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Neglect of the Commercial Bond Market

The extensive developments in the financial architecture have benefited the equity and gilt-edged markets but the corporate bond market continues to be excluded. Although the development of this bond market is essential for mobilisation of the vast funds required for infrastructure, many important recommendations such as those of the R H Patil Committee remain unimplemented. Urgent steps must be taken to create the right enabling environment for primary issues for corporate bonds and to establish the infrastructure for secondary market transactions.

Money Market

Neglect of the CommercialBond Market

The extensive developments in the financial architecture have benefited the equity and gilt-edged markets but the corporate bond market continues to be excluded. Although the development of this bond market is essential for mobilisation of the vast funds required for infrastructure, many important recommendations such as those of the R H Patil Committee remain unimplemented. Urgent steps must be taken to create the right enabling environment for primary issues for corporate bonds and to establish the infrastructure for

secondary market transactions.

EPW RESEARCH FOUNDATION

I A Serious Lapse

I
ndia has reasons to be proud of its financial structure, which consists of varied institutions and instruments of service delivery (except for its inegalitarian character). The buoyancy in the financial market activities, which dominate the economic scene, has been the result of extensive efforts made in the postliberalisation phase to ensure an enabling environment for fostering competition, depth, efficiency, transparency and vibrancy in transactions. World-class clearing and settlement systems have been put in place. But, as of now, the benefits of such a comprehensive financial architecture are derived only by equity and gilt-edged markets. There is the third crucial segment of this market architecture, namely, the corporate bonds market that continues to languish for want of the required initiative on the part of the concerned authorities. One is not sure if they realise the extent of damage their inaction is inflicting on the system of providing development finance for various projects, particularly in infrastructure – whether in agriculture or industries or in physical infrastructure.

It was universally perceived that after the acceptance of the system of universal banking, which led to the conversion of the erstwhile development finance institutions (DFIs) into commercial banks and which in turn created a huge gap in project finance, the commercial bonds market would fill this gap. In the meantime, all worthwhile studies have shown that the objectives of sustaining the potentially high 9 per cent or more GDP growth in the medium term will be confronted with serious infrastructure bottlenecks. The Planning Commission has estimated that investments in infrastructure will be of the order of about Rs 14,50,000 crore (or $ 320 billion) during the Eleventh Five-Year Plan (2007-08 to 2011-12). As a percentage of GDP, this would mean doubling of infrastructure investment from 4.6 per cent to 8 per cent during the plan period. In fact, when the Deepak Parekh Committee on Infrastructure Financing (May 2007) revised the demand from some of the sub-sectors, the investment requirements were scaled up to Rs 17,40,000 crore ($ 384 billion) at 2005-06 prices which is equivalent to Rs 21,52,000 crore or $ 475 billion at current prices (union finance minister at a parliamentary consultative committee on September 6, 2007). More important than the need for generating such sizeable investible funds, it is the instruments through which appro priate funds could be mobilised for financial closure of projects that has emerged as a major issue. Bank advances can constitute only small portions of long-term finance for such projects. In this scenario, commercial bonds, appropriately structured, should obviously be the preferred route. These bonds have emerged as the viable instruments of finance for a wide variety of private as well as public sector activities – irrigation projects, power plants, roads, railways, civil aviation, ports and even water supply and drainage projects in municipalities, apart from projects in manufacturing and IT areas.

But unlike the equity and government securities markets, the market for commercial bonds has remained chronically neglected in all aspects of promoting primary issues as well as creating infrastructure for secondary transactions. The sorry state of affairs continues despite the series of recommendations by the R H Patil Committee report titled ‘Report of High Level Expert Committee on Corporate Bonds and Securitisation’ carefully arti culated two years ago in July 2005 and accepted by the government. The apathy shown by the authorities in this respect has invited strong outbursts by R H Patil thus:

There is absolutely no will on the part of policymakers to bring about any reforms in the corporate debt market. For instance, our committee had proposed reforms related to the primary market. Not an inch has moved in this direction (The Economic Times, August 13, 2007).

The recommendations of the committee covered wide-ranging issues including enhancing the issuer as well as investor base, simplification of listing and disclosure norms, rationalisation of stamp duty and withholding tax, consolidation of debt, statutory listing of private placements, creation of market-makers, improving trading systems through introduction of an electronic order matching system, effi cient clearing and settlement systems, a comprehensive reporting mechanism, developing market conventions and self-regulation and development of the securitised debt market.

The RBI did appoint an in-house group to examine the follow-up actions to be

Table 1: Corporate Bonds Trading Reported on BSE and NSE

(Rs crore)

Month NSE BSE Total

March-07 1480.49 3151.86 4632.35* April-07 1279.41 3343.68 4623.09 May-07 1220.95 3691.48 4912.43 June-07 1523.51 3269.28 4792.79 July-07 7190.62 5430.48 12621.09* August-07 3044.89 4206.99 7251.88

* Data for four days in March and one day in July

have not been included. Source: NSE and BSE web sites.

Graph A: Trends in Weighted Averages of Call Rates, Repo Rates, CBLO Rates and Call Money Borrowing – August 2007

16.00 25000
14.00
12.00 20000
10.00 15000
8.00
6.00 10000
4.00 5000
2.00
0.00 0

Call Rates CBLO Rates

Repo Rates -Outside the RBI Call Money Volume (Rs Cr)

undertaken immediately after the report, but nothing of it has been heard thereafter. One possible reason is that there is some overlap of jurisdictions between the apex institutions, on the one hand, and between these institutions and the ministry of finance, on the other. More specifically, the differences in perspectives in this regard came to the fore when the finance minister sought to create a single unified exchange-traded market for corporate bonds. The Securities and Exchange Board of India (SEBI) preferred the Bombay Stock Exchange (BSE) on the ground that (i) there would be concentration of trading at the National Stock Exchange (NSE) in both equity and equity derivative segments, and (ii) there would be conflict of interest as banks and institutions, which own NSE, would also be traders in the corporate bonds segment. Though this reasoning was questioned by market participants, with effect from January 2, 2007 BSE became a single unified reporting platform for all corporate bond deals executed in the country. But, interestingly, SEBI issued new guidelines soon thereafter and NSE began reporting deals executed on its reporting portal from March 2007 onwards (Table 1).

7/28/20077/30/20078/1/20078/3/20078/5/20078/7/20078/9/20078/11/20078/13/20078/15/20078/17/20078/19/20078/21/20078/23/20078/25/20078/27/20078/29/20078/31/2007

50

Graph B: Spot Quotations for the US Dollar in the Domestic Inter-Bank Market

49
47 48 (Daily) Working
44 45 46 Days August 2007
43
41 42 Monthly Averages (Jan 2001 to July 2007
40

In the meantime, the Fixed Income Money Market and Derivatives Association of India (FIMMDA) is also in the process of setting up a reporting platform for the over-the-counter (OTC) trades in corporate bonds and also a consolidated ticker service for reporting all trades in corporate bonds. But, FIMMDA’s website shows no such consolidated ticker as yet.

An important recommendation made by the Patil Committee for expanding the secondary market deals concerned widening of the repo market to include corporate bonds which has to be done by the Reserve Bank of India (RBI), but the RBI has taken the view that a decision on it will be taken “after the proposed trading platforms stabilise and robust clearing and settlement systems (delivery versus payment system) are established” (Annual Policy Statement, April 2007).

There are a number of other secondary market issues like the introduction of an electronic order matching system and efficient clearing and settlement systems, which are yet to be addressed. But, to an extent, the secondary market will grow if there is the healthy growth of the primary market for bonds. In the primary market, an overwhelming amount of issues are in the form of private placements. In this respect, the Patil Committee had made an important suggestion that all private placement issues should be mandatorily listed within seven days of allotment with recognised exchanges so that secondary trading is promoted.

There are thus a number of pending issues, particularly in regard to the widening of the primary market for commercial bonds. A close examination of the various issues suggests that there is something seriously amiss in the development of the financial markets in the country insofar as their integrated and coordinated growth is concerned. The various fora created in the financial system such as the High-Level Coordination Committee on Financial and Capital Markets are said to con centrate on a “coordinated approach to supervision” (RBI Annual Report, 2006-07, p 158). There does not appear to be any institutional arrangement for a coordinated approach to ensuring healthy growth of the various financial markets. The travails of the commercial bond markets provide a strong case for instituting an institutional mechanism in the form of a Board for Financial and Capital Market Development so that the evolving promotional issues of finance are debated and efforts made to resolve them in a coordinated manner.

II Money, Gilt-Edged and Forex Markets

August saw a number of deviations in the operations of government and forex markets from their normal trends in response to changes effected through policy decisions and international developments.

Table 2: Money Market Operations (RBI’s Daily Data)

Average August 2007

Items for Five
Weeks
No of working days 28
Call Money
Weighted average of call rates:

per cent (weekly range) per annum* 0.13-23.82 Daily averages (Rupees crore)

Total call market borrowings 7935

Notice Money Weighted average of notice money rates:

per cent (weekly range) per annum* 0.10-10.35 Daily averages (Rupees crore)

Total notice market borrowings 2606

Turnover in term money market 155 (borrowings) $$

31(RF) 24 17(RF) 10 65 56

5.73-6.31 6.20-13.80 6.13-23.82 3.47-6.17

(5.73) 10876

5.50-6.27

(6.0) 1945

191

(180)

(23.82) 11721 10035 12124

5.35-8.07 6.04-10.35 5.00-6.40

(10.4)
3756 2945 2870
248 158 150
(315)

Average July 2007 for Four 3(RF) Weeks 27(RF) 20 13(RF) 6

624 666 6

0.13-2.07 0.19-3.33 0.19-0.51 0.21-0.51 0.37-3.33 0.27-2.87
(2.07) (0.21) (0.27)
7153 7935 7291 8331 9878 6240
(125) (144)

0.10-2.62 0.20-0.40 0.20-0.22 0.23-0.25 0.30-0.40 0.33-4.90

(2.6)
1762 1676
13 150
(0.23) (0.33)
1509 1562 2202 1429
(9371) (8561)
124 277 94 108
(745) (65

*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.

Economic and Political Weekly September 22, 2007 After a gap of two months, concerns about liquidity again resurfaced following the hike in the cash reserve ratio (CRR) by 50 bps announced in the first quarter review of the credit policy pre-empting about Rs 15,000 crore and removal of the cap on absorptions under reverse repo window along with second Liquidity Adjustment Facility (LAF) being withdrawn. Despite the hike in CRR, interest rates did not rise as the finance minister urged banks to bring down the deposit rates. Further, there were the normal as well as Market Stabilisation Scheme (MSS) borrowings along with enhanced limit of MSS absorptions from Rs 1.1 lakh crore to Rs 1.5 lakh crore for the current year thereby inducing concerns of such higher absorptions. Also, the decline in global stock markets in response to US sub-prime mortgage crisis instigated fears of further outflows that may pressure the liquidity scenario. As against the trend in the previous month of short-term and T-bill rates ruling easy, the call rates in August reverted to rule within the informal corridor except for a few cases. Yields on treasury bills jumped significantly across maturities. Even so, the absorptions under LAF reverse repo continued though at a lower level. In the forex market, the rupee rate vis-àvis the dollar depreciated in response to the RBI placing limits on ECB borrowings and deepening US sub-prime mortgages crisis evoking risk averse behaviour among international investors towards emerging markets. However, with the US fed reducing its discount rate, the sentiments turned positive. But, with the heightened political uncertainty in view of the stand off over the nuclear deals among the political parties, the market sentiments remained cautious. In the last week of the month, however, with the temporary freeze on the stand off and return to stability in equity markets along with RBI refraining from issuing MSS securities, the market sentiments turned positive, though cautious as the RBI in its annual report expressed concern about inflation. Also, the central bank of China raised its lending and deposit rates with effect from August 22.

Graph C: Annualised Forward Premia in Percentage for the US Dollar in the Domestic Inter-Bank Market and Weighted Averages of Call Rates for August 2007

0 5 10 15 20 25 30 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 7/30/20078/1/20078/3/20078/5/20078/7/20078/9/20078/11/20078/13/20078/15/20078/17/20078/19/20078/21/20078/23/20078/25/20078/27/20078/29/20078/31/2007 1-month 3-month 6-month Weighted Averages of Call Rates (Right Axis)

Graph D: Yield Curves for Dated Securities – Weighted Averages for Weeks of August 2007

6.50 7.00 7.50 8.00 8.50 9.00 1357911131517202529 Yield (per cent per annum) Years to Maturity 1st Week 2nd Week 3rd Week 4th Week 5th Week

During the month, the RBI transferred surplus profits to the government amounting to Rs 45,719.60 crore which includes Rs 34,308.60 crore on account of profit on sale of SBI shares. Further, government converted recapitalisation of bonds into new marketable securities. Also, the Clearing Corporation of India (CCIL) has developed a reporting platform for OTC interest rate derivatives, which was operationalised from August 30.

Call Money Market

After a gap of about two months, the overnight rates began hovering around the informal corridor set by the reverse repo and repo rates, that is around August 6 when the RBI removed the cap imposed on absorptions under reverse repo and withdrew second LAF.

The month began with the call rates firming up from the minuscule 0.15 per cent on August 1 to 2.07 per cent on August 3, the first reporting Friday (Table 2), as banks began building positions ahead of the CRR hike and outflows towards dated securities auction. The overnight rate rose to 3.47 per cent on August 4 and then jumped to 6.14 per cent on August 6 with the removal of the cap on reverse repo absorptions. Until August 16, the call rate ruled in a narrow range of 6.12-6.19 per cent, but on the second reporting Friday, August 17, the rate peaked to 23.82 per cent in res ponse to huge demand for funds. Thereafter, the call rates eased to 13.8 per cent on August 18

Table 3: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum: Simple Statistical Characteristics

Month/Week Simple Standard Coefficient Simple Standard Coefficient
Mean* Deviation of Variation Mean* Deviation of Variation
(Percentages)$ (Percentages)$
Call Money Notice Money**
July 2007
All four weeks 0.72 0.86 119.72 0.46 1.13 246.61
27 0.29 0.12 40.60 0.10 0.11 109.77
20 (RF)* 0.35 0.11 30.62 0.08 0.12 155.12
13 1.25 1.19 95.22 0.12 0.18 157.27
6 (RF)* 0.99 1.08 109.66 1.54 2.00 129.75
August 2007
All four weeks 5.75 4.59 79.97 4.76 2.77 58.35
31 (RF)* 6.11 0.21 3.37 5.99 0.27 4.58
24 7.74 3.39 43.77 6.36 1.02 16.03
17 (RF)* 9.70 7.90 81.43 5.76 3.70 64.23
10 5.70 1.09 19.14 4.82 2.42 50.32
3 (RF)* 0.48 0.78 164.53 1.29 2.00 155.59

** Separate reportings began on March 15, 2005.

* Including data for reporting Fridays (RF). $ Based on original unrounded figures. Source: RBI.

Table 4: Comparison of Call, Overnight CBLO and Repo Rates

Week-Ending Weighted Average Rates Daily Average Volumes
(in Per Cent) (Rs Crore)
Call Overnight CBLO Repo Call Overnight CBLO Repo
6-Jul-07 0.92 0.17 0.40 9,204 18,056 11,844
13-Jul-07 0.90 0.06 0.26 12,080 26,529 11,937
20-Jul-07 0.33 0.04 0.22 9,893 19,249 11,030
27-Jul-07 0.27 0.03 0.19 8,800 19,466 9,383
3-Aug-07 0.63 0.08 0.32 8,914 15,314 9,079
10-Aug-07 6.08 5.00 5.71 14,994 30,748 16,839
17-Aug-07 7.12 6.01 5.89 12,980 26,196 17,687
24-Aug-07 6.41 6.09 6.12 15,476 27,306 17,350
31-Aug-07 6.13 5.74 6.05 12,821 28,085 17,389

Source: The Clearing Corporation of India (CCIL).

and then to 6.21 per cent on August 21. Despite outflows towards dated securities auction, the rate dipped to 6.20 per cent on August 24 and ruled at 6.31 per cent on August 25 following higher foreign currency inflows. There after, liquidity further eased as the RBI refrained from undertaking MSS mobilisations and the call rate fell to 5.73 per cent on August 31 (Graph A). Overall, fluctuations were more in August (Table 3).

In sync with call rates, the market repo (outside the LAF) and the collateralised borrowing and lending obligation (CBLO) rates declined and continued to remain below the call rate. Overnight call rates, market repo rates and CBLO rates have displayed close co-movements during the month (Table 4).

Forex Market

August saw huge volatility across global as well as currency markets amidst the US subprime crisis, turmoil in global credit markets and high crude oil prices.

But the rupee has been resilient amidst all these skirmishes. In correcting the earlier appreciation, it depreciated not only against the US dollar and Chinese Yuan, but also against some of the south-east Asian currencies such as the Hong Kong dollar and Singaporean dollar, along with marginal appreciations against the South Korean won, Malaysian ringgit and Indonesian rupiah. Interestingly, this has happened when the US dollar itself was depreciating against most of the currencies in the wake of the deepening sub-prime mortgage crisis and spreading contagion effect. Also, there were unwinding of yen carry trades as a part of global risk aversion. There were FII outflows from the domestic equities market to the extent of Rs 7,771 crore during August as it implied that the investors’ penchant for emerging markets appeared to have waned albeit temporarily and the rupee-dollar exchange rate

Table 7: Auctions of 182-Day Treasury Bills

(Amount in Rs 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 Aug 09 1,500.00 65 5,683.00 30 1,500.00 0.00 96.77 6.69 14,606.56

[96.78] [6.67] Aug 23 1,500.00 44 2,460.00 20 1,500.00 0.00 96.76 6.72 16,106.56

(1) (500.00) (1) (500.00) [96.77] [6.69]

2007 Aug 08 1,500.00 81 1,985.00 46 1,500.00 0.00 96.50 7.27 25,641.00

(1) (500.00) (1) (500.00) [96.61] [7.04] Aug 22 1,500.00 68 2,235.00 53 1,500.00 0.00 96.41 7.47 27,141.00

(1) (1,500.00) (1) (1,500.00) [96.45] [7.38]

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 5: Details of Central Government Market Borrowing

(Amount in Rs crore)

Date of Auction Nomenclature of Type of Notified Competitive Bids Competitive Bids Indicative YTM at Devolvement on Loan Auction Amount Received Accepted Cut-off Price Primary Dealers Number Amount Number Amount (in Per Cent) (Rs Crore)

1-Aug-07 5.48 per cent 2009 MSS 5,000 111 5,705 107 5,000 7.74 per cent (Rs 96.14) 8-Aug-07 5.48 per cent 2009 MSS 4,000 203 17,630 65 4,000 7.72 per cent (Rs 96.21) 16-Aug-07 5.48 per cent 2009 MSS 4,000 147 8,215 55 4,000 7.99 per cent (Rs 95.82) 22-Aug-07 5.48 per cent 2009 MSS 4,000 176 14,813 37 4,000 7.92 per cent (Rs 95.97) 3-Aug-07 7.99 per cent 2017 Normal 6,000 380 19,948 86 5,988 7.93 per cent (Rs 100.4) Nill 3-Aug-07 7.95 per cent 2032 Normal 4,000 210 9,812 85 3,995 8.45 per cent (Rs 94.83) Nill 24-Aug-07 7.27 per cent 2013 Normal 5,000 224 14,482 32 4,988 7.87 per cent (Rs 97.16) Nill 24-Aug-07 7.99 per cent 2017 Normal 2,000 194 5,855 69 1,986 7.91 per cent (Rs 100.53) Nill

Source: RBI Press Releases.

Table 6: Auctions of 91-Day Treasury Bills

(Amount in Rs crore)

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Outstanding Auction Amount Devolved Price Yield on the Date of Issue No Face Value No Face Value on PDs (Rupees) Rate

(Amount) (Amount) (Amount) (Per Cent) Total With RBI Outside RBI

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

2006 August 02 2,000.00 79 4,703.00 63 2,000.00 0.00 98.42 6.44 27,526.60 0.00 27,526.60

  • (0) (0.00) (0) (0.00) [98.43] [6.40] August 09 2,000.00 64 5,520.59 17 2,000.00 0.00 98.44 6.36 27,585.46 0.00 27,585.46
  • (1) (700.00) (1) (700.00) [98.45] [6.31] August 16 2,000.00 71 3,666.47 49 2,000.00 0.00 98.43 6.40 28,576.26 0.00 28,576.26
  • (2) (1,510.00) (2) (1,510.00) [98.44] [6.36] August 23 2,000.00 54 3,736.15 21 2,000.00 0.00 98.43 6.40 30,559.01 0.00 30,559.01
  • (1) (500.00) (1) (500.00) [98.43] [6.40] August 30 2,000.00 43 2,687.00 31 2,000.00 0.00 98.42 6.44 31,032.91 0.00 31,032.91
  • (1) (100.00) (1) (100.00) [98.43] [6.40]

    2007 August 01 2,000.00 96 4,932.00 55 2,000.00 0.00 98.41 6.48 70,997.00 0.00 70,997.00

  • (1) (200.00) (1) (200.00) [98.43] [6.40] August 08 2,000.00 84 4,295.00 27 2,000.00 0.00 98.39 6.56 73,497.00 0.00 73,497.00
  • (2) (2,500.00) (2) (2,500.00) [98.41] [6.48] August 14 2,000.00 92 3,450.47 59 2,000.00 0.00 98.35 6.73 72,397.00 0.00 72,397.00
  • (2) (303.00) (2) (303.00) [98.37] [6.65] August 22 2,000.00 78 3,990.50 10 2,000.00 0.00 98.33 6.81 72,896.00 0.00 72,896.00
  • (4) (2,050.00) (4) (2,050.00) [98.34] [6.77] August 29 3,500.00 102 7,552.50 24 3,500.00 0.00 98.26 7.10 73,596.00 0.00 73,596.00
  • (2) (550.00) (2) (550.00) [98.28] [7.02]

    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 September 22, 2007 depreciated below the Rs 41-mark. After the US Fed unexpectedly effected a cut in its benchmark rate and as the domestic stock markets recovered, the rupee firmed up. However, again in the wake of political uncertainty over the Indo-US nuclear deals along with firm international crude oil prices, the rupee reverted to below the Rs 41-mark. The market sentiments for the rupee were influenced by the Chinese central bank raising its lending and deposit rates and internally the RBI imposing constraints on ECB borrowings.

    The month began with the rupee-dollar exchange rate slipping from Rs 40.44 on July 31 to Rs 40.55 on August 1 following the weakness in stock markets and firming up of crude oil prices. But, as the domestic stock markets edged up dispelling fears of FII outflows due to the US subprime crisis, the rupee surged to Rs 40.36 on August 3, but with renewed weaknesses in stock markets the rupee fell to Rs 40.45 on August 6. Following the imposition of curbs on ECB borrowings and firm global crude prices, the rupee further dipped to Rs 40.58 on August 8. However, with the deepening and spreading of the impact of US sub-prime mortgage crisis, the rupee breached the Rs 41mark and ruled at Rs 41.57 on August 17. But following the reduction in US discount rate and adjustments in the Fed’s usual discount window practices to facilitate the provision of term financing for as long as 30 days, renewable by the borrower, the rupee rose to Rs 41.06 and further to Rs

  • 40.86 on August 23 as the Chinese authorities set a lower reference rate for the yuan to protect their exports and increased interest rates to combat the rising inflation rates there. But, as there appeared signs of possible political instability in response to the standoff over the nuclear deal issue, the rupee turned weak and dipped to Rs
  • 41.18 on August 24. As there was a truce dismissing fears of immediate instability, the rupee firmed up but as month end demand for dollars remained high, the rupee ruled in a range of Rs 40.98-41.24 until August 30. It rose to Rs 40.96 on August 31 due to buoyancy in stock markets
  • Table 8: Auctions of 364-Day Treasury Bills

    (Amount in Rs crore)

    after higher-than-expected GDP growth figures raised expectations of FII inflows into equities (Graph B).

    The appreciation of the rupee in terms of REER (six-currency trade-based weights) has declined from 107.14 in July to 104.97 as on August 17 while the NEER has declined from 103.23 to 100.95 (base: 2005-06 = 100).

    The forward premia for the US dollar firmed up across maturity as the domestic liquidity came under some pressure. With the spot rupee weakening, exporters sold dollars and booked forwards with a view to gaining from depreciating rupee. As a result, the one-month forward peaked to

    2.48 per cent on August 16. Thereafter, it eased to 0.88 per cent on August 27. But, as the spot rupee depreciated, the exporters sold forward dollars and thereby the premia ruled at (-)0.15 per cent on August 28. It rose to 1.32 per cent on August 31 again as the month-end demand and arbitraging between offshore and onshore influenced the premia (Graph C).

    III Primary Market

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Auction Amount Devolved Price Yield Outstanding Dated Securities No Face Value No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (Per Cent) of Issue

    The government in August mobilised

    2006

    Rs 17,000 crore through two instances by

    Aug 2 2,000.00 113 7,900.00 33 2,000.00 0.00 93.48 6.99 4,3518

    (0) (0.00) (0) (0.00) [93.49] [6.98] issuing two securities each. In the first Aug 16 2,000.00 90 5,955.00 14 2,000.00 0.00 93.51 6.96 4,3520 instance on August 3, the government

    (1) (8.00) (1) (8.00) [93.52] [6.95]

    reissued 7.99 per cent 2017 and 7.95 per

    Aug 30 2,000.00 82 7,030.00 27 2,000.00 0.00 93.54 6.93 4,3526

    (1) (10.00) (1) (10.00) [93.55] [6.91] cent 2032 for notified amounts of Rs 6,000 2007

    crore and Rs 4,000 crore, respectively.

    Aug 1 2,000.00 84 4,675.00 43 2,000.00 0.00 93.26 7.25 5,5627

    (0) (0.00) (0) (0.00) [93.31] [7.19] The cut-off yield for the 10-year paper Aug 14 2,000.00 104 4,685.00 33 2,000.00 0.00 93.05 7.49 5,5619

    was set lower at 7.93 per cent against

    (0) (0.00) (0) (0.00) [93.10] [7.43] Aug 29 2,000.00 113 5,415.00 37 2,000.00 0.00 93.02 7.52 5,5643 7.99 per cent set in July, while the yield

    (2) (93.06) (2) (93.06) [93.06] [7.48] on 25-year security was set higher at 8.45

    Figures in the square brackets represent weighted average price and the respective yield. per cent against 8.34 per cent (Table 5). Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.

    Table 9: Operations of RBI's Liquidity Adjustment Facility**

    (Amount in Rs crore)

    For the Week Range of Repo (Injection) * Reverse Repo (Absorption) * Net Injection Net
    (July-Sept 2007) Repo/RR Bids Received Bids Accepted Bids Received Bids Accepted (+) / Outstanding
    Period Days Number Amount Number Amount Number Amount Number Amount Daily Averages Absorption (-) Amount at the
    Averages of Liquidy Week End@
    Bids Accepted
    1 2 3 4 5 6 7 8 9 10 11 12 13
    02 Jul - 06 Jul 07 1-3 0 0 0 0 279 3,56,600 279 11,978 2,396 -11,978 2,999
    09 Jul - 13 Jul 07 1-3 0 0 0 0 374 4,73,120 374 14,984 2,997 -14,984 2,999
    16 Jul - 20 Jul 07 1-3 0 0 0 0 415 5,25,090 415 14,999 3,000 -14,999 3,000
    23 Jul - 27 Jul 07 1-3 0 0 0 0 412 5,99,900 412 14,980 2,996 -14,980 2,992
    30 Jul - 03 Aug 07 1-3 0 0 0 0 368 6,48,060 368 14,972 2,994 -14,972 2,997
    06 Aug - 10 Aug 07 1-3 0 0 0 0 95 1,87,860 95 1,87,860 37,572 -1,87,860 19,625
    13 Aug - 17 Aug 07 1-4 0 0 0 0 79 1,16,095 79 1,16,095 29,024 -1,16,095 30,650
    21 Aug - 24 Aug 07 1-3 0 0 0 0 37 52,460 37 52,460 13,115 -52,460 12,325
    27 Aug - 31 Aug 07 1-3 0 0 0 0 79 1,16,930 79 1,16,930 23,386 -1,16,930 16,855
    01 Sept - 07 Sept 07 1-3 0 0 0 0 104 1,74,235 104 1,74,235 34,847 -1,74,235 35,090

    * with effect from March 31, 2007 the Repo Rate is 7.75 per cent and Reverse Repo Rate 6 per cent. ** Includes Second LAF Auctions under Repo and Reverse Repo. With effect from August 06, 2007 RBI has withdrawn Second LAF auctions and also the cap on daily reverse repo . @ Net of Repo and Reverse Repo Outstandings.

    On August 24, the government reissued amounts of Rs 5,000 crore and Rs 2,000 the 10-year security the yield was set at

    7.27 per cent 2013 and the 10-year security crore, respectively. The yield on six-year 7.91 per cent lower than that set earlier auctioned earlier in the month for notified paper was set at 7.87 per cent while for during the month.

    Appendix Table: Secondary Market Operations in Government Papers: NDS and NDS-OM Deals

    (Amount in Rs crore)

    Descriptions Week ending August 2007: Yield to Maturity on Actual Trading Total for the month
    31 24 17 10 3 of August 2007
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury Bills
    A 91-Day Bills 677.26 6.60 963.67 6.71 1001.90 6.47 1476.20 6.20 2345.84 5.19 6464.87 5.99
    B 182-Day Bills 1093.33 7.26 1002.94 7.09 121.67 6.91 270.00 6.82 1152.00 6.28 3639.94 6.86
    C 364-Day Bills 2825.91 7.25 715.70 6.94 710.22 7.01 725.90 6.62 2197.50 5.08 7175.23 6.47
    2 GOI Dated Securities
    A Regular (Per Cent: Year)
    12.00 , 2008 - - - 0.02 7.51 11.66 20.00 7.40 11.64 - - - - - - 20.02 7.40 11.64
    5.48 , 2009 3745.70 7.74 5.69 2987.42 7.85 5.70 1605.00 7.91 5.71 2247.83 7.63 5.69 1905.00 7.56 5.68 12490.95 7.74 5.69
    6.65 , 2009 930.00 7.76 6.76 754.00 7.84 6.77 968.80 7.80 6.77 2661.15 7.67 6.76 4370.00 7.30 6.72 9683.95 7.54 6.74
    7.07 , 2009 OMC SB - - - 49.00 8.10 7.18 116.80 8.00 7.17 - - - 13.20 7.95 7.17 179.00 8.02 7.17
    7.33 , 2009 OIL MKT BONDS - - - 50.00 8.06 7.41 - - - - - - - - - 50.00 8.06 7.41
    11.50 , 2009 - - - - - - - - - 50.00 7.55 10.81 - - - 50.00 7.55 10.81
    11.99 , 2009 10.00 7.81 11.30 - - - - - - - - - - - - 10.00 7.81 11.30
    6.00 , 2010 UTI SB - - - 15.00 8.25 6.30 - - - - - - - - - 15.00 8.25 6.30
    6.20 , 2010 UTI SB - - - 10.00 8.25 6.49 - - - - - - - - - 10.00 8.25 6.49
    6.40 , 2010 UTI SPL SEC - - - 25.00 8.33 6.70 - - - - - - - - - 25.00 8.33 6.70
    7.55 , 2010 - - - 10.00 7.83 7.60 50.00 7.81 7.60 895.00 7.48 7.54 675.00 7.37 7.52 1630.00 7.45 7.53
    11.30 , 2010 - - - - - - - - - 0.29 7.75 10.34 109.14 10.35 - 109.43 10.35 0.03
    11.50 , 2010 0.15 8.14 10.63 - - - 25.00 7.84 10.54 25.00 7.52 10.45 - - - 50.15 7.68 10.50
    12.29 , 2010 - - - - - - 25.00 7.86 11.20 25.00 7.52 11.11 - - - 50.00 7.69 11.16
    8.00 , 2011 - - - - - - - - - - - - 5.20 7.57 7.89 5.20 7.57 7.89
    9.39 , 2011 645.00 7.79 8.93 25.07 7.85 8.94 890.07 7.79 8.92 180.26 7.67 8.89 25.11 7.33 8.78 1765.51 7.77 8.92
    6.85 , 2012 - - - 30.00 7.91 7.14 - - - - - - 110.00 7.60 7.06 140.00 7.67 7.07
    7.40 , 2012 1.60 7.78 7.51 - - - 140.20 7.91 7.55 65.50 7.69 7.49 70.50 7.36 7.39 277.80 7.72 7.49
    7.44 , 2012 OMC SB 10.00 8.30 7.69 50.00 8.24 7.67 - - - - - - - - - 60.00 8.25 7.67
    11.03 , 2012 6.00 7.85 9.79 - - - - - - 0.12 7.79 9.76 0.72 8.09 9.87 6.84 7.88 9.80
    7.27 , 2013 1381.10 7.83 7.47 563.58 7.86 7.48 375.50 7.80 7.46 225.00 7.68 7.41 280.00 7.55 7.37 2825.19 7.79 7.45
    9.81 , 2013 - - - - - - - - - - - - 100.00 7.70 8.94 100.00 7.70 8.94
    7.37 , 2014 85.00 7.89 7.57 10.00 7.86 7.56 195.50 7.92 7.59 405.00 7.78 7.53 670.00 7.65 7.48 1365.50 7.74 7.52
    11.83 , 2014 0.10 8.10 9.86 - - - - - - - - - 90.00 7.84 9.71 90.10 7.84 9.71
    7.38 , 2015 416.85 7.90 7.61 310.00 7.94 7.63 95.00 7.97 7.65 215.00 7.84 7.59 940.00 7.70 7.52 1976.85 7.81 7.57
    7.59 , 2015 OMC SB - - - - - - - - - 10.00 8.25 7.88 50.00 8.25 7.88 60.00 8.25 7.88
    7.61 , 2015 OIL MKT BONDS - - - - - - - - - - - - 10.00 8.25 7.89 10.00 8.25 7.89
    9.85 , 2015 5.03 8.00 8.89 - - - 1.00 7.89 8.83 - - - 130.00 7.90 8.83 136.03 7.90 8.83
    10.47 , 2015 - - - - - - - - - - - - 30.00 7.86 9.13 30.00 7.86 9.13
    10.79 , 2015 0.04 8.15 9.39 - - - - - - - - - 50.00 7.87 9.24 50.04 7.87 9.24
    11.43 , 2015 - - - 30.00 8.10 9.58 - - - - - - - - - 30.00 8.10 9.58
    11.50 , 2015 0.07 8.14 9.67 - - - - - - - - - 15.00 7.87 9.52 15.07 7.87 9.52
    7.59 , 2016 5.00 7.99 7.78 15.68 7.91 7.74 14.51 8.00 7.79 40.00 7.79 7.69 270.00 7.83 7.70 345.19 7.83 7.71
    10.71 , 2016 0.66 8.10 9.24 - - - - - - - - - 100.00 7.94 9.14 100.66 7.94 9.14
    12.30 , 2016 - - - 0.04 8.02 9.71 - - - - - - 15.07 7.95 9.66 15.11 7.95 9.66
    7.49 , 2017 2452.10 7.93 7.72 7200.55 7.93 7.72 3446.04 7.99 7.75 11310.53 7.90 7.70 12368.15 7.82 7.66 36777.37 7.89 7.70
    7.99 , 2017 3519.68 7.92 7.95 8285.43 7.91 7.95 4308.10 7.97 7.98 11168.96 8.53 8.00 4643.87 7.85 7.92 31926.04 8.13 7.97
    8.07 , 2017 403.28 7.99 8.03 755.00 7.95 8.01 20.00 8.03 8.05 470.00 7.87 7.97 690.90 7.81 7.93 2339.18 7.90 7.98
    6.25 , 2018 1.84 8.08 7.15 1.00 8.44 7.35 0.50 8.19 7.22 1.02 8.14 7.19 7.26 7.95 7.09 11.62 8.04 7.14
    5.64 , 2019 5.77 8.01 6.83 9.55 8.09 6.88 - - - 7.00 8.13 6.90 4.50 8.34 7.02 26.82 8.12 6.90
    6.05 , 2019 9.00 8.14 7.17 2.50 7.95 7.06 - - - 22.60 8.13 7.17 40.50 8.21 7.22 74.60 8.17 7.20
    7.75 , 2021 OMC SB - - - - - - - - - - - - 250.00 8.47 8.24 250.00 8.47 8.24
    7.94 , 2021 21.12 8.06 8.02 5.28 8.17 8.10 20.15 8.13 8.07 - - - 25.00 8.02 7.99 71.55 8.07 8.03
    8.13 , 2021 OMC SB - - - 10.30 8.43 8.34 2.93 8.44 8.34 109.16 8.44 8.34 83.85 8.44 8.34 206.24 8.44 8.34
    10.25 , 2021 0.60 8.10 8.71 3.50 8.21 8.79 0.23 8.30 8.85 - - - 36.69 8.08 8.70 41.02 8.09 8.71
    8.15 , 2022 FCI SB 1.45 8.63 8.49 - - - 1.00 8.53 8.42 110.00 8.50 8.40 - - - 112.45 8.51 8.40
    8.35 , 2022 0.12 8.20 8.25 3.55 8.11 8.19 2.24 8.11 8.19 36.70 8.06 8.15 165.00 8.13 8.20 207.61 8.12 8.19
    6.17 , 2023 0.75 8.39 7.64 1.15 8.37 7.63 0.10 8.00 7.37 0.20 8.14 7.47 92.50 8.24 7.54 94.70 8.24 7.54
    8.01 , 2023 OMC SB - - - - - - 0.20 8.52 8.39 1.74 8.49 8.36 112.00 8.55 8.41 113.94 8.55 8.41
    8.03 , 2024 FCI SB 0.16 8.52 8.40 0.25 8.58 8.44 5.00 8.70 8.54 2112.88 8.70 8.54 0.20 8.45 8.35 2118.49 8.70 8.54
    8.20 , 2024 - - - 39.83 8.63 8.52 - - - - - - - - - 39.83 8.63 8.52
    8.20 , 2024 OMC SB - - - 0.80 8.65 8.53 0.50 8.51 8.43 29.26 8.49 8.42 0.05 8.26 8.24 30.61 8.50 8.42
    8.40 , 2026 OMC SB 0.55 8.50 8.48 0.65 8.60 8.56 0.96 8.54 8.51 29.52 8.50 8.48 5.48 8.45 8.44 37.16 8.49 8.47
    10.18 , 2026 - - - 0.62 8.29 8.63 - - - 2.45 8.23 8.58 3.07 8.50 8.79 6.14 8.37 8.69
    8.23 , 2027 FCI SB 49.63 8.68 8.59 118.42 8.69 8.60 130.37 8.76 8.65 3106.07 8.78 8.67 1.24 8.42 8.38 3405.73 8.77 8.67
    6.01 , 2028 12.50 8.32 7.76 1.25 8.38 7.81 7.44 8.38 7.81 27.25 8.34 7.78 30.85 8.35 7.79 79.29 8.35 7.78
    6.13 , 2028 12.50 8.33 7.82 - - - 0.45 8.40 7.88 2.75 8.74 8.16 18.60 8.36 7.84 34.30 8.38 7.86
    7.95 , 2032 485.80 8.31 8.26 1099.50 8.32 8.27 270.00 8.44 8.37 1650.64 8.36 8.31 360.87 8.36 8.30 3866.81 8.35 8.30
    7.50 , 2034 0.12 8.45 8.34 - - - 2.45 8.42 8.31 - - - 3.35 8.22 8.13 5.92 8.31 8.21
    7.40 , 2035 - - - - - - 2.00 8.14 8.05 3.40 8.42 8.31 - - - 5.40 8.31 8.21
    8.33 , 2036 811.50 8.31 8.32 2858.50 8.31 8.32 166.00 8.43 8.42 1493.27 8.34 8.34 2791.45 8.33 8.33 8120.72 8.33 8.33
    Sub-total 15036.17 7.89 7.30 25337.38 7.98 7.63 12910.54 7.96 7.61 38745.20 8.19 7.79 31774.14 7.79 7.52 123803.44 7.98 7.61
    B RBI's OMO: Sales 136.00 - - 92.00 - - 11.00 - - 201.00 - - 43.00 - - 483.00 - -
    Purchase - - - - - - - - - - - - - - - 0.00 - -
    Sub-total 136.00 - - 92.00 - - 11.00 - - 201.00 - - 43.00 - - 483.00 - -
    (A+B) 15172.17 7.89 7.30 25429.38 7.98 7.63 12921.54 7.96 7.61 38946.20 8.19 7.79 31817.14 7.79 7.52 124286.44 7.98 7.61
    3 Market Repo 109439.10 94940.74 89107.41 132916.80 55161.73 481565.78
    4 State Govt Securities 183.80 8.31 8.43 637.40 8.36 8.58 74.03 7.81 9.80 163.30 8.03 8.54 188.50 8.13 8.26 1247.03 8.24 8.58
    Grand total (1 to 4) 129391.57 123689.83 103936.77 174498.40 92862.71 624379.29

    (-) means no trading YTM = Yield to maturity in per centage 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 NDS = Negotiated Dealing System OM = Order Matching Segment . 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. (2) Current yield has not been worked out for treasury bills. (3) For Floating Rate Bonds (FRB's) Current

    yields are based on the latest half-year yield determined in the auction.

    Economic and Political Weekly September 22, 2007

    Eight state governments tapped the market to mobilise Rs 3,484 crore by issuing 10-year state development loans (SDL) through a yield-based auction using multiple price auction method on August 16. In the case of Madhya Pradesh, the green shoe option was exercised and bids worth Rs 750 crore were accepted instead of Rs 600 crore. The cut-off yields were set at the lowest for Tamil Nadu at 8.30 per cent and the highest for 8.90 per cent for Jammu and Kashmir (J&K); in the previous month, J&K offered on SDL 8.25 per cent for the same maturity.

    Under MSS issuances, the RBI issued

    5.48 per cent 2009 for an aggregate amount of Rs 17,000 crore through three weekly auctions wherein the yields offered declined from 7.74 per cent on August 1 to 7.72 per cent on August 8 and then jumped to

    7.99 per cent on August 16, thus exceeding the yield offered on the 10-year security auctioned during the month. However, in the last auction of the month on August 22, it dipped to 7.92 per cent.

    The government issued new marketable securities 8.08 per cent 2022 for an aggregate amount of Rs 2,969 crore, 8.26 per cent 2027 for Rs 1,427 crore and 8.32 per cent 2032 for Rs 2,434 crore to 11 nationalised banks on August 2, 2007 against their holdings recapitalisation bonds.

    Treasury Bills

    The pressure on liquidity arising from increased government borrowings was reflected in the unusual firming up of treasury bill rates. The yield on 91-day TB surged from 4.46 per cent on July 25 to 6.48 per cent on August 1, to 6.56 per cent on August 8 and then to 6.73 per cent and to 6.81 per cent on August 22; finally it breached the 7 per cent mark by touching 7.10 per cent on August 29. Similarly, the yield on 182-day jumped from

    5.82 per cent on July 25 to 7.27 per cent on August 8 and then to 7.47 per cent on August 22. Likewise, the yield on 364-day surged from 6.58 per cent on July 18 to

    7.25 per cent on August 1 and to 7.49 per cent on August 14 and further to 7.52 per cent on August 29 (Tables 6 to 8).

    Corporate Bonds Market

    A major development, which may propel the corporates to mobilise more funds through bonds in the domestic market, concerns the imposition of restrictions by RBI on external commercial borrowings (ECBs). ECBs up to $ 20 million per borrowing company per financial year have been permitted for foreign currency expenditures for permissible end-uses under the automatic route; also these funds are to be parked overseas and not to be remitted to India. Borrowers proposing to avail of ECBs up to $ 20 million for rupee expenditure for permissible end-uses would require prior approval of the RBI under the approval route. However, such funds have to be parked overseas until actual requirement arise in India. Also, foreign currency convertible bonds (FCCBs) have been losing investor interest due to rising interest rate costs, declining premia, lower conversion into equity and volatility in stock and currency markets.

    But the benefits of above developments were not seen in fund mobilisations, in fact amidst interest rate uncertainty, the mobilisation in August dipped to Rs 878 crore as against Rs 5,401 crore in July. There were three banks/financial institutions (FIs), two state under takings and two corporates that tapped the market. The two corporates have entered the market after a long gap. Global Trade Finance Ltd and Indian Hotels Company Ltd have raised Rs 25 crore and Rs 300 crore, respectively. Also, Himachal Pradesh State Finance Corpoartion again raised funds through unrated bonds by offering 9.20 per cent for 10 years. The National Bank for Agriculture and Rural Development (NABARD) tapped the market twice during the month: in the first case, it offered 8.90-9.05 per cent for three years and in the second instance, it had to offer 9.50-9.65 per cent for the same maturity due to strain in liquidity in the market. There was news that the issue of Power Finance Corpoartion was cancelled as the rate offered by the investors was high and was not found to be attractive for the corporation.

    IV Secondary Market

    Given the pressure on liquidity and uncertainty, the secondary market turnover for gilt-edged securities declined and the weekly average turnover ranged between Rs 14,629 crore and Rs 35,912 crore as against a range of Rs 38,961 crore and Rs 55,324 crore in the previous month. Following the announcement of the first review of credit policy, the market sentiments turned cautious and prices fell. However, as the RBI enhanced the MSS limit, the sentiments again remained cautious except for a brief spell.

    During the month, the short-term yields firmed up given the pressure on liquidity while the medium and long-term yields displayed stickiness leading to a somewhat flat yield curve. The spread between 7.49 per cent 2017 and 8.33 per cent 2036 narrowed from 50 basis points in the week ending August 3 to 38 basis points on August 31 (Graph D) (see also Appendix Table).

    RBI Reverse Repos, OMOs and MSS

    In the first quarter review of credit policy, the RBI withdrew the ceiling of Rs 3,000 crore on daily reverse repo absorp tions and also second LAF was withdrawn from August 6, as there was shift in liquidity scenario necessitating absorptions through reverse repo. However, the aggregate reverse repo bids tendered in August dipped to Rs 11,21,405 crore as against Rs 19,54,710 crore as the outflows towards dated and MSS securities auctions and hike in CRR impinged the liquidity scenario. Of the bids tendered in August, Rs 4,88,317 crore were accepted. In the first week ending August 6 after the implementation of new norms, Rs 187,860 crore were tendered and accepted as against Rs 6,48,060 crore tendered in week ending August 3. The bids dipped further to Rs 116,095 crore in week ending August 17 and further dipped to Rs 52,460 crore in week ending August 24 due to outflows towards auction. In the last week ending August 31, the bids increased to Rs 116,930 crore as RBI refrained from issuing MSS securities (Table 9).

    The turnover in repo outside RBI jump ed from Rs 2,65,655 crore in July to Rs 4,81,566 crore at a higher average rate of 5.31 per cent as against 0.26 per cent in July.

    Commercial Bonds

    The secondary market for corporate debt market was subdued in August with the daily average turnover declining to Rs 92 crore from Rs 181 crore in July. Among the various securities traded, the trading in PSU bonds dipped sharply from Rs 1,458 crore in July to Rs 748 crore in August. The total traded volume reported on both the exchanges was Rs 7,252 crore of which Rs 3,045 crore was reported on NSE and Rs 4,207 crore on BSE.

    EPW

    [The note has been prepared by Piyusha Hukeri and the accompanying statistical tables have been collated by V P Prasanth.]

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