ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Coping with the Deluge of Capital Inflows

The Reserve Bank of India finds its hands tied in coping with the massive surge in capital inflows. The government, more keen on maintaining a global investor-friendly image, refuses to hear its argument that participatory notes should be banned and a close watch be placed on hedge funds. A larger use of the foreign exchange reserves for infrastructure is also ruled out because of the self-imposed stiff fiscal targets. India has committed itself to participating in the game of globalisation of the financial markets irrespective of the consequences for the macroeconomy

Money Market

Coping with the Deluge ofCapital Inflows

The Reserve Bank of India finds its hands tied in coping with the massive surge in capital inflows. The government, more keen on maintaining a global investor-friendly image, refuses to hear its argument that participatory notes should be banned and a close watch be placed on hedge funds. A larger use of the foreign exchange reserves for infrastructure is also ruled out because of the self-imposed stiff fiscal targets. India has committed itself to participating in the game of globalisation of the financial markets irrespective of the consequences for the macroeconomy.

EPW RESEARCH FOUNDATION

I Need for Calibrated Interventions

A
dominant aspect of the current macroeconomic scene is the massive inflow of foreign currency assets which has wide-ranging implications. Apart from productively deploying the reserves to supplement domestic savings, the management of liquidity and the country’s exchange rate as also the containment of inflationary pressures pose serious challenges to the authorities.

Since the end of March 2007 and up to October 5, reserves have expanded by $ 51.60 billion (Rs 1,25,080 crore) or year-on-year they have galloped by $ 85.21 billion (Rs 2,39,625 crore), equivalent to nearly 40 per cent of M3 expansion, during this period. A redeeming feature of the reserve flows into the country is that there have hardly been any short-term flows (which were a cause of the Asian crisis in 1997). A quick assessment of the current year’s inflows suggests that the portfolio flows through foreign institutional investors (FIIs) constitute about 20 per cent; the balance are contributed by increased private remittances, higher earnings from software and other business services exports, and increased long-term capital flows. Thus, the quality of inflows being healthy, their productive deployment should be that much easier provided there are strong institutional arrangements and organisational preparedness to step up domestic investment. But the reports suggest that the tempo of investment in many infrastructure areas and of industrial investment in general has begun to slacken.

As a result, the focus in policy has been on short-term management of reserve flows – liquidity management through increased market stabilisation targets, permitting the rupee rate to strengthen as a factor in inflation control despite the adverse consequences for the country’s export competitiveness, and suppression of inflation through postponement of petroleum price increases. The size of sterilisation of liquidity has been increased to Rs 2 lakh crore. The rupee has been allowed to appreciate, not only against the currencies of advanced economies but also against the currencies of emerging market economies which have emerged as major trading partners for India. Since the end of March 2007, the real effective exchange rate of the rupee (REER) stands appreciated by about 7 per cent amongst the six-currency basket countries (including China) as well as amongst the 36-currency basket countries. The rupee has appreciated since March by about 7 to 10 per cent against the currencies of China, Indonesia, South Korea, Malayisa, Thailand, Hong Kong, Singapore, Japan, US, and even Pakistan. This is truly a depressing scene for Indian exporters. And the reported control of inflation evidently appears to be artificial, for the prices of a majority of primary articles have risen, year-onyear, by over 7 per cent even as the wholesale prices index has risen only by

3.2 per cent. During the same period, consumer price indices have risen by a

Table 1: Estimated Flow of Liquidity into the Financial System during September 2007

(Rupees crore)

Week-Ended 28 (RF) 21 14(RF) 7 Items Inflow Outflow Net Inflow Outflow Net Inflow Outflow Net Inflow Outflow Net

Autonomous liquidity flows (Total) 49,941 16,811 33,130 9,430 41,477 -32,047 10,596 13,565 -2,969 15,737 13,855 1,882 91-day T bills 3,500 3,500 0 3,500 3,500 0 3,500 3,500 0 2,000 3,500 -1,500 182-day T bills --0 855 2,500 -1,645 --0 2,000 3,355 -1,355 364-day T bills 2,000 3,000 -1,000 --0 2,000 3,000 -1,000 --0 Government securities auction/redemption -10,000 -10,000 --0 --0 -7,000 -7,000 Coupon payments 1,939 -1,939 3,074 -3,074 3,583 -3,583 2,496 -2,496 RBI credit to Govt * (Net of OMO/Repo/Reverse Repo) -311 -311 -35,477 -35,477 -7,023 -7,023 --0 RBI credit to others ( FIs and non-banks) * --0 --0 --0 8,399 -8,399 Net foreign assets * 42,266 -42,266 1,715 -1,715 1,513 -1,513 785 -785 Other deposits with RBI * 236 -236 286 -286 -42 -42 57 -57 Discretionary liquidity flows (Total) 4,870 46 4,824 16,910 0 16,910 19,380 1 19,379 0 18,235 -18,235 Open market operations (RBI) --0 --0 --0 --0 Repo/Reverse Repo by RBI 4,870 -4,870 16,910 -16,910 19,380 -19,380 -18,235 -18,235 RBI liquidity support ** -46 -46 --0 -1 -1 --0

(RF) means reporting Friday. - means nil. ** Based on RBI’s daily data on liquidity support. * means variation over week.

Notes: (i) A negative sign implies net outflow. (ii) This table follows a slightly broader concept of liquidity flow as it covers auctions/redemptions of central government securities because loan floatations are pre-determined.

Economic and Political Weekly October 20, 2007

Call Rates, Repo Rates, CBLO Rates and

Call Money Borrowing – September 2007

Graph A: Trends in Weighted Averages of

0 2000 4000 6000 8000 10000 12000 14000 16000 18000 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 // Call Rates CBLO Rates Repo Rates -Outside the RBI Call Money Volume (Rs Cr) 9/1/20079/3/20079/5/20079/7/20079/9/20079/11/20079/13/20079/15/20079/17/20079/19/20079/21/20079/23/20079/25/20079/27/2007

range of 7 to 9 per cent. The fiscal cost of avoiding petroleum price increases is truly massive – about Rs 55,000 crore as under recoveries of major oil companies during 2007-08.

This approach of facing the challenges of large foreign exchange inflows based on short-term considerations is understandable, for the authorities in India are caught in the quagmire of neoliberal stabilisation and structural adjustment programmes. Within that cobweb they have no escape routes to follow, both in regard to establishing stable trends in the foreign exchange flows, particularly concerning portfolio inflows, and in regard to more productive deployment of foreign exchange reserves

With regard to portfolio inflows, which have been the primary reason for vast fluctuations in equity prices, there is a strong case for discouraging such inflows through participatory notes (PNs), where there is no transparency in the sources of funds. Reports indicate that as much as 70 per cent of the inflows in July and August 2007 have been through the PN route. Opposing the contention of the Ashok Lahiri expert group report, the RBI had clearly opined that “PNs should not be permitted to be issued since the nature of the beneficial ownership or the identity

50 49 48 47 46 45 44 43 42 41 40

of the investor will not be known” (RBI 2006: Annual Report 2005-06, p 99). With a view to keeping up the so-called investmentfriendly global image of the country, the government has refused to fall in line. Likewise, the RBI, on the same occasion, had warned of the need for a close watch “on any funds which are believed to be hedge funds and are registered with SEBI”. Despite the vast known proclivities of hedge funds to move-in and move-out of markets and create wider fluctuations in financial markets, the authorities have obviously permitted hedge funds to get into the Indian bourses. In addition, it does not occur to the authorities that the absence of long-term capital gains and such other easy tax environment is responsible for the free flow of portfolio investments.

A similar self-imposed constraint is faced by the authorities in India in the deployment of foreign exchange reserves. For instance, a more rapid deployment of forex reserves could have been facilitated if an expansionary fiscal policy were pursued but the presence of the FRBM Act with all its benchmark objectives and targets will prevent any flexibility in this respect. With such flexibility, vast increases in public investment in the muchneeded physical infrastructures could have been carried out. Again, it is the rigidity in the pursuit of the stabilisation programme that is preventing the government from expanding the investment base. Similarly, if the RBI had moved away from its

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**
August 2007
All five 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
September 2007
All four weeks 6.34 0.43 6.83 6.29 0.50 7.90
28 (RF)* 6.65 0.57 8.61 6.71 0.53 7.93
21 6.70 0.35 5.24 6.44 0.53 8.30
14 (RF)* 6.08 0.01 0.24 6.08 0.19 3.16
7 6.04 0.11 1.88 5.91 0.22 3.72

** Separate reportings began on March 15, 2005.

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

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

(Daily) Working Days Sept 2007 Monthly Averages (Jan 2001 to August 2007)

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

Average September 2007 Average August 2007 Items for Four for Five Weeks 28(RF)* 21 14(RF)* 7 Weeks 31(RF)* 24 17(RF)* 10 3(RF)*

No of working days 23 6 5 6 6 28 6 5 5 6 6 Call Money Weighted average of call rates:

per cent (weekly range) per annum 5.81-7.42 6.15-7.42 6.40-7.28 6.05-6.09 5.81-6.11 0.13-23.82 5.73-6.31 6.20-13.80 6.13-23.82 3.47-6.17 0.13-2.07 Daily averages (Rupees crore) (6.08) (5.73) (23.82) (2.07) Total call market borrowings 10,343 10,694 11,854 11,732 9,128 7,935 10,876 11,721 10,035 12,124 7,153

(10741) Notice Money Weighted average of notice money rates:

per cent (weekly range) per annum 5.50-7.42 6.15-7.42 5.97-7.28 5.81-6.31 5.50-6.08 0.10-10.35 5.50-6.27 5.35-8.07 6.04-10.35 5.00-6.40 0.10-2.62 Daily averages (Rupees crore) (6.0) (10.4) (2.6) Total notice market borrowings 3,580 10,475 348 870 2,233 2,606 1,945 3,756 2,945 2,870 1,762

(9382) (1791) Turnover in term money market 146 251 623 162 64 155 191 248 158 150 13 (borrowings) $$ (530) (85) (180) (315)

* 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 October 20, 2007 exchange rate; the rupee breached the Rs 40 barrier after nine years and RBI had to intervene aggressively to stem the appreciation of the rupee. As part of the consequential sterili sation activities, the RBI undertook two MSS auctions on a single day. Besides, the RBI encouraged outward flows by permitting mutual funds to invest abroad and increasing the prepayment limit for ECBs, among others, as per the fuller capital account convertibility committee report. Yet, the rupee continued to remain firm, attracting confessions from the finance minister, P Chidambaram, that the rupee was way above the comfort level. As absorptions under MSS were approaching its threshold limit and as the liquidity bulge was continuing unabated, the limit itself was increased by Rs 50,000 crore to Rs 2 lakh crore on October 4. In a unique development, for the first time in the corporate bond market a sub-investment grade was accepted and displayed by an issuer. Incidentally, the European Central Bank maintained its interest rate and so did the Bank of England. The People’s Bank of China raised the reserve requirement ratio maintained by the commercial banks with the central bank by 50 bps to 12.5 per cent.

Call Money Market

The overnight call borrowing rate in September ruled in a narrow range in the first half of the month, and though in the later half it surged it yet ruled within the informal corridor set by the reverse repo and repo rates (Table 2).

The month began with the call rate ruling at 6.06 per cent; the rate rose to

6.11 per cent on September 3 and then it ruled steady for sometime at 6.09 per cent as liquidity remained in surplus. It dipped to 5.81 per cent on September 7 despite outflows towards dated securities auction. Until September 13, the rate hovered within a narrow range of 6.05-6.09 per cent; even on the first reporting Friday, monetarist proclivities and directed more calibrated distribution of bank credit in favour of all productive sectors, the overall investment level in the economy could have been raised.

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

5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 0.0 0.5 1.0 1.5 2.0 2.5 9/3/20079/5/20079/7/20079/9/20079/11/20079/13/20079/15/20079/17/20079/19/20079/21/20079/23/20079/25/20079/27/2007 i ll t i i1-month 3-month 6-month Weighted averages of call rates (right axis)

The authorities are thus committed to participate in the game of globalisation of the financial markets irrespective of the consequences for the macroeconomy. On the other hand, countries like China, Korea and others in east Asia have derived the benefits of globalisation on their own terms and hence could face the challenges in a much more calibrated way.

II Money, Gilt-Edged and Forex Markets

In September, in the wake of the US Fed’s decision to effect a substantial cut in its key rates, the RBI had to grapple with a massive liquidity increase, despite large outflows toward advance tax payments (Table 1). The month began with concerns about declining liquidity following the advance tax payments and huge absorptions under dated securities and Market Stabilisation Scheme (MSS) securities. Anxieties in the financial markets were further strengthened due to a surge in international crude oil prices even though the domestic inflation rate eased rather distinctly. However, the larger than expected cut in the US fed and discount rate, resulted in a deluge of portfolio flows into the Indian stock markets as they have been perceived to be less affected by the US sub-prime crisis and to be among the best performing markets driven by robust macroeconomic fundamentals and good corporate earning prospects, notwithstanding the deceleration in the rate of industrial growth. Further, the ongoing IPOs attracted investment inflows. The immediate impact of these was on the rupee-dollar

Week-Ending Weighted Average Rates Daily Average Volumes
(in Per Cent) (Rs Crore)
Call Overnight CBLO Repo Call Overnight CBLO Repo
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
7-Sep-07 6.09 5.88 6.01 11,361 29,438 19,213
14-Sep-07 6.08 5.64 6.10 12,457 27,608 19,943
21-Sep-07 6.70 6.34 6.54 14,884 33,566 19,585
28-Sep-07 6.53 5.82 6.41 10,554 26,319 13,046

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

6.0 6.5 7.0 7.5 8.0 8.5 9.0 02345678910111213151617192021252829 Yield (per cent per annum) Years to Maturity 1st Week 2nd Week 3rd Week 4th Week

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

Source: The Clearing Corporation of India (CCIL).

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)
7-Sep-07 8.20 per cent 2022 Normal 4,000 211 15,359 13 3,992 8.16 per cent (Rs 100.35)
7-Sep-07 8.33 per cent 2036 Normal 3,000 207 8,673 80 2,989 8.41 per cent (Rs 99.13)
26-Sep-07 5.48 per cent 2009 MSS 5,000 210 12,501 72 5,000 7.79 per cent (Rs 96.36)
26-Sep-07 5.87 per cent 2010 MSS 5,000 150 11,875 49 5,000 7.86 per cent (Rs 95.93)
Source: RBI Press Releases.
4202 Economic and Political Weekly October 20, 2007

September 14, it ruled moderate at 6.08 per cent. Thereafter began the process of upward movement. Following the outflows for advance tax payments, the overnight rate jumped to 6.74 per cent on September 17 and further to 7.28 per cent on September 21, whereupon the RBI injected liquidity through repo (Rs 1,200 crore). Yet, the call rates for the month peaked at 7.42 per cent on September 22. But as the liquidity situation improved following a huge foreign currency inflow in the week ending September 28, the call rate eased to 6.15 per cent on September

26. Ahead of the half-yearly closing, the call rates again firmed up but as demand receded, the rates eased (Graph A). Overall, call rates remained unusually stable in September as compared with vast fluctuations that occurred in August (Table 3).

The NDS-CALL system has helped in improving the ease of transactions, and has also brought about greater transparency and efficient price discovery. Though banks are free to contract deals outside NDS-CALL, there appears to be growing preference for it as it currently accounts for around 75 per cent of the total call money volumes

The overnight rates in the collateralised segment generally ruled below the call rate and exhibited even greater stability as compared with that on the call market. Also, the collateralised segment exceeded the turnover in call money market (Table 4).

Forex Market

After nine years, the rupee-dollar exchange rate breached the strong Rs 40barrier and ruled even stronger at Rs 39.70 per dollar driven by huge forex inflows including FII inflows. Over the month, the rupee appreciated by 122 paise against the dollar (over 3 per cent) despite the RBI’s insistent intervention to arrest the appreciation against the backdrop of slowing exports growth. The rapid appreciation generated anxiety among the exporters, though it has been considered that it would lead to cost-saving and improvement in efficiency. The finance minister accepted that this appreciation was causing discomfort.

As stated above, what is significant in this movement is that among the southeast Asian countries, the Indian rupee has appreciated the most and it has also appreciated against major east Asian currencies: Chinese yuan, South Korean won, Indonesian rupiah and Thai bhat, among investment outflows in August as per the others. Sebi data. But, the rally in domestic stock

The month began with the rupee-dollar market and weaknesses in the US economy exchange rate depreciating from Rs 40.88 generating expectations of a rate cut in on September 3 to Rs 40.94 on Septem-the FED’s impending FOMC meeting, the ber 5 on concerns that there were net rupee continued to appreciate and rose to

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 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

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

2006 Aug 30 2,000.00 43 2,687.00 31 2,000.00 0.00 98.42 6.44 31,029.91

  • (1) (100.00) (1) (100.00) [98.43] [6.40] Sept 6 2,000.00 41 3,155.00 23 2,000.00 0.00 98.42 6.44 30,229.91
  • (0) (0.00) (0) (0.00) [98.43] [6.40] Sept 13 2,000.00 48 2,873.54 33 2,000.00 0.00 98.41 6.48 31,137.61
  • (4) (1,165.00) (4) (1,165.00) [98.42] [6.44] Sept 20 2,000.00 44 2,125.11 24 860.11 0.00 98.40 6.52 30,935.86
  • (1) (620.00) (1) (620.00) [98.41] [6.48] Sept 27 2,000.00 46 2,645.36 40 2,000.00 0.00 98.40 6.52 33,060.86
  • (2) (1,200.00) (2) (1,200.00) [98.40] [6.52]

    2007 Sept 5 3,500.00 101 7,985.00 50 3,500.00 0.00 98.27 7.06 69,703.00

  • (2) (2,100.00) (2) (2,100.00) [98.28] [7.02] Sept 12 3,500.00 106 8,870.92 49 3,500.00 0.00 98.26 7.10 69,403.00
  • (4) (4,300.00) (4) (4,300.00) [98.27] [7.06] Sept 19 3,500.00 85 7,838.25 30 3,500.00 0.00 98.29 6.98 65,053.00
  • (3) (7,100.00) (3) (7,100.00) [98.30] [6.94] Sept 26 3,500.00 81 4,255.14 68 3,500.00 0.00 98.24 7.19 59,953.00
  • (1) (1,000.00) (1) (1,000.00) [98.26] [7.10]

    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 square brackets under cols 8 and 9 represent weighted average price and respective yield.

    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 Sept 6 1,500.00 41 2,605.00 22 1,500.00 0.00 96.75 6.74 18,106.56

    (0) (0.00) [96.76] [6.72] Sept 20 1,500.00 44 2,807.09 24 1,500.00 0.00 96.73 6.78 19,705.56

    (0) (0.00) [96.74] [6.76]

    2007 Sept 5 2,500.00 104 4,573.00 61 2,500.00 0.00 96.44 7.40 28,496.44

    (1) (855.00) (1) (855.00) [96.46] [7.36] Sept 19 2,500.00 102 9,980.00 38 2,500.00 0.00 96.51 7.25 30,141.44

    (0) (0.00) (0) (0.00) [96.52] [7.23]

    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: Auctions of 364-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 30 2,000.00 82 7,030.00 27 2,000.00 0.00 93.54 6.93 43,526
    (1) (10.00) (1) (10.00) [93.55] [6.91]
    Sept 13 2,000.00 84 4,980.00 40 2,000.00 0.00 93.54 6.93 43,376
    (1) (100.00) (1) (100.00) [93.56] [6.90]
    Sept 27 2,000.00 85 6,679.87 30 2,000.00 0.00 93.56 6.90 43,976
    (2) (600.00) (2) (600.00) [93.57] [6.89]
    2007
    Sept 12 3,000.00 133 11,145.00 20 3,000.00 0.00 93.07 7.47 56,542
    (0) (0.00) (0) (0.00) [93.10] [7.43]
    Sept 26 3,000.00 96 5,846.00 65 3,000.00 0.00 93.04 7.50 57,317
    (1) (375.00) (1) (375.00) [93.08] [7.45]

    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.

    Economic and Political Weekly October 20, 2007 Rs 40.45 on September 14. The rupee appreciated despite the record surge in international crude oil prices. However, there was a brief respite due to temporary weaknesses in domestic stock market and arbitrage opportunities in the non-delivered forward (NDF) market; the rupee rate fell to Rs 40.59 on September 18. But, following the cut in key US rates, there were overwhelming inflows, which pushed the rupee to breach the Rs 40-barrier. Though the RBI undertook massive interventions to arrest the appreciation, the strength of inflows persisted and the rupee touched a peak of Rs 39.70 on September 26. But it was pulled down to close at Rs 39.74 on September 28 (Graph B).

    As fallout of the sub-prime mortgage crisis in the US, the spot rupee continued to appreciate and importers took advantage by holding uncovered positions and exporters began selling dollars and undertaking hedging, which led to sharp declines in forward premia across maturities. Further, as the interest rate differential widened following the cut in benchmark rates effected by the US Fed, the forward premia eased amongst all maturities and also surprisingly almost converged on the last trading day of the month implying that the market hardly expects any change in the strength of the rupee (Graph C).

    III Primary Market

    Dated Securities

    As per the scheduled calendar of issuances, the government mobilised Rs 7,000 crore by reissuing 8.20 per cent 2022 and

    8.33 per cent 2036 for notified amounts of Rs 4,000 crore and Rs 3,000 crore, respectively, through price-based auctions using the multiple price method on September 7. The 15-year paper was auctioned at a cut-off yield of 8.16 per cent, while the 29-year paper was issued at a cut-off yield of 8.41 per cent; the latter was issued in July 2007 at a slightly higher yield of

    8.45 per cent (Table 5).

    On September 26, two securities: 5.48 per cent 2009 and 5.87 per cent 2010 were reissued for notified amounts of Rs 5,000 crore each through price-based auctions using the multiple price auction method – both under the MSS. The yield for the two-year paper was set at 7.79 per cent as against a range of 7.72-7.99 per cent set in repeated reissues under the MSS in August on the same paper.

    As proposed in the annual credit policy for 2006-07, an advance indicative market borrowing calendar for state borrowings

    Table 11: Repo Transactions inGovernment Paper@ (Other than with the RBI) – September 2007

    Repo Period Amount Range of Interest
    in Number (Rupees (Per Cent
    of Days Crore) Per Annum)
    1 3,40,056.00 3.00-7.15 (6.19)
    2 1,712.72 5.50-6.10 (5.86)
    3 83,293.13 0.25-8.75 (6.46)
    4 25.50 6.10 (6.10)
    6 517.00 6.25 (6.25)
    7 522.50 6.15 (6.15)
    17 78.00 6.75 (6.75)
    22 6.00 8.50 (8.50)
    29 5.00 8.00 (8.00)
    60 6.00 8.50 (8.50)
    153 305.00 7.75 (7.75)
    All Issues
    1-153 4,26,526.85 0.25-8.75 (6.25)
    [1-270] [4,81,565.73] [0.01-25.00] [5.31]

    @ 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: Profile of Major Commercial Bond Issues during September 2007

    Sr Issuing Company/Rating Nature of Coupon in Per Cent Per Annum Amount in No Instrument and Tenor Rs Crore

    Banks/FIs

    1 State Bank of Indore

    AAA by Crisil, Care 2 State Bank of Patiala AAA by Crisil, Care

    3 Allahabad Bank AA+ and AA by Care and Crisil

    4 Exim Bank AAA by Crisil, Icra 5 State Bank of India AAA by Crisil, Care

    6 HDFC AAA

    Central PSUs

    1 Power Finance Corp AAA by Crisil, Icra

    2 Rural Electrification Corp Bonds AAA by Crisil, Fitch and Care Perpetual Bond 10.25 per cent with a step-up of 50 bps

    Upper Tier II Bonds

    Bonds

    Bonds

    Upper Tier II Bonds Bonds

    Bonds is call is not exercised at the end of 10 years. 165

    9.90 per cent for 15 years with a step-up of 50 bps is call is not exercised at the end of 10 years. 300 10 per cent for 10 years. 400

  • 9.10 per cent for three years with put/call option at the end of one year. 500
  • 10.10 per cent for 15 years with a step-up of 50 bps if call is not exercised at the end of 10 years. 1,500 (500) 220 bps above MIBOR for 21 years. 1,000
  • 9.80 per cent for five years. 500

    9.85 per cent for 10 years. 1,500 (1,000)

    Total 6,165*

    Total for September-06 (a year ago): Rs 11,402 crore. Total for Aug-07 (a month ago): Rs 878 crore.

    Notes: The amount shown in brackets above denotes the greenshoe option of the issue.

    * Total includes six more issues for less than Rs 150 crore (five bank’s issues and one corporate). Source: Various media sources.

    (Amount in Rs crore)

    Table 10: Operations of RBI's Liquidity Adjustment Facility**

    For the Week Range of Repo (Injection) * Reverse Repo (Absorption) * Net Injection Net
    (Aug-Sept 2007) Repo/RR Bids Received Bids Accepted Bids Received Bids Accepted (+) / Outstanding
    Period Days Number Amount Number Amount Number Amount Number Amount Daily Absorption (-) Amount at the
    Averages of Liquidy Week-End@
    Bids Accepted
    1 2 3 4 5 6 7 8 9 10 11 12 13
    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
    10 Sept - 14 Sept 07 1-3 0 0 0 0 96 1,05,605 96 1,05,605 21,121 -1,05,605 15,710
    17 Sept - 21 Sept 07 1-3 1 1,200 1 1,200 24 21,765 24 21,765 4,353 -20,565 -1,200
    24 Sept - 28 Sept 07 1-3 13 9,735 13 9,735 60 85,285 60 85,285 17,057 -75,550 -6,070
    01 Oct - 05 Oct 07 1-3 0 0 0 0 124 1,95,770 124 1,95,770 39,154 -1,95,770 54,370

    * 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.

    Economic and Political Weekly October 20, 2007

    was released for the first time in order to loans through the auction method. Accord-additional subscription up to a maximum usher in greater transparency in the bor-ingly, state governments are expected to of Rs 125 crore over and above the notirowing programme. It was estimated that raise the balance amount of Rs 23,087 fied amount, but it was not exercised. The state governments would raise Rs 35,113 crore during the remaining part of the cut-off yield was set the lowest for crore through market borrowings taking year 2007-08 in a phased manner. Tamil Nadu at 8.14 per cent and the highinto account the net allocation, addi-On September 20, eight state governments est for Punjab at 8.22 per cent. Tamil tional allocation to a few state governments sold 10-year state development loans for Nadu had mobilised funds in August for and repayments during the financial year an aggregate amount of Rs 3,073.74 crore the same maturity at 8.30 per cent 2007-08. So far (up to September 12, through a yield-based auction using the The government converted nationalised 2007), 17 state governments have raised multiple price auction method. Also, banks’ recapitalisation bonds in new Rs 12,026 crore through the sale of their Tamil Nadu had an option to retain marketable securities through issue of 8.13

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

    (Amount in Rs crore)

    Descriptions Week-Ending September 2007: Yield to Maturity on Actual Trading Total for the Month
    28 21 14 7 of September 2007
    AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
    1 Treasury Bills
    A 91-Day Bills 1042.24 6.98 368.19 6.85 540.19 6.89 768.13 6.73 2718.75 6.87
    B 182-Day Bills 560.65 6.81 1064.25 7.15 1211.21 7.10 1918.10 7.20 4754.21 7.12
    C 364-Day Bills 1522.76 7.11 651.90 7.23 2177.11 7.20 685.00 7.01 5036.77 7.15
    2 GOI Dated Securities
    A Regular (Per Cent: Year)
    11.40, 2008 - - - 15.00 7.36 11.00 - - - - - - 15.00 7.36 11.00
    11.50 , 2008 - - - 40.00 7.31 11.20 - - - - - - 40.00 7.31 11.20
    12.00 , 2008 - - - - - - 90.00 7.14 11.66 - - - 90.00 7.14 11.66
    5.48 , 2009 4754.20 7.75 5.68 2355.97 7.54 5.67 1631.61 7.59 5.67 2759.00 7.61 5.68 11500.79 7.65 5.68
    6.65 , 2009 1220.06 7.64 6.74 1286.30 7.56 6.74 1101.73 7.58 6.74 1060.00 7.60 6.74 4668.09 7.59 6.74
    7.07 , 2009 OMC SB 622.00 7.83 7.14 - - - - - - 100.00 7.92 7.16 722.00 7.84 7.15
    7.33 , 2009 OIL MKT BONDS 85.00 7.86 7.38 20.00 7.85 7.38 50.00 7.83 7.38 - - - 155.00 7.85 7.38
    11.50 , 2009 - - - - - - 79.00 7.64 10.86 - - - 79.00 7.64 10.86
    11.99 , 2009 - - - - - - 25.00 7.63 11.28 15.00 7.63 11.27 40.00 7.63 11.28
    5.87 , 2010 1186.77 7.83 6.11 - - - - - - - - - 1186.77 7.83 6.11
    6.20 , 2010 UTI SB - - - - - - 25.00 8.18 6.47 25.00 8.14 6.47 50.00 8.16 6.47
    7.55 , 2010 140.00 7.73 7.58 35.00 7.60 7.56 - - - - - - 175.00 7.70 7.58
    11.30 , 2010 - - - 0.10 7.54 10.32 - - - 5.30 7.69 10.35 5.40 7.69 10.35
    11.50 , 2010 - - - - - - - - - 120.08 7.65 10.51 120.08 7.65 10.51
    9.39 , 2011 75.98 7.74 8.92 0.40 7.61 8.88 270.19 7.66 8.89 25.00 7.73 8.91 371.56 7.68 8.90
    12.32 , 2011 - - - 65.00 7.68 10.86 60.00 7.70 10.85 5.00 7.89 10.91 130.00 7.70 10.86
    7.40 , 2012 - - - 105.00 7.67 7.48 155.00 7.69 7.48 10.00 7.77 7.51 270.00 7.68 7.48
    7.44 , 2012 OMC SB 20.00 8.18 7.65 - - - - - - - - - 20.00 8.18 7.65
    10.25 , 2012 - - - - - - 25.50 7.75 9.35 - - - 25.50 7.75 9.35
    7.27 , 2013 280.73 7.77 7.45 1440.55 7.68 7.41 2290.04 7.67 7.41 3741.00 7.75 7.44 7752.32 7.72 7.43
    12.40 , 2013 - - - - - - - - - 15.00 7.85 10.22 15.00 7.85 10.22
    7.37 , 2014 100.00 7.86 7.56 345.00 7.76 7.52 120.00 7.75 7.52 220.00 7.81 7.54 785.00 7.78 7.53
    10.50 , 2014 - - - 60.00 7.81 9.18 - - - - - - 60.00 7.81 9.18
    11.83 , 2014 0.30 8.16 9.90 65.05 7.83 9.73 - - - - - - 65.35 7.83 9.74
    7.38 , 2015 388.88 7.88 7.60 1132.00 7.83 7.58 691.50 7.85 7.59 575.30 7.87 7.60 2787.68 7.85 7.59
    7.61 , 2015 OIL MKT BONDS - - - 35.00 8.40 7.95 - - - - - - 35.00 8.40 7.95
    9.85 , 2015 - - - - - - 8.70 7.97 8.87 - - - 8.70 7.97 8.87
    7.59 , 2016 - - - - - - 65.00 7.80 7.69 80.00 7.86 7.72 145.00 7.83 7.71
    10.71 , 2016 0.66 8.10 9.24 - - - 65.00 8.05 9.21 - - - 65.66 8.05 9.21
    12.30 , 2016 - - - - - - - - - 13.77 8.05 9.72 13.77 8.05 9.72
    6.65 , 2017 - - - - - - 10.00 7.59 6.74 - - - 10.00 7.59 6.74
    7.49 , 2017 2198.56 7.91 7.70 5578.36 7.86 7.68 4560.32 7.88 7.69 5068.65 7.90 7.70 17405.89 7.88 7.69
    7.99 , 2017 4810.45 7.89 7.94 8004.00 7.83 7.91 6445.35 7.85 7.92 6378.06 7.88 7.93 25637.86 7.86 7.92
    8.07 , 2017 132.61 8.00 8.03 1167.25 7.93 8.00 645.05 7.92 7.99 1000.35 7.96 8.01 2945.26 7.94 8.00
    5.69 , 2018 0.36 8.11 6.89 - - - 100.00 8.00 6.84 122.00 8.11 6.89 222.36 8.06 6.87
    6.25 , 2018 0.60 8.19 7.21 9.50 8.03 7.13 4.04 8.10 7.17 5.11 8.08 7.16 19.25 8.06 7.15
    7.94 , 2021 - - - - - - 35.22 8.07 8.03 70.00 8.03 8.00 105.22 8.04 8.01
    8.13 , 2021 OMC SB - - - - - - 5.45 8.45 8.35 0.45 8.45 8.35 5.90 8.45 8.35
    10.25 , 2021 - - - - - - 3.55 8.11 8.72 13.59 8.11 8.72 17.14 8.11 8.72
    8.15 , 2022 FCI SB 7.00 8.44 8.35 11.52 8.46 8.37 - - - 0.56 8.55 8.43 19.08 8.45 8.37
    8.20 , 2022 1615.05 8.16 8.17 363.83 8.11 8.14 345.66 8.07 8.11 105.00 8.12 8.15 2429.54 8.14 8.16
    8.35 , 2022 157.00 8.09 8.17 - - - 21.83 8.10 8.18 0.80 8.11 8.18 179.63 8.10 8.17
    8.03 , 2024 FCI SB 1.65 8.57 8.44 10.10 8.57 8.44 0.65 8.51 8.39 0.04 8.59 8.45 12.44 8.57 8.44
    8.23 , 2027 FCI SB 66.46 8.63 8.55 50.31 8.62 8.54 91.17 8.61 8.53 91.30 8.70 8.61 299.24 8.64 8.56
    6.01 , 2028 10.55 8.31 7.75 28.70 8.28 7.72 30.81 8.35 7.78 6.50 8.37 7.80 76.56 8.32 7.75
    7.95 , 2032 845.00 8.41 8.35 64.00 8.36 8.31 325.21 8.35 8.30 190.00 8.34 8.29 1424.21 8.39 8.33
    8.33 , 2036 1121.49 8.41 8.41 886.70 8.36 8.36 1894.35 8.35 8.35 902.09 8.37 8.36 4804.64 8.37 8.37
    9.39 , 2036 - - - - - - 25.00 7.68 8.90 - - - 25.00 7.68 8.90
    Sub-total 19844.34 7.91 7.22 23184.77 7.82 7.56 21304.18 7.86 7.67 22726.59 7.85 7.50 87059.88 7.86 7.49
    B RBI's OMO: Sales 29.00 - - 1.00 - - 209.00 - - 175 - - 414.00 - -
    Purchase - - - - - - 10.00 - - 5 - - 15.00 - -
    Sub-total 29.00 - - 1.00 - - 219.00 - - 180.00 - - 429.00 - -
    (A+B) 19873.34 7.91 7.22 23185.77 7.82 7.56 21523.18 7.86 7.67 22906.59 7.85 7.50 87488.88 7.86 7.49
    3 Market Repo 81322.32 103027.80 124742.50 117434.30 426526.92
    4. State Govt Securities 257.02 8.15 8.29 296.65 8.28 8.41 84.54 8.29 8.76 70.19 8.20 8.60 708.39 8.23 8.43
    Grand total (1 to 4) 104578.33 128594.56 150278.72 143782.31 527233.92

    (-) 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 October 20, 2007 per cent 2022, 8.28 per cent 2027 and

    8.33 per cent 2032 for aggregate amounts of Rs 2,495.28 crore, Rs 1,252.24 crore and Rs 1,522.48 crore, respectively to 19 nationalised banks as on September 21, 2007.

    Treasury Bills

    The RBI increased the notified amounts of all the treasury bills auctioned during the month thus mobilising an aggregate of Rs 25,000 crore against Rs 20,500 crore in August; this was done partly with an intention to mop up surplus liquidity and partly to repay the additional mobilisations undertaken in June in order to facilitate the takeover of SBI. The monthly weighted average yields on 91day and 364-day TB shows increase from

  • 6.74 per cent in August to 7.08 per cent September and from 7.42 per cent to 7.49 per cent, respectively, while the average yield on 182-day TB declined over the same period. The yield on 91-day TB slipped from 7.06 per cent on September 5 to 6.98 per cent on September 19, but rose to 7.19 per cent on September 26. The yield on 182-day TB declined from
  • 7.40 per cent on September 7 to 7.25 per cent on September 21, while that on 364day TB edged up from 7.47 per cent on September 14 to 7.50 per cent on September 28 (Tables 6 to 8).
  • Corporate Bonds Market

    In the current financial year so far, the highest monthly amount was mobilised at Rs 6,165 crore in September, which could be partly due to restriction on the ECB borrowings imposed by the RBI (Table 9). However, this was lower than that mobilised in the corresponding month last year at Rs 11,402 crore. Two central public sector units (PSUs) tapped the market in this month to mobilise Rs 2,000 crore and the rest was mobilised by 11 banks/FIs and one corporate. The Power Finance Corporation (PFC) tapped the domestic debt market after RBI rejected the corporation’s proposal to raise an overseas loan of $ 200 million. But even the domestic issue failed to evoke positive response for its three- and five-years papers. Of these, as the three-year paper could get only subscriptions worth Rs 40 crore, the corporation refrained from accepting the limited bids. Thus, it issued only five-year bond by offering 9.80 per cent.

    As compared with the previous financial year, the coupons offered on upper tier-II and perpetual bonds were above 10 per cent in the current financial year, for instance, SBI offered 10.10 per cent on upper tier-II while in September 2006 for the same paper it offered 8.97 per cent.

    Haryana Vidyut Prasaran Nigam Ltd (HVPNL) of ‘CCR BB+’ is among the first non-investment grade ratings assigned by Crisil, which was accepted and released in the market, indicating the deepening of the Indian debt market. The rating reflects HVPNL’s risks of concentration of revenues with off-takers who have below-average credit profiles, and the company’s own below-average financial risk profile which were partially offset by HVPNL’s monopoly in intra-state power transmission, stable revenues, and efficient operations.

    IV Secondary Market

    Despite surplus liquidity and subdued domestic inflation rate, the secondary market turnover for gilt-edged securities remained moderate with the weekly average turnover ranging between Rs 18,362 crore and Rs 26,052 crore as against a range of Rs 14,596 crore and Rs 35,912 crore in August as market participants refrained from holding positions ahead of the halfyearly closing.

    In response to subdued inflation rate and surplus liquidity, the yields declined across maturities, but following the cut in US fed rate, the rates dipped further. As the RBI absorbed huge liquidity through MSS issuances in the last week of the month, the yield rates jumped amongst all maturities. The spread between 7.99 per cent 2017 and 8.33 per cent 2036 widened from 48 bps in the week ending September 7 to 52 bps in the week ending September 28. With the short-term rates firming up more than the long-term rates, the yield curve somewhat flattened over the month (Graph D) (see also Appendix Table).

    RBI Reverse Repos, OMOs and MSS

    The fluctuations in liquidity manifested themselves through the ebb and flow of the reverse repo bids tendered during the month; they rose to a high of Rs 39,175 crore, while no bids were tendered on September 21 in response to the tightness following advance tax outflows. Also, the RBI had to inject liquidity on two occasions: on September 21 it injected Rs 1,200 crore and on September 28, Rs 9,735 crore ahead of the half-yearly closing of bank accounts. In the week ending September 7, the aggregate bids tendered increased to Rs 1,74,235 crore despite outflows towards dated securities auction; these bids fell to Rs 1,05,605 crore in the week ending September 14 and further dwindled to Rs 21,765 crore in the next week in response to the advance tax outflows, which pushed RBI to inject liquidity. Despite the RBI having injected funds for half-yearly closing, the size of bids tendered and accepted surged to Rs 85,285 crore due to improved liquidity scenario towards the month-end (Table 10).

    The turnover in repo outside RBI declined from Rs 4,81,566 crore in August to Rs 4,26,527 crore in September at a much higher average rate of 6.25 per cent against

    5.31 per cent in August (Table 11).

    As the deluge of investment flows has continued, the RBI has been expanding the scope of MSS absorptions which touched Rs 1,31,473 crore as on September 28 and surged to Rs 1,44,940 on October 4; this led RBI to revise the ceiling to Rs 2 lakh crore. The finance ministry had provided for Rs 3,700 crore as interest outgo for MSS borrowings, but given the enlarged mobilisations, the interest outgo on this count is sure to increase.

    Commercial Bonds

    As per the consolidated data published by SEBI for secondary market trading in corporate bonds on both the stock exchanges (NSE and BSE) as well as from Fimmda which is recording the OTC deals, shows that the total trading during January-September 2007 was Rs 59,395 crore wherein the reporting on BSE had begun in January and that on NSE from March while on Fimmda it has just begun in September. Interestingly, the number of trades was declining over this period.

    In sync with decline in secondary market trading in gilt-edged securities, the trading in corporate bonds fell with daily average turnover slipping from Rs 92 crore in August to Rs 60 crore in September. Among the traded securities, the highest decline was in PSU bonds from Rs 748 crore in August to Rs 295 crore in September.

    EPW

    [Piyusha Hukeri drafted the initial note and V P Prasanth compiled the accompanying tables and graphs].

    Economic and Political Weekly October 20, 2007

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