the fiscal year so far. Though the PSU banks have been intervening in the forex market at the behest of the RBI since November, the purchases that they have been made in the second-half of February must have been sizeable giving rise to a 20 paise depreciation against the US dollar. And as the domestic stock market displayed signs of weakness along with month-end demand for dollars, the rupee weakened and after the budget announcement, rupee further depreciated.
It is for the first time since July 2006, that the rupee has depreciated by 20 paise in February. Despite RBI intervention in November and December 2006, the rupee had appreciated in those months. The month began with the rupee appreciating from Rs 44.17 on January 31 to Rs 44.11 on February 2 and further to Rs 44.09 on February 7 due to ratings upgrade and buoyancy in stock markets, but RBI intervened to arrest the rupee’s movement and it dipped to Rs 44.12 on February 8. Given the robust GDP growth estimates and newspaper reports on the exchange rate as an inflation-targeting instrument, the rupee edged up to Rs 44.06 on February 9 but was driven down to Rs 44.18 on February
12. It appreciated continuously to Rs 44.07 on February 19 after the RBI announced monetary tightening measures. With the weakening of stock indices, increased month-end demand for dollars and heavy RBI purchases, the rupee depreciated to Rs
44.28 on February 23. But with improved inflows, it rose to Rs 44.17 on February 26, and following the announcement of the budget, the rupee dipped to Rs 44.31 on February 28 on account of massive decline in stock indices (Graph B).
Following the spot rate, the forward premia moved in a range bound manner. The six-month forward premia declined from 3.38 per cent on February 2 to 3 per cent on February 12, which jumped to 3.07 per cent on February 13 and further to 3.67 per cent on the next day following the announcement of hike in CRR. But, then it again eased to 3.12 per cent on February 22. With the emerging monthend demand for dollars, the premia rose to 3.50 per cent on February 28 (Graph C). Among the three maturities of the forward premia, the premia on one-month tenure rose more than the other two tenures indicating possible appreciation of the rupee in longer periods as compared to that in near-term.
III Primary Market
Dated Securities
As per the scheduled calendar for issuances, the government mobilised Rs 9,000 crore on February 9, by reissuing 7.37 per cent 2014 and 8.33 per cent 2036 for notified amounts of Rs 6,000 crore and Rs 3,000 crore through price-based auctions using multiple price auction method. For underwriting these issues, RBI offered higher cut-off rates of 7 paise and 3.33 paise for
Table 10: Repo Transactions inGovernment Paper@ (Other thanwith the RBI) – February 2007
Repo Period Amount Range of Interest in Number (Rupees (Per Cent of Days Crore) Per Annum)
1 108075.30 5.00-7.90 (7.06)2 18107.45 5.00-8.20 (7.35) 3 31419.68 5.95-7.70 (6.71)4 7320.38 5.75-8.20 (7.51)
All Issues 1-60 165665.49 5.00-9.50 (7.04)[1-70] [145155.02] [2.00-13.00] [7.31]
@ Cover all types of securities. Figures in round brackets are weighted average interest rate; in square bracket, the figure represents the previous month’s turnover/interest rate.
Table 9: Operations of RBI’s Liquidity Adjustment Facility**
(Amount in rupees crore)
Range of Repo (Injection)* Reverse Repo (Absorption)* Net Injection Net For the Week Repo/RR Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding (Dec 2006-Period Number Amount Number Amount Number Amount Number Amount Daily Averages Absorption (-) Amount Jan 2007) Days of Bids of Liquidity at the
Accepted Week End@
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
02 Jan - 05 Jan 07 1-3 66 26660 66 26660 105 42150 105 42150 10538 -15490 5185 08 Jan - 12 Jan 07 1-3 197 92775 197 92775 26 1390 26 1390 278 91385 -20725 15 Jan - 19 Jan 07 1-3 155 66660 155 66660 27 855 27 855 171 65805 -11810 22 Jan - 25 Jan 07 1-3 115 48595 115 48595 19 840 19 840 210 47755 -11445 29 Jan - 02 Feb 07 2-3 80 29980 80 29980 21 4225 21 4225 1408 25755 -7450 05 Feb - 09 Feb 07 1-3 36 22300 36 22300 36 5815 36 5815 1163 16485 1750 12 Feb - 15 Feb 07 1-4 24 11925 24 11925 52 13140 52 13140 3285 -1215 -5140 19 Feb - 23 Feb 07 1-3 55 18495 55 18495 51 20035 51 20035 4007 -1540 6940 26 Feb - 02 Mar 07 1-3 ----207 118810 207 118810 23762 -118810 22420
Notes: * with effect from January 31, 2007 the Repo Rate is 7.50 per cent and Reverse Repo Rate 6.00 per cent.** Includes Second LAF Auctions under Repo and Reverse Repo. @ Net of Repo and Reverse Repo Outstandings.
Economic and Political Weekly March 17, 2007 the 7-year and 29-year papers, respectively, while in January for the 29-year, RBI had offered 1.88 paise (Table 4).
For the 7-year paper, the cut-off yield was set higher at 7.88 per cent as against
7.31 per cent set in December 2006, but lower than that set at 7.92 per cent in June 2006. Unlike it, the yield set for the 29-year paper at 8.19 per cent was lower than that set at 8.23 per cent in January and also higher than that set at 8.10 per cent in October 2006. The yields set at the auction assisted the market being impervious of the surge in inflation rate during the week of its issuance.
Seven state governments tapped the market to mobilise an aggregate amount of Rs 3,399.573 crore through a yieldbased auction using multiple price auction method on February 22. Underwriting from primary dealers was accepted only for Andhra Pradesh and Uttar Pradesh stocks at 8 paise and 43.79 paise per Rs 100, respectively. All issues were oversubscribed. The cut-off yields were set higher in the range of 8.10-8.45 per cent with the lowest being set for Arunachal Pradesh and highest for Uttar Pradesh which is higher than that set for Jammu and Kashmir at
7.95 per cent for the same maturity on February 2 and also higher than that set in January in the range of 7.96-7.99 per cent.
On February 22, Orissa (12 securities) and Rajasthan (13 securities) offered to buy back a set of their securities. For Orissa, 82 bids were received for them for an amount of Rs 542.42 crore, of which Rs 308.20 crore worth of securities were bought back at a cut-off discount of
Appendix Table: Secondary Market Operations in Government Paper – RBI’s SGL Data
(Amount in rupees crore)
| Descriptions | Week Ending February 2007: Yield to Maturity on Actual Trading | Total for the Month | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2 3 | 1 6 | 9 | 2 | of February 2007 | |||||||||||
| AMT | YTM | CY | AMT | YTM | CY | AMT | YTM | CY | AMT | YTM | CY | AMT | YTM | CY | |
| 1 Treasury BillsA 91-Day Bills B 182-Day BillsC 364-Day Bills 2 GOI Dated Securities | 636.54 132.60 749.29 | 7.58 7.29 7.63 | 413.90 65.90 370.21 | 7.46 7.11 7.53 | 536.74 328.75 1066.80 | 7.32 7.49 7.41 | 408.62 817.71 135.15 | 7.40 7.36 7.52 | 1995.80 1344.96 2321.45 | 7.457.377.51 | |||||
| A Regular (Per Cent: Year) 11.00 , 2007 | 7.10 | 7.48 | 10.88 | - | - | - | - | - | - | - | - | - | 7.10 | 7.48 | 10.88 |
| 11.90 , 2007 | 736.69 | 7.71 | 11.78 | 371.00 | 7.59 | 11.76 | 46.40 | 7.50 | 11.75 | 330.00 | 7.45 | 11.74 | 1484.09 | 7.61 | 11.76 |
| 11.40 , 2008 | 130.00 | 7.81 | 10.85 | - | - | - | - | - | - | - | - | - | 130.00 | 7.81 | 10.85 |
| 11.50 , 2008 | - | - | - | - | - | - | 0.15 | 7.90 | 11.02 | 75.15 | 7.50 | 10.97 | 75.30 | 7.50 | 10.97 |
| 12.00 , 2008 | - | - | - | 251.00 | 7.56 | 11.42 | - | - | - | - | - | - | 251.00 | 7.56 | 11.42 |
| 7.07 , 2009 OMC SB | - | - | - | 109.00 | 8.17 | 7.22 | 169.80 | 8.11 | 7.21 | - | - | - | 278.80 | 8.13 | 7.22 |
| 7.33 , 2009 OIL MKT BONDS | 300.00 | 8.32 | 7.47 | 50.00 | 8.35 | 7.47 | 20.00 | 8.12 | 7.44 | 20.00 | 8.15 | 7.45 | 390.00 | 8.31 | 7.46 |
| 11.99 , 2009 | - | - | - | - | - | - | - | - | - | 25.00 | 7.51 | 11.02 | 25.00 | 7.51 | 11.02 |
| 7.55 , 2010 | - | - | - | 160.15 | 7.70 | 7.58 | 20.00 | 7.68 | 7.58 | 0.30 | 7.69 | 7.58 | 180.45 | 7.70 | 7.58 |
| 11.30 , 2010 | 20.00 | 7.95 | 10.28 | - | - | - | - | - | - | - | - | - | 20.00 | 7.95 | 10.28 |
| 11.50 , 2010 | - | - | - | - | - | - | 105.00 | 7.71 | 10.36 | 175.00 | 7.71 | 10.36 | 280.00 | 7.71 | 10.36 |
| 12.25 , 2010 | - | - | - | - | - | - | - | - | - | 50.00 | 7.74 | 10.81 | 50.00 | 7.74 | 10.81 |
| 12.29 , 2010 | 25.07 | 7.95 | 11.05 | 0.04 | 8.90 | 11.31 | 150.00 | 7.72 | 10.98 | 45.00 | 7.74 | 10.98 | 220.10 | 7.75 | 10.99 |
| 9.39 , 2011 | 180.30 | 7.96 | 8.93 | 70.00 | 7.89 | 8.90 | 945.90 | 7.72 | 8.85 | 55.00 | 7.72 | 8.85 | 1251.20 | 7.76 | 8.86 |
| 12.32 , 2011 | 5.03 | 8.20 | 10.84 | 0.03 | 8.93 | 11.09 | - | - | - | - | - | - | 5.05 | 8.20 | 10.85 |
| 7.27 , 2012 | 10.00 | 7.93 | 7.52 | - | - | - | - | - | - | - | - | - | 10.00 | 7.93 | 7.52 |
| 7.40 , 2012 | 175.47 | 7.93 | 7.57 | 50.26 | 7.97 | 7.58 | 301.60 | 7.61 | 7.47 | 13.04 | 7.62 | 7.47 | 540.37 | 7.75 | 7.51 |
| 7.44 , 2012 OIL MKT BONDS | - | - | - | - | - | - | 105.00 | 8.22 | 7.69 | - | - | - | 105.00 | 8.22 | 7.69 |
| 7.44 , 2012 OMC SB | 60.00 | 8.44 | 7.76 | 60.00 | 8.24 | 7.69 | - | - | - | 5.00 | 8.13 | 7.66 | 125.00 | 8.33 | 7.72 |
| 7.37 , 2014 | 951.97 | 7.98 | 7.62 | 1534.58 | 7.88 | 7.58 | 1686.66 | 7.85 | 7.57 | 10.00 | 7.64 | 7.48 | 4183.21 | 7.89 | 7.58 |
| 11.83 , 2014 | 43.50 | 8.07 | 9.75 | - | - | - | 4.00 | 7.61 | 9.51 | - | - | - | 47.50 | 8.03 | 9.73 |
| 7.59 , 2015 OMC SB | 25.00 | 8.48 | 8.00 | - | - | - | - | - | - | - | - | - | 25.00 | 8.48 | 8.00 |
| 9.85 , 2015 | 10.00 | 8.12 | 8.91 | 7.50 | 7.66 | 8.66 | 2.50 | 7.38 | 8.52 | 5.00 | 7.95 | 8.81 | 25.00 | 7.87 | 8.78 |
| 7.59 , 2016 | 159.15 | 8.00 | 7.79 | 66.83 | 7.91 | 7.75 | 154.00 | 7.73 | 7.66 | 293.50 | 7.72 | 7.66 | 673.48 | 7.81 | 7.70 |
| 7.46 , 2017 | 0.85 | 8.00 | 7.75 | 40.09 | 7.93 | 7.71 | 5.15 | 7.77 | 7.63 | 10.72 | 7.79 | 7.64 | 56.81 | 7.89 | 7.69 |
| 8.07 , 2017 | 169.04 | 7.98 | 8.02 | 45.77 | 8.01 | 8.04 | 84.13 | 7.76 | 7.90 | 168.18 | 7.75 | 7.90 | 467.12 | 7.86 | 7.96 |
| 6.25 , 2018 | 0.70 | 8.15 | 7.23 | 1.00 | 7.91 | 7.10 | 4.25 | 7.88 | 7.09 | 2.35 | 7.87 | 7.08 | 8.30 | 7.91 | 7.10 |
| 6.05 , 2019 | 4.65 | 8.16 | 7.22 | 2.40 | 7.99 | 7.12 | - | - | - | - | - | - | 7.05 | 8.10 | 7.19 |
| 6.35 , 2020 | 10.00 | 8.17 | 7.41 | 1.06 | 7.93 | 7.27 | 0.12 | 7.83 | 7.21 | - | - | - | 11.18 | 8.14 | 7.40 |
| 10.70 , 2020 | 13.69 | 8.20 | 8.93 | 4.04 | 8.14 | 8.88 | 7.06 | 7.76 | 8.63 | - | - | - | 24.79 | 8.06 | 8.83 |
| 7.75 , 2021 OMC SB | 12.33 | 8.35 | 8.16 | 2.94 | 8.26 | 8.10 | 25.65 | 8.27 | 8.11 | 2.20 | 8.25 | 8.10 | 43.12 | 8.29 | 8.12 |
| 7.94 , 2021 | 328.88 | 8.08 | 8.04 | 107.42 | 8.11 | 8.06 | 266.03 | 7.87 | 7.89 | 704.68 | 8.11 | 8.06 | 1407.01 | 8.06 | 8.02 |
| 8.13 , 2021 OMC SB | 17.60 | 8.32 | 8.26 | 281.99 | 8.30 | 8.25 | 132.79 | 8.29 | 8.24 | 14.11 | 8.19 | 8.17 | 446.48 | 8.29 | 8.24 |
| 8.15 , 2022 FCI SB | 138.16 | 8.38 | 8.32 | 23.18 | 8.29 | 8.25 | 109.81 | 8.27 | 8.24 | 20.87 | 8.17 | 8.17 | 292.02 | 8.32 | 8.27 |
| 6.17 , 2023 | 27.00 | 8.19 | 7.53 | 0.50 | 7.69 | 7.18 | 2.00 | 7.71 | 7.19 | 2.04 | 8.27 | 7.58 | 31.54 | 8.16 | 7.50 |
| 6.30 , 2023 | 10.05 | 8.17 | 7.56 | - | - | - | 0.54 | 7.87 | 7.35 | 1.00 | 7.95 | 7.40 | 11.59 | 8.14 | 7.53 |
| 8.24 , 2027 | 260.00 | 8.20 | 8.21 | - | - | - | - | - | - | - | - | - | 260.00 | 8.20 | 8.21 |
| 6.01 , 2028 | 1.50 | 7.81 | 7.37 | - | - | - | 11.00 | 8.00 | 7.52 | 11.25 | 8.06 | 7.57 | 23.75 | 8.01 | 7.54 |
| 7.50 , 2034 | 3.45 | 8.16 | 8.08 | 6.10 | 8.10 | 8.03 | 23.50 | 7.93 | 7.88 | 4.16 | 8.16 | 8.08 | 37.21 | 8.01 | 7.95 |
| 8.33 , 2036 | 214.75 | 8.19 | 8.21 | 439.28 | 8.11 | 8.14 | 563.72 | 8.09 | 8.11 | 105.10 | 8.09 | 8.11 | 1322.85 | 8.11 | 8.14 |
| Sub-total | 4071.20 | 8.01 | 8.76 | 3690.82 | 7.92 | 8.43 | 4958.55 | 7.87 | 8.13 | 2161.16 | 7.83 | 9.00 | 14881.74 | 7.91 | 8.50 |
| B RBI’s OMO: Sales | 13.00 | - | - | 9.00 | - | - | - | - | - | 52.00 | - | - | 74.00 | ||
| Purchase | - | - | - | - | - | - | - | - | - | - | - | - | 0.00 | ||
| Sub-total | 13.00 | - | - | 9.00 | - | - | 0.00 | - | - | 52.00 | - | - | 74.00 | ||
| (A+B) 3 Market Repo 4 State Govt Securities | 4084.20 48197.79 423.43 | 8.01 8.21 | 8.76 3699.82 39342.62 8.39 222.85 | 7.92 7.79 | 8.43 10.59 | 4958.55 49467.42 197.08 | 7.87 7.83 | 8.13 2213.16 28657.70 8.79 73.39 | 7.83 7.74 | 9.00 14955.74 165665.53 9.79 916.75 | 7.91 7.99 | 8.50 9.12 | |||
| Grand total (1 to 4) | 54223.85 | 44115.30 | 56555.34 | 32305.73 | 187200.23 |
(-) means no trading YTM = Yield to maturity in percentage per annum CY = Current yield in per cent per annum SGL = (RBI’s) Subsidiary General Ledger OMO = Open Market Operations OMC SB= Oil Marketing Companies Special Bonds. Securities with small-size transactions (Rs 5 crore or less) have been dropped from the above list but included in the respective totals. Notes: (1) Yields are weighted yields, weighted by the amounts of each transaction.
Economic and Political Weekly March 17, 2007 0.37 per cent. In case of Rajasthan, 25 bids for Rs 386.16 crore were received of which Rs 84.46 crore worth of securities were bought back at the reference price.
On February 15, the government issued
8.20 per cent 2022, 8.24 per cent 2027 and
8.28 per cent 2032 for aggregate amounts of Rs 1,632.33 crore, Rs 4,388.55 crore and Rs 2,687.11 crore, respectively, to 19 nationalised banks. These were issued in lieu of outstanding amount of 10 per cent each of Nationalised Banks’ Recapitalisation Bonds and special security, 2006 aggregating to Rs 4,818.78 crore and Rs 3,889.21 crore held by these nationalised banks.
Treasury Bills
The yields on treasury bills gyrated during the month reflecting the underlying inflation and liquidity situation. Also, as against in the previous month, all the auctions in February were fully subscribed. The yield on 91-day TBs eased from 7.56 per cent on January 31 to 7.52 per cent on February 7, but jumped to 8.10 per cent on February 14 following the advancing inflation rate and hike in CRR limit. But, as liquidity remained easy, the rate dipped sharply to 7.77 per cent on February 21 and further to 7.48 per cent on February
28. Similarly, the yield on 182-day TB eased from 7.75 per cent on January 24 to 7.62 per cent on February 7 but moved up again to 7.73 per cent on February 21. Unlike them, the yield on 364-day TB rose consistently from 7.27 per cent on January 17 to 7.70 per cent on January 31 to 7.84 per cent on February 14 but eased to 7.73 per cent on February 28 due to improved liquidity scenario (Tables 5 to 7).
Corporate Bonds Market
In sync with the buoyant growth scenario, the mobilisations from the corporate bond market increased for the first nine-months of the current fiscal year to Rs 67,082 crore as against Rs 52,742 crore in the corresponding period last year as per the data put out by Prime Database. As usual, banks and financial institutions accounted for the bulk of mobilisations, followed by private sectorand public sector undertakings. However, in the latest two months, mobilisations have dipped as domestic interest rates firmed up rather rapidly given the 100 basis points increase in CRR in a span of two months or so, thereby increasing the interest differential between domestic and international markets. Simultaneously, the ratings upgrade by Standards & Poor’s helped borrowers to mobilise funds in offshore markets at relatively cheaper and competitive rates. As a result, the mobilisations from domestic markets declined while that in offshore markets increased.
The mobilisations dipped to Rs 2,042 crore in February as against Rs 2,155 crore in January and Rs 3,265 crore in February 2006 (Table 8). Among the banks/FIs, Bank of Maharashtra had to offer 9.90 per cent for 15 years while in October 2006 for the same maturity but for upper tier II bonds, it had offered 9.10 per cent with a step up of 50 bps in case the call was not exercised at the end of 10 years; thus it turned out to be lower than that offered in February. Also, Power Grid Corporation (PGC) offered a rate in the range of 8.65-9.25 per cent for 10 years as against
8.68 per cent for the same maturity in December 2006. Interestingly, the issue of FCI in January 2007 could mobilise only Rs 66 crore as against a targeted amount of Rs 1,250 crore.
IV Secondary Market
Given the inflation and interest rate uncertainties, the secondary market turnover for gilt-edged securities ruled in a lower range and also fluctuated across weeks as compared to the previous month. The weekly turnover increased from Rs 9,682 crore in week ending February 2 to Rs 14,350 crore in week ending February 9 given the competitive yields set at the dated securities auction, but fell to Rs 12,965 crore in the wake of the CRR hike, but as the liquidity improved due to sterilisation activities of the RBI in the foreign exchange market, the turnover rose to Rs 19,684 crore in the week ending February 23. Despite interest payments on CRR balances, the turnover fell to Rs 13,460 crore as the budget announced somewhat steady market borrowings in spite of improved tax collections.
Following the firmness in inflation and CRR cut, the yield curve shifted upwards across all maturity profiles, but with the improvement in liquidity due to sterilisation activities and easing of inflation rate, the short-term yields eased marginally while the long-term yields firmed up, resulting in somewhat flat yield curve. The spread between 12.29 per cent 2010 and 8.07 per cent 2017 widened from one basis points in week ending February 2 to (-) 88 basis points in week ending February 16 implying inversion of the curve, but narrowed to 4 basis points on February 23. Similarly, the spread between 8.33 per cent 2036 and above-mentioned 10-year security narrowed from 34 basis points to 10 basis points in week ending February 16, but again rose to 21 basis points in February23 (Graph D) (see also Appendix Table).
RBI Reverse Repos, OMOs and MSS
Unlike in previous months, the bids and amount tendered under LAF reverse repo window exceeded those of the repo window manifesting an improved liquidity scenario despite the implementation of the first phase of CRR hike. The repo bids tendered and accepted declined from Rs 22,300 crore in week ending February 9 to Rs 11,925 crore in the next week, but rose to Rs 18,495 crore in the week ending February 23 in the wake of CRR hike, but dipped to nil position in the last week of the month. The reverse repo bids, however, displayed a continually rising trend from Rs 5,815 crore in week ending February 9 to Rs 20,035 crore in week ending February 23 and further to Rs 1,18,810 crore in week ending March 2 with inflow of CRR related interest payments (Table 9).
In February, not only were the repo transactions outside RBI higher at Rs 1,65,666 crore as compared with Rs 1,45,155 crore in January, but also, the weighted average interest rate was lower at 7.04 per cent as compared with 7.31 per cent in January (Table 10).
Commercial Bonds
Following the subdued primary corporate bond market, the secondary market for them also remained subdued with daily average turnover falling from Rs 79 crore to Rs 65 crore, within the total turnover the trading in PSU bonds fell sharply from Rs 374 crore in January to Rs 71 crore.
EPW[While Piyusha Hukeri has prepared the initial draft, the required tabular data have been compiled by V P Prasanth.]
References
Nitsure, Rupa Rege (2005): ‘Basel II Norms:
Emerging Market Perspective with Indian
Focus’, Economic and Political Weekly,
Vol XL, No 12, March 19. Sisodiya, Amit Singh and Sanjay De (2006):
‘Basel II: It’s Gearing Up Time’, The Analyst,
October.
Economic and Political Weekly March 17, 2007
