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Sustainability of External Liabilities

The debt-service ratio may appear low and satisfactory, but it is high time the official agencies conceived of a more meaningful concept of sustainability of total external liabilities in the face of reserves built substantially on volatile flows. Persistent disinvestment by foreign institutional investors ever since signs of discouraging economic prospects surfaced earlier this year should be an eye-opener.

MONEY MARKET REVIEW

Sustainability of External Liabilities

EPW Research Foundation

disinvest in the Indian stock exchanges. There was a sudden net disinvestment of as much as $ 3.23 billion in January by the FIIs. Since then, there have been many months of continuous disinvestments; for these seven months so far, SEBI data show an outflow of about $ 7.0 billion on FIIs’

The debt-service ratio may appear low and satisfactory, but it is high time the official agencies conceived of a more meaningful concept of sustainability of total external liabilities in the face of reserves built substantially on volatile flows. Persistent disinvestment by foreign institutional investors ever since signs of discouraging economic prospects surfaced earlier this year should be an eye-opener.

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

Economic & Political Weekly

EPW
august 23, 2008

S
ince the beginning of the current financial year, there has been a sudden reversal of the phenomenon of rising foreign exchange reserves experienced continuously now for 12 years from 1996-97 to 2007-08. The erosion in the size of foreign currency assets to the extent of $ 9.47 billion as of August 8, 2008 from the end of March 2008 appears very glaring as compared with a total accretion of $ 107.32 billion during the whole of 2007-08 and $ 46.82 billion in 2006-07.

1 Fragility in Foreign Currency Assets

The concern about the current year’s development arises out of the fragility of the sources of expansion in foreign currency assets during the past few years. We had an occasion to bring out the tenuous nature of the earlier flows (‘Is the Comfort in the External Sector Tenuous?’, EPW, February 23, 2008), but now the Reserve Bank of India (RBI) has released the balance of payments data as well as the data on India’s external debt for the yearending 2007-08, which pose many further issues of concern on the external sector front; in the same vein, we now have updated data on India’s international investment position.

The reserves outflow began some time in the first quarter of this year when the economy’s growth prospects, the inflationary situation and the general economic conditions began to wane. Fearful of the adverse consequences of the strong rupee policy pursued since the beginning of April 2007, the RBI changed track after 11 months and allowed the rupee to depreciate rather precipitately during March 2008. The rupee’s nominal effective exchange rate (NEER with base 2006-07=100) fell steeply from 105.64 in February to 101.28 in March. That was the time when foreign institutional investors (FIIs) began to equity investment account.

The dependence on FII investments for capital inflow has a number of adverse consequences for the economy, the most important of which is that they are not need-based and are unrelated to developmental finance requirements. Their ebb and flow are entirely market-determined. Because of their sensitivity to market sentiments, the greatest harm they do is to prevent the exercise of any policy autonomy. We cannot curb them with fiscal or other measures when we do not need them. The sensitivity of FIIs to the government’s postures on the patently unhealthy participatory notes (PNs) makes an interesting case study of the absence of policy autonomy. Finally, there is no social audit of the potential burden that the FIIs may impose on the system in terms of sizeable dividend earnings and massive capital appreciation.

Once it is accepted that portfolio investments are an unstable source, it becomes equally true that because of capital appreciation, the actual external liabilities on this count over the years turn out to be many times over what are reported as the “outstandings” of portfolio investments. As per the RBI’s latest data on India’s international investment position (IIP), by far the largest increase in external liabilities during the past few years has occurred under two volatile items, namely, portfolio investment and trade credits. Along with “currency and deposits”, these (possible) volatile items have together worked out to $ 206 billion or over 50 per cent of the total liabilities at the end of December 2007 (Table 1, p 20). When the current portfolio investments, particularly in equity shares are measured in terms of marked-to-market, one should not be surprised if all these volatile items together come closer to the foreign exchange reserves of about $ 290 billion.

Such a concern arises because the country has built additional reserves

MONEY MARKET REVIEW MONEY MARKET REVIEW

year-by-year with the help of unstable ritualistically. To take a concrete example, billion at end-March 2005 to $ 44.31
sources of capital flows to a large extent. the RBI’s latest publication on Macro billion at end-March 2008 (Table 3), but the
As shown in Table 2, portfolio investment economic and Monetary Developments stock of portfolio investment has galloped
and short-term credit have constituted a (July 29, 2008) contends thus: from $ 56 billion to over $ 120 billion.
preponderant part of the capital account Debt sustainability indicators remained The pretension of such comfort based
flows. To cite the example of the latest year at comfortable levels during 2007-08. The on time-worn concepts of debt sustain
2007-08, the foreign exchange reserves external debt to GDP ratio rose to 18.8 per ability is sure to be misleading for the
increased by $ 92.16 billion as against an cent at end-March 2008 from 17.8 per cent public at large, and more importantly,
increase of $ 36.61 billion during 2006-07 at end-March 2007; this ratio was 30.8 per
cent at end-March 1995. The debt service Table 3: India’s External Debt
(both excluding valuation changes of ratio was placed at 5.4 per cent during 2007- Item End-End-End-End
$ 18.3 billion and $ 11.0 billion, respec08 as against 4.8 per cent during 2006-07. March March March March 2005 2006 2007 2008
tively) – an improvement of $ 55.55 Reflecting the rise in short-term debt during In $ million
billion. Of this improvement, $ 33.27 2007-08, the ratio of short-term to total debt Long-term 1,15,250 1,18,594 1,43,293 1,76,899
billion muchand short-term debt to reserves increased to Short-term 17,723 19,539 26,376 44,313
or as as 60 per cent is 20 per cent and 14.3 per cent, respectively. Debt Indicators: In percentages
accounted for by the above two items, India’s foreign exchange reserves exceeded Total debt/GDP 18.6 17.2 17.8 18.8
namely, portfolio investments and shortthe external debt by $ 88.5 billion providing Short-term/
term credits. Portfolio investment alone a cover of 140 per cent to the external debt total debt 13.3 14.1 15.5 20
has accounted for 40 per cent of increstock at end-March 2008 (p 97). Short-term debt/
mental foreign exchange reserves during While the statement thus takes comfort reserves 12.5 12.9 13.2 14.3
2007-08. in the fact that foreign exchange reserves Short-term/ 15.4 16.5 18.4 25.0
Against such a background, it is have exceeded the stock of external debt long-term
inadmissible to take comfort from the by $ 88.5 billion, the same statement Concessional debt/ total debt 30.9 28.6 23.3 19.9
conventional debt sustainability indicaprovides data elsewhere indicating that Reserves/total debt 106.4 109.8 117.4 140
tors, as the official discourses do almost the “outstandings” of portfolio investment Debt service ratio 6.1 9.9 4.8 5.4
Table 1: India’s External Liabilities – Size of Volatile Items (In $ billion) been of the order of $ 124.5 in the Indian bourses have RBI (2008): Macroeconomic and Monetary Developments: First Quarter Review 2008-09, July 29.
Item March March March March March December
2003 2004R 2005 PR 2006 PR 2007 PR 2007P billion; it is not realised that very discomforting for the authorities
Non-volatile items 92.3 100.1 109.8 120.4 157.1 199.6 the latter deserve the same themselves when they have to face the
(59.1) (54.6) (52.3) (49.4) (51.1) (49.2)attention and concern as in crunch. The persistent disinvestment by
1 Direct investment 31.2 38.2 44.5 52.4 76.2 102.4the case of external debt. FIIs since the signs of discouraging
2 Loans* 61.1 61.9 65.3 68.0 80.9 97.2 Volatile items 63.8 83.2 100.1 123.3 150.6 206.0 Similarly, the conventional economic prospects surfaced around the
(40.9) (45.4) (47.7) (50.6) (48.9) (50.8)measure of debt-service ratio early 2008, should be an eye-opener.
1 Portfolio investment 32.4 43.7 55.7 64.2 79.5 124.5may appear low and satisfac- In this respect, it is instructive to take
2 Trade credits 4.9 6.3 9.6 21.2 27.7 36.1 tory, but it is time the official note of what happened in 1997 on the eve
3 Currency and deposits agencies conceived of a more of the Asian crisis. We reproduce below
and other liabilities 26.5 33.2 34.8 37.9 43.4 45.4 meaningful concept of the some assessment made by the Bank for
Total liabilities 156.1 183.2 209.8 243.7 307.7 405.6 sustainability of total exter- International Settlements in its Annual
PR: Partially Revised. P: Provisional. Figures within brackets are percentages to total. * Historically some loans are known to have proved volatile nal liabilities in the face of Report for 1997-98 in this respect. We do
Source: RBI Studies on India’s International Investment Position. reserves built substantially so rather extensively as each statement
Table 2: Sources of Accretions to Foreign Exchange Reserves (In $ billion) on volatile flows. The system rings broadly true to the current situation
Items 2003-04 2004-05 2005-06 2006-07 2007-08 takes full responsibility for in India and can emerge as a useful
Current account balance 14.08 -2.47 -9.90 -9.77 -17.40 16.74 28.02 25.47 46.37 109.57 servicing the full stock of warning:
Capital account* Durable flows -3.40 10.83 7.24 26.40 39.83 portfolio liabilities, the costs ...a wave of speculative pressure engulfed
-(20.3) (38.6) (28.4) (56.9) (36.4) of which are unknown but a host of currencies and countries in the
Foreign direct investment 2.39 3.71 3.03 8.48 15.55 sure to be many multiples region. ... Many had recently received large
External assistance -2.86 1.92 1.70 1.77 2.11 of the debt-service ratio inflows of short-term foreign capital.
External commercial borrowings** -2.93 5.19 2.51 16.16 22.17 (about 5 per cent). As is their Possible volatile flows 21.11 18.22 18.28 20.13 69.87 wont, western agencies like A particularly important factor was the large exposure of domestic residents to short-term
(126.1) (65.0) (71.8) (43.4) (63.8) foreign currency liabilities, perhaps to be
Portfolio investment 11.36 9.29 12.49 7.06 29.26 the Bank for International expected after a decade of currency stabil-
Settlements (BIS), which ity, and their increasingly frantic attempts to
Short term credit 1.42 3.79 3.70 6.61 17.68 made short-term debt as the hedge their positions as the spreading crisis
NRI deposits, banking andkingpin of the Asian crisis, made losses look more probable. In the end,
other capital 7.73 4.53 2.60 5.86 21.39 are silent on equally volatile with even trade credit drying up in some
Errors and omissions 0.60 0.61 -0.52 0.59 1.54 Change in reserves (+) 31.42 26.16 15.05 36.61 92.16 FII flows. In India’s case, cases, the events took on the character of a liquidity crisis or “bank run” of classic di
*Excluding rupee debt. Figures in brackets are percentages to total capital flows. **Historically some such borrowings have proved to be volatile. short-term debt outstanding mensions (p 5).
Source: RBI Bulletin, various issues. has jumped from $ 17.72 … a corporate sector burdened with high
20 august 23, 2008 Economic & Political Weekly
EPW

levels of short-term debt were at the heart of a series of crises in Asia in the second half of 1997. In particular, they greatly increased the complexity of managing in a sound and productive manner the foreign funds that surged into Asia in the mid-1990s (p 33). “In retrospect, however, they can be seen to have masked the fact that systems of governance in the corporate, financial and government sectors failed to keep pace with a rapidly expanding economy, and that investment strategies increasingly focused on areas with less solid risk-to-return characteristics (p 35).

2 Money, Gilt and Forex Markets

Against an environment of heightened uncertainty, the money, government securities and forex markets exhibited mixed sentiments in July. The month began with international crude oil prices touching a peak of $ 145.31 on July 3, the highest since trading began on the Nymex in 1983. Next, on the issue of the nuclear deal, the left parties withdrew their support to the government. Further, domestic inflation continued to surge. Despite these concerns, market sentiments were initially positive, as liquidity remained comfortable. But, following the two 25 basis points (bps) hike in the cash reserve ratio (CRR) impounding about Rs 20,000 crore (concurrently with outflows towards dated securities auction), market sentiments became cautious despite a remarkable decline in global crude oil prices and increased prospects of the government winning the vote of confidence. However, with the sharp fall in the index of industrial production (IIP), there were expectations that the RBI would either hold rates steady or effect a small hike in its impending credit policy on July 29. Further, these sentiments

were supported by the government winning the confidence vote. With domestic inflation continuing to surge, the finance minister asserted that though there are different tools available for controlling inflation, the government was relying on monetary policy to cool demand

Graph A: Trends in Weighted Averages of Call Rates, Repo Rates and Call Money Borrowing – July 2008

and calm prices. He further said that interest rates should be in line with inflationary expectations.

Finally, the stringent monetary measures by the RBI in its first quarter policy review by increasing the repo rate by 50 bps from 8.50 per cent to 9.0 per cent with immediate effect on July 29 and increasing the CRR by 25 bps to 9 per cent with effect from the fortnight beginning August 30, caught the market unawares. In the forex market, the sentiments were adversely affected due to the

Table 5: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum: Simple Statistical Characteristics

Month/Week Simple Standard Coefficient of Simple Standard Coefficient of
Mean * Deviation Variation Mean * Deviation Variation
(in %)$ (in %)$
Call Money Notice Money **
June 2008
All four weeks 7.57 0.96 12.73 7.65 1.05 13.67
27 8.49 0.34 4.03 8.56 1.19 13.91
20 (RF)* 7.85 0.62 7.84 7.87 0.43 5.51
13 7.65 0.58 7.63 7.09 0.77 10.93
6 (RF)* 6.28 0.58 9.19 6.93 0.97 14.05
July 2008
All four weeks 8.57 0.98 11.48 8.10 0.96 11.89
25 9.28 0.55 5.94 8.63 1.09 12.69
18 (RF)* 8.70 0.42 4.85 8.24 0.71 8.58
11 8.90 0.21 2.31 8.25 0.59 7.16
4 (RF)* 7.31 1.31 17.89 7.37 1.25 17.01

** Separate reportings began on March 15, 2005. * Including data for reporting Fridays (RF). $ Based on original unrounded figures. Source: RBI.

Table 6: Comparison of Call, Overnight CBLO and Repo Rates

Week Ending Weighted Average Rates (in %) Daily Average Volumes (Rs Crore)

Repo Rates – Outside Call Overnight CBLO Repo Call Overnight CBLO Repo the RBI

12– –25

10– –

20 6-Jun-08 6.33 5.80 6.10 11,370 40,954 12,151

13-Jun-08 7.77 7.61 7.65 11,048 41,580 12,821

8– 15

20-Jun-08 8.03 7.67 7.84 11,436 35,804 11,819 6–

27-Jun-08 8.56 8.20 8.34 15,669 25,244 8,526

10 4–

– 4-Jul-08 7.34 5.87 6.25 11,137 29,084 10,459

11-Jul-08 9.01 8.43 8.56 16,556 23,936 7,326

5

– 18-Jul-08 8.95 8.26 8.44 14,530 20,354 7,910

2–

0–

– 0 25-Jul-08 9.44 8.51 8.71 15,754 17,533 6,615 Source: The Clearing Corporation of India Ltd (CCIL).

Table 4: Money Market Operations (RBI’s Daily Data)

Call Money Volume (Rs ‘000 Crore) (Right axis) Call Rates

28/6 1/7 4/7 7/7 10/7 13/7 16/7 19/7 22/7 25/7

Average July 2008 Average June 2008 Items for Four Weeks 25 18 (RF) 11 4 (RF) for Four Weeks 27 20 (RF) 13 6 (RF)

No of working days 24 6 6 6 6 24 6 6 6

Call Money

Weighted average of call rates: 5.60-9.58 8.51-9.58 7.98-8.98 8.49-9.03 5.60-8.70 5.71-8.98 8.12-8.98 6.60-8.22 6.76-8.21 5.71-7.33 per cent (weekly range) per annum (6.60) (5.71)

Daily averages (Rupees crore) 10,978 164 95 136 254 10,192 12,293 9,891 9,056 9,527 Total call market borrowings (316) (166) (174) (426)

Notice Money

Weighted average of notice money rates: 6.25-9.10 7.00-9.00 7.50-9.10 7.70-9.07 6.25-8.80 6.10-10.21 7.11-10.21 7.18-8.25 6.40-8.19 6.10-7.99 per cent (weekly range) per annum (7.75) (6.11)

Daily averages (Rupees crore) 2,915 75,715 2,306 3,933 2,431 12,381 4,051 1,855 2,391 1843 Total notice market borrowings (11,519) (11,132) (8,831) (10,253)

Turnover in term money market 157 164 95 136 254 172 141 223 238 (borrowings) $$ (103) (60) (140) (10)

*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 & Political Weekly

EPW
august 23, 2008

MONEY MARKET REVIEW

downgrading of local currency outlook to negative by Fitch Ratings.

2.1 Call Money Market

Due to active liquidity management measures of the RBI, money market rates firmed up in response to the impounding of liquidity through two hikes in the CRR effected during the month, but ruled in a narrow range above the repo rate segment continued to dominate the 2.2 Forex Market money market. The mutual funds were After a gap of three months, the rupee the major lender in CBLO while commer-appreciated against dollar by 78 paise due cial banks were the major borrowers to the special market operations carried (Table 6, p 21). out by the RBI, a sharp fall in international

Table 7: Auctions of 91-Day Treasury Bills (Amount in rupees crore)

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount
Auction Amount Devolved Price Yeild Outstanding-
No Face Value No Face Value on PDs (Rupees) Rate on the Date
(Amount) (Amount) (Amount) (%) of Issue
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

due to the liquidity support extended 2007 July 4 500.00 102 6,246.00 18 500.00 0.00 98.48 6.19 70,356.00

through the liquidity adjustment facility

(4) (7,100.00) (4) (7,100.00) [98.50] [6.11]

(LAF) window (Tables 4 and 5, p 21). As a

July 11 2,000.00 131 7,253.00 34 2,000.00 0.00 98.74 5.12 70,106.00 result, the standard deviation, a measure (2) (250.00) (2) (250.00) [98.76] [5.04]

of volatility, ruled around the levels in June.

The overnight rate slipped from 7.61 per cent on July 2 to 6.35 per cent on July 3 and dipped further to 5.6 per cent on the first reporting Friday of the month, July 4, as liquidity eased mainly on account of a decline in the cash balances of the central government. Following the first 25 bps hike in the CRR effective from July 4 and dated securities auction outflows, the call rate jumped to 8.85 per cent on July 5 and further to 9.03 per cent on July 9. However, the overnight rate slipped to

8.39 per cent on July 12 and then further

July 18 2,000.00 100 9,177.47 14 2,000.00 0.00 98.89 4.50 70,897.00

(1) (500.00) (1) (500.00) [98.90] [4.46]

July 25 2,000.00 78 6,468.08 32 2,000.00 0.00 98.90 4.46 70,797.00

(0) (0.00) (0) (0.00) [98.93] [4.34]

2008 July 2 500 66 2,130.75 8 500.00 0.00 97.87 8.73 56,454.00

(2) (750.00) (2) (750.00) [97.87] [8.73]

July 9 3,500 113 6,508.94 21 500.00 0.00 97.80 9.02 52,632.00

(5) (4,100.00) (5) (4,100.00) [97.80] [9.02]

July 16 3,000 127 8,219.61 63 3,000.00 0.00 97.78 9.11 54,882.00

(3) (2,250.00) (3) (2,250.00) [97.80] [9.02]

July 23 3,000 113 6,685.73 41 3,000.00 0.00 97.79 9.06 55,632.00

(2) (750.00) (2) (750.00) [97.80] [9.02]

July 30 3,000 130 9,274.83 60 3,000.00 0.00 97.72 9.36 56,432.00

(2) (800.00) (2) (800.00) [97.73] [9.32]

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.

Table 8: Auctions of 182-Day Treasury Bills (Amount in rupees crore)

to 7.98 per cent on July 18, the second reporting Friday of the month, as banks had already covered their positions. With the second scheduled hike in CRR, the call rate jumped to 9.51 per cent on July 21 and then peaked to 9.67 per cent on July 23. But, as the demand for funds waned, the overnight rates slipped to 8.66 per cent on July 29. Following the announcement of the re-introduction of second LAF, the market sentiment was buoyant. The rate dipped to 8.22 per cent on July 31 (Graph A, p 21).

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) (%) of Issue

2007 July 11 1,500.00 78 4,005.67 30 1,500.00 0.00 97.07 6.05 23,301.00

(0) (0.00) [97.10] [5.99]

July 25 1,500.00 68 4,085.00 12 1,500.00 0.00 97.18 5.82 25,141.00

(3) (900.00) (3) (900.00) [97.19] [5.80]

2008 July 9 1,500.00 83 3,923.46 46 1,500.00 0.00 95.58 9.27 20,288.00

(1) (500.00) (1) (500.00) [95.55] [9.34]

July 23 1,500.00 83 4,232.25 23 1,500.00 0.00 95.56 9.32 19,683.00

(0) (0.00) (0) (0.00) [95.58] [9.27]

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 9: Auctions of 364-Day Treasury Bills (Amount in rupees crore)

Graph B: Spot Quotations for the US Dollar in the Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Domestic Inter-Bank Market Auction Amount Devolved Price Yield Outstanding No Face Value No Face Value on PDs (Rupees) Rate on the Date (Amount) (Amount) (Amount) (%) of Issue

2007

47

July 4 1,000.00 93 6,255.00 20 1,000.00 0.00 93.33 7.17 55,325

45

(0) (0.00) [93.41] [7.07]

July 18 2,000.00 93 7,415.49 22 2,000.00 0.00 93.84 6.58 55,627

43

(3) (583.43) (3) (583.43) [93.92] [6.49]

41

2008 39

July 2 1,000.00 106 3,385.55 13 1,000.00 0.00 91.62 9.17 56,220

(1) (8.75) (1) (8.75) [91.78] [8.98]

The interest rates in the collateralised

(Daily)
Working
Days July
2008
(Monthly Averages)
(Jan 2001 to June 2008)

July 16 2,000.00 109 4,703.50 48 2,000.00 0.00 91.39 9.45 55,886 segment, the market repo and the (1) (250.00) (1) (250.00) [91.42] [9.41]

collateralised borrowing and lending July 30 2,000.00 153 9,661.00 25 2,000.00 0.00 91.30 9.56

(1) (36.55) (1) (36.55) [91.31] [9.55] 55,923

obligation (CBLO), moved lower but in

Figures in the square brackets represent weighted average price and the respective yield. tandem with call rates. The collateralised Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.

august 23, 2008

MONEY MARKET REVIEW

crude oil prices after having touched a peak early during the month, the easing of political uncertainty, an encouraging buoyancy in the domestic stock markets, interventions by the RBI and arbitraging between off-shore and on-shore markets. However, the outflows to an extent of $ 5,181 million had marginal impact on the rupee’s appreciation. But, the widening of the current account deficit as well as revision of India’s local currency outlook to negative by Fitch Ratings, indicating fiscal deterioration at the central government level, affected market sentiments adversely.

Graph C: Annualised Forward Premia in Percentage for the US Dollar in the Domestic Inter-Bank Market and Weighted Averages of Call winning of the vote of confidence

Rates for July 2008

8– 7– 6– 5– 4– 3– 2– 1–

Weighted Averages of Call Rates (%) (Right axis) 1 month 6 month
as well as positive domestic stock
12– market sentiments pushed the
10– rupee higher to Rs 41.96 on
8– July 24. But, with the month-end
demand for dollars, the rupee
6– slipped to Rs 42.54 on July 29.
4– Following the monetary measures
2– announced in the first quarter
review of credit policy, the rupee

Table 11: Repo Transactions in Government Paper @ (Other than with the RBI) – July 2008 (Rupees crore)

0–

–0

30/6 3/7 6/7 9/7 12/7 15/7 18/7 21/7

The rupee-dollar exchange rate depreciated sharply from Rs 42.95 on June 30 to Rs 43.27 on July 1 as the domestic stock market touched a 16-year low, spurring fear of further investment outflows. It dipped further to Rs 43.34 on the next day on soaring international crude oil prices and arbitrage between the domestic and non-delivered forward (NDF) market. But, it rose to Rs 43.12 on July 7, as the domestic stock markets were buoyant. With the left parties withdrawing support to the

government over the nuclear deal, the rupee dipped to Rs 43.37 on July 8, but strengthened later as the prospects of the ruling government winning the vote of confidence gathered momentum and there was an easing in international crude oil prices. The rupee rose to Rs 42.72 on July 11, as there were inflows relating to corporate activities. However, with the Fitch Ratings downgrading the local currency outlook to negative, the rupee depreciated sharply to Rs 43.17 on July 15. But due to the buoyancy in the stock markets coupled with an easing global crude oil prices, the rupee rose to Rs 42.17 on July 21. The

24/7 firmed up to 42.49 on July 31

(Graph B, p 22).

The forward premia in July reflected the rising interest rate differentials on account of higher domestic interest rates and CRR hikes. The one-month forward premia eased from 8.46 per cent on July 1 to 6.92 per cent on July 31, while the six-month premia fell from 5.57 per cent to

4.90 per cent (Graph C) due to subdued hedging by exporters as they expected the spot rupee to remain advantageous for them and reduced import covers due to a decline in international crude oil prices as well as arbitrage between the on-shore and off-shore markets.

3 Primary Markets

Yields offered in primary markets generally showed a sharp firmness.

3.1 Dated Securities

In July, the government mobilised Rs 16,000 crore through two instances. In the first case, on July 4, the government re-issued 8.24 per cent 2018 and 8.28 per cent 2032 for notified amounts of Rs 6,000 crore and Rs 4,000 crore, respectively, through price-based auctions using multiple price method. The cut-off yield for the 10-year paper was set higher at 9.13 per cent as against the ruling secondary market yield of 8.80 per cent as well as

Repo Period in Amount Range of Interest
Number of Days (Rupees, Crore) (% per annum)
1 1,27,269.50 0.25-9.00 (8.19)
2 10,517.93 5.10-9.40 (8.16)
3 50,018.43 2.00-8.90 (7.08)
4 121.18 3.00-8.50 (6.56)
5 115.00 3.00-6.00 (5.35)
6 25 7.00 (7.00)
7 205 6.00-8.00 (7.48)
21 120 6.00 (6.00)
30 20 6.25 (6.25)
31 225 6.00-6.25 (6.11)
81 13 10.60 (10.60)
82 12.5 10.60 (10.60)
90 50 10.60 (10.60)
All Issues
1-90 18,8712.54 0.25-10.60 (7.88)
[1-91] [4,39,449.43] [2.00-9.75] [7.27]

@ 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 10: Operations of RBI’s Liquidity Adjustment Facility (Amount in rupees in crore)

For the Week Range of Repo (Injection) * Reverse Repo (Absorption) * Net Injection Net
(June-July 2008) Repo / RR Period Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding
Days Number Amount Number Amount Number Amount Number Amount Daily Absorption (-) Amount
Averages of of Liquidity at the
Bids Accepted Week End@
1 2 3 4 5 6 7 8 9 10 11 12 13
02 June - 06 June 08 1-3 1 10 1 10 81 1,04,780 81 1,04,780 20,956 -1,04,770 22,025
09 June - 13 June 08 1-3 54 60,345 54 60,345 0 0 0 0 0 60,345 -12,290
16 June - 20 June 08 1-3 34 33,480 34 33,480 0 0 0 0 0 33,480 -5,000
23 June - 27 June 08 1-3 144 1,82,775 144 1,82,775 0 0 0 0 0 1,82,775 -32,090
30 June - 04 July 08 1-3 25 24,780 25 24,780 30 25,915 30 25,915 6,478.75 -1135 11,700
07 July - 11 July 08 1-3 157 1,87,605 157 1,87,605 0 0 0 0 0 1,87,605 -45,295
14 July - 18 July 08 1-3 125 1,67,920 125 1,67,920 1 5 1 5 1 3,95,945 -34,325
21 July - 25 July 08 1-3 200 2,28,030 200 2,28,030 0 0 0 0 0 2,28,030 -43,260
28 July - 01 Aug 08 1-3 60 75,100 60 75,100 19 4,875 19 4,875 975 70,225 -8,200
* Reverse Repo Rate is 6.00 % and the Repo rate during Mar 31,2007 to June 11, 2008 was 7.75% which was raised to 8.00% on June 12, 2008 and further to 8.50% on June 25, 2008.
@ Net of Repo and Reverse Repo Outstandings.
Economic & Political Weekly august 23, 2008 23
EPW

MONEY MARKET REVIEW

Appendix Table: Secondary Market Operations in Government Papers: NDS and NDS-OM Deals (Amount in rupees, crore)
Descriptions Week Ending July 2008: Yield to Maturity on Actual Trading Total for the Month
25 18 11 4 of July 2008
AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY AMT YTM CY
1 Treasury Bills A 91-Day Bills 850.54 8.87 591.04 8.83 712.01 9.25 627.70 8.69 2781.29 8.92
B 182-Day Bills 453.27 9.21 135.50 8.67 369.28 8.90 336.00 8.80 1294.05 8.96
C 364-Day Bills 176.81 9.06 855.98 9.04 367.20 8.82 2243.92 8.94 3643.91 8.96
2 GOI Dated Securities
A Regular (in % Year)
5.48 , 2009 340.14 9.24 5.66 2000.065 9.36 5 .67 1196.069 9.09 5.66 2688.15 9.12 5.66 6224.42 9.20 5.66
6.65 , 2009 20 9.36 6.77 85.9 9.40 6.78 260 9.18 6.77 420 9.19 6.77 785.90 9.21 6.77
6.96 , 2009 OMC SB 200 9.69 7.09 - - - - - - - - - 200.00 9.69 7.09
7.00 , 2009 - - - 50 9.45 7.14 - - - - - - 50.00 9.45 7.14
7.07 , 2009 OMC SB - - - 20 9.5999 7.19 20 9.6 7.19 - - - 40.00 9.60 7.19
11.99 , 2009 50 9.26 11.78 50 9.45 11.79 - - - - - - 100.00 9.35 11.78
5.87 , 2010 1100 9.23 6.14 1099.25 9.49 6.17 860 9.31 6.16 1785.1 9.27 6.16 4844.35 9.32 6.16
7.55 , 2010 - - - 10.2 9.28 7.77 - - - - - - 10.20 9.28 7.77
11.30 , 2010 632.061 9.38 10.92 298.4 9.57 10.96 615 9.37 10.92 223.496 9.51 10.94 1768.96 9.43 10.93
12.25 , 2010 265 9.29 11.66 - - - 225 9.41 11.67 35 8.87 11.55 525.00 9.32 11.65
6.57 , 2011 625 9.25 6.99 245 9.32 7.01 240 9.29 7.01 70 9.20 6.99 1180.00 9.27 7.00
7.39 , 2011 105 9.22 7.36 - - - - - - - - - 105.00 9.22 7.36
9.39 , 2011 255 9.30 9.37 235.92 9.32 9.37 184.972 9.28 9.36 689.01 9.32 9.37 1364.90 9.31 9.37
7.40 , 2012 - - - 270 9.54 7.93 0.62 9.27 7.87 - - - 270.62 9.53 7.93
7.47 , 2012 OIL MKT BONDS - - - 10 9.71 8.01 - - - 290 9.32 7.92 300.00 9.33 7.92
7.47 , 2012 OIL MKT BONDS 50 9.59 7.98 - - - - - - - - - 50.00 9.59 7.98
7.57 , 2012 FRB - - - - - - - - - 25 7.7088 7.61 25.00 7.71 7.61
10.25, 2012 24.89 9.44 10.00 10 9.4919 10.01 0.06 8.6719 9.75 0.74 8.2386 9.62 35.69 9.43 9.99
7.27 , 2013 210.5 9.17 7.87 - - - 53.864 9.31 7.92 140 9.18 7.88 404.36 9.19 7.88
7.85 , 2013 FRB - - - - - - - - - 285 7.45 7.72 285.00 7.45 7.72
9.00 , 2013 40 9.19 9.07 - - - - - - - - - 40.00 9.19 9.07
7.37 , 2014 488 9.23 8.02 - - - 10 9.1817 8.01 450 9.03 7.96 948.00 9.13 7.99
7.66 , 2014 FRB - - - - - - - - - 25 7.5952 7.64 25.00 7.60 7.64
11.83 , 2014 90 9.41 10.63 105 9.46 10.65 0.112 9.2537 10.55 - - - 195.11 9.43 10.64
7.38 , 2015 46 9.16 8.12 131.62 9.48 8.27 178.15 9.34 8.21 263.06 9.20 8.15 618.83 9.30 8.19
7.61 , 2015 OIL MKT BONDS - - - 5 10.0403 8.61 - - - 240 9.26 8.28 245.00 9.28 8.29
8.01 , 2015 FRB AUG - - - - - - - - - 90 6.99 7.80 90.00 6.99 7.80
8.01 , 2015 FRB JUL - - - - - - - - - 85 7.63 7.90 85.00 7.63 7.90
11.50 , 2015 - - - 450 9.45 10.44 - - - - - - 450.00 9.45 10.44
7.49 , 2016 FRB - - - - - - - - - 14.475 7.49 7.49 14.48 7.49 7.49
7.59 , 2016 - - - 55 9.44 8.44 20 9.31 8.38 0.44 8.6627 8.07 75.44 9.40 8.42
7.46 , 2017 - - - - - - 29 9.22 8.36 - - - 29.00 9.22 8.36
7.49 , 2017 15.22 9.08 8.27 - - - 90.2 9.39 8.43 0.916 8.7351 8.10 106.34 9.34 8.41
7.99 , 2017 - - - - - - 26.24 9.39 8.72 3.78 8.75 8.38 30.02 9.31 8.68
7.99 , 2017 256.352 9.23 8.63 65.754 9.46 8.76 - - - - - - 322.11 9.28 8.66
8.07 , 2017 30 9.20 8.64 0.42 9.36 8.72 - - - 0.3 8.7507 8.41 30.72 9.20 8.63
5.69 , 2018 - - - - - - 3.945 9.07 7.32 34.9 9.16 7.36 38.85 9.15 7.36
8.24 , 2018 12467.43 9.06 8.70 9159.921 9.26 8.81 8409.082 9.29 8.83 2637.89 8.97 8.65 32674.32 9.17 8.76
7.75 , 2021 - - - - - - 1370 9.75 9.09 - - - 1370.00 9.75 9.09
7.75 , 2021 OMC SB 140 9.45 8.88 - - - - - - 140 9.47 8.90 280.00 9.46 8.89
7.94 , 2021 135 9.49 8.96 - - - 5 9.2849 8.82 30 9.20 8.76 170.00 9.44 8.92
8.13 , 2021 OMC SB 0.138 9.71 9.20 240 9.80 9.27 - - - 580 9.46 9.03 820.14 9.56 9.10
10.25 , 2021 22.086 9.52 9.73 14.15 9.64 9.82 2.22 9.56 9.76 - - - 38.46 9.57 9.77
8.20 , 2022 712.404 9.21 8.89 20 9.82 9.32 100.55 9.41 9.03 25 9.06 8.78 857.95 9.24 8.91
8.35 , 2022 29 9.43 9.10 33.396 9.76 9.34 11.95 9.35 9.04 83 9.17 8.92 157.35 9.35 9.05
8.01 , 2023 OMC SB 11.21 9.65 9.21 1141.04 9.69 9.24 - - - 190 9.63 9.20 1342.25 9.68 9.23
8.03 , 2024 FCI SB 0.8 9.71 9.30 14.74 9.98 9.52 3.45 9.84 9.40 4.9 9.69 9.28 23.89 9.89 9.45
8.20 , 2024 OMC SB 362.2 9.57 9.21 1.3 9.90 9.47 5 9.62 9.25 293.85 9.64 9.27 662.35 9.61 9.24
7.95 , 2025 OMC SB 16.6 9.78 9.34 300.4 9.96 9.48 735 9.90 9.43 3.2 8.82 8.60 1055.20 9.91 9.44
8.40 , 2025 OMC SB 115.695 9.64 9.35 0.07 9.6114 9.33 6.98 9.65 9.36 1592.56 9.27 9.07 1715.31 9.30 9.09
7.95 , 2026 FERT SB 3.02 9.88 9.46 2.05 9.97 9.53 8.29 9.91 9.49 1.35 9.65 9.27 14.71 9.89 9.47
8.40 , 2026 OMC SB - - - 220 10.02 9.69 - - - 460 9.52 9.28 680.00 9.68 9.42
8.23 , 2027 FCI SB 4.96 9.82 9.51 19.16 10.01 9.67 - - - 1.45 9.66 9.38 25.57 9.95 9.62
8.24 , 2027 32.7 9.58 9.31 137.14 9.65 9.23 0.33 9.67 9.39 51.23 9.42 9.18 221.40 9.58 9.23
7.95 , 2032 175.948 9.69 9.48 66.4 10.03 9.79 25.07 10.00 9.76 32.9 9.51 9.32 300.32 9.77 9.55
8.28 , 2032 918.26 9.68 9.51 305.3 10.00 9.80 2447.832 9.99 9.79 885 9.90 9.71 4556.39 9.91 9.72
7.50 , 2034 16.815 9.80 9.55 3.1 9.68 9.45 0.58 9.73 9.49 - - - 20.50 9.78 9.54
7.40 , 2035 - - - 77.237 9.71 9.49 10 10.09 9.84 - - - 87.24 9.75 9.53
8.33 , 2036 300 9.59 9.49 590 9.67 9.56 416.258 9.65 9.55 606.79 9.25 9.17 1913.05 9.52 9.42
Sub-total 20333.09 9.18 8.62 17556.64 9.41 8.45 17593.28 9.45 8.73 15493.78 9.19 7.95 70976.80 9.31 8.46
B RBI’s OMO: Sales - - - 119.00 - 466.00 - - 289 - 874.00 - -
Purchase 900.00 - - 277.00 - - 2200.00 - - 2610 - - 5987.00 - -
Sub-total 900.00 - - 396.00 - - 2666.00 - - 2899.00 - - 6861.00 - -
(A+B) 21233.09 9.18 8.62 17952.64 9.41 8.45 20259.28 9.45 8.73 18392.78 9.19 7.95 77837.80 9.31 8.46
3 Market Repo 40068.20 49220.92 44740.16 54683.21 188712.49
4 State Govt Securities 104.04 9.43 9.40 116.37 9.69 9.72 166.49 9.60 9.52 1775.16 9.04 9.20 2162.06 9.14 9.26
Grand total (1 to 4) 62885.95 68872.45 66614.42 78058.77 276431.60

(-) 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. NDS = Negotiated Dealing System. OM = Order Matching Segment. Securities with small-size transactions (Rs 10 crore or less) have been dropped from the above list but included in the respective totals.

(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.

august 23, 2008

MONEY MARKET REVIEW

that set in the previous month at 8.26 per cent. The cut-off yield set on 24-year paper crossed 10 per cent and was set at

10.03 per cent.

In the second instance, the government changed the maturity period of the security to 10 years instead of a 15-19 year maturity period as per the scheduled

Graph D: Yield Curves for Dated Securities – Weighted Averages for the First and Last Week of July 2008

Yield (per cent per annum) 7.5 8 8.5 9 9.5 Week ending July 4 Week ending July 25

23456789 10111213141516171819202125272829

Years to Maturity

calendar of issuances. Thus, the government re-issued 8.24 per cent 2018 for a notified amount of Rs 6,000 crore through price-based auctions using a uniform price method instead of the usual multiple price auction method. The cut-off yield was set lower at 9.08 per cent as against that set earlier during the month.

On July 10, the government of Punjab auctioned 10-year loans for an amount of Rs 500 crore through a yield-based auction using a multiple price auction method. The cut-off yield was set at 9.81 per cent. Further, on July 24, three state governments auctioned 10-year loans for an aggregate amount of Rs 2,100 crore through a yield-based auction using a multiple price auction method. The cut-off yields were set higher in the range of 9.86-9.90 per cent compared with the range of 9.38 per cent to 9.59 per cent set in the previous month. The spreads of state government securities over the yields of central government securities of corresponding maturity was 82 bps as against a range of 22-35 bps in 2007-08.

3.2 Treasury Bills

In tandem with the firmness in the money market rates, the primary yields across treasury bills (TBs) rose above 9 per cent. The average yield set on 91-day TBs jumped to 9 per cent in July 2008 as against 8 per cent in June 2008 and around 5 per cent in July 2007. Similarly, the yields rose by about 90 bps in case of

Economic & Political Weekly

EPW
august 23, 2008

182-day TBs and by 138 bps for 364-day TBs. The cut-off yields on 91-day rose from

  • 8.81 per cent on July 2 to 9.11 per cent on July 16 and then slipped marginally to
  • 9.06 per cent on July 23. Likewise, the yield on 182-day increased from 9.16 per cent on June 25 to 9.34 per cent on July 9 and then slipped to 9.32 per cent on July 23. However, the yield on 364-day increased from 8.25 per cent on June 18 to
  • 9.17 per cent on July 2 and further to 9.45 per cent on July 16 (Tables 7 to 9, p 22).

    3.3 Corporate Bonds Market

    Despite the looming uncertainties, mobilisations through the primary corporate bond market increased to Rs 2,900 crore in July as compared with Rs 1,900 crore in June. Typically issuers prefer to adopt a wait and watch stand ahead of the review of credit policy, but this year it appears that the issuers perceived that the RBI would adopt strong measures and hence preferred to tap the market ahead of the review.

    With the government securities offering yields above 9 per cent, corporates had to offer rates above 10 per cent. For instance, Rural Electrification Corporation (REC), for its 10-year paper, had to offer 10.75 per cent, while in June it had offered only 9.68 per cent. Thus, the spread between this 10-year paper and the corresponding dated securities widened from 144 bps in June to 169 bps in July as the yields offered by both of them have increased.

    4 Secondary Market

    Due to a number of factors mentioned earlier such as strained liquidity situation, looming inflationary concerns and impending review of the credit policy, the weekly average secondary market turnover ranged lower between Rs 13,038 crore and Rs 21,784 crore in July compared with a range of Rs 16,383 crore to Rs 28,329 crore in June.

    The yields on short-term securities continued to rule above the 10-year benchmark, despite the RBI setting a higher cut-off yield in the auction held on July 4, thus resulting in a narrow negative spread. Further, the spread between 10-year and

    8.28 per cent 2032 narrowed from 93 bps in the week ending July 4 to 62 bps in the week ending July 25. Thus, the yield curve turned somewhat flat over the month (Graph D) (See also Appendix Table, p 24).

    4.1 RBI Reverse Repos, OMOs and MSS

    The RBI modulated the liquidity through a dynamic mix of absorptions through increases in the CRR while simultaneously supporting the market by profuse injection of short-term liquidity. In view of the deficit situation, the RBI, in July, injected the highest ever amount of Rs 6,83,435 crore through its repo window, far exceeding the amount of Rs 3,29,930 crore injected in March 2007. In the first week ending July 4, the liquidity situation was comfortable due to increased government expenditure; as a result, the reverse repo bids worth Rs 25,915 crore were tendered and accepted while repo bids for Rs 24,780 crore were accepted. Due to the fallout of the first CRR hike, the liquidity support through repo bids jumped to Rs 1,87,605 crore in the week ending July 11 which slipped to Rs 1,67,920 crore in the next week. However, in the week ending July 25, the repo bids tendered and accepted jumped to a high of Rs 2,28,030 crore, even as the call rates ruled firm above 9 per cent due to the shortage of liquidity following the second scheduled hike in the CRR (Table 10, p 23)

    4.2 Commercial Bonds

    In sync with the subdued gilt-edged secondary market, the aggregate trading in corporate debt as reported on the SEBI website, comprising of trades executed on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) and Fimmda, declined to Rs 6,536 crore in July from Rs 10,164 crore in June.

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