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The External Sector: A Tightrope Walk

The situation in the external sector has become an extremely challenging one for the authorities. Foreign currency assets have begun to deplete and there is considerable uncertainty on the exchange rate front. The authorities are hard put to contain the depreciation of the rupee. Above all, if large forex assets have to be deployed every month to protect the value of the rupee, the available foreign currency assets of $237 billion may be depleted soon.

MONEY MARKET REVIEW

The External Sector: A Tightrope Walk

EPW Research Foundation

The situation in the external sector has become an extremely challenging one for the authorities. Foreign currency assets have begun to deplete and there is considerable uncertainty on the exchange rate front. The authorities are hard put to contain the depreciation of the rupee. Above all, if large forex assets have to be deployed every month to protect the value of the rupee, the available foreign currency assets of $237 billion may be depleted soon.

The review has been drafted by Piyusha D Hukeri, while the supporting tables and graphs have been jointly compiled by V P Prasanth, Rema K Nair and Anita B Shetty.

Economic & Political Weekly

EPW
december 20, 2008

T
here are serious apprehensions regarding our ability to contain the adverse repercussions of global financial turmoil on the domestic economy, but there is hardly any reference in these varied discourses to the possible consequences for India’s external sector. As in the case of the domestic economic situation, the disquieting trends on the external front had begun much before the current global crisis exploded in mid-September 2008 (“Sustainability of External Liabilities”, EPW, 23 August 2008).

1 Steep Fall in Forex Reserves

The country’s total foreign exchange reserves have been almost continuously falling since the end of March 2008. As on 5 December 2008, the total loss in reserves since March works out to $63.87 billion; the total reserves had reached a peak of $310 billion towards the end of March 2008 and now they stand at $245.9 billion. Apart from the $62.1 billion loss in foreign currency assets, there has been an erosion of $2.2 billion purely in the value of official gold holdings (with the physical volume of 358 tonnes remaining unchanged since 1999-2000 due to the absence of any monetisation). This is partly because of a decline in gold prices and partly because of the recent strengthening of the dollar. In the absence of a full picture of the external transactions accounts in the form of the balance of payments, external debt and India’s international position beyond the first quarter of 2008-09, it is difficult to discern as to what has caused the loss of near $63 billion of foreign currency assets within a period of eight to nine months.

Apprehensions expressed in the literature are that portfolio investments by foreign institutional investors (FIIs) and short-term debt outstanding, which had grown substantially in recent years, may have caused the loss in reserves. But, putting the various nuts and bolts of external transactions together, the picture that emerges is much more complex. It appears that India’s external transactions accounts have begun to face attacks from many angles and all of these put together may place tremendous pressure on the external sector as the domestic economy begins to recover from the shocks of destabilisation arising from the current meltdown.

First, according to DGCI&S data, the merchandise deficit has galloped to $73 billion during April-October 2008 – a 60% increase over April-October 2007. The seven-month deficit has come close to the whole year deficit of $80.4 billion of 2007-08 (Table 1). This deterioration has occurred due to a galloping import bill, both on account of oil and non-oil imports. The import budget is sure to benefit from the steep fall in crude oil prices from a peak $145 per barrel (Texas) in July 2008 to $45 now, but there is the expectation of a corresponding slowdown in export growth. More importantly, the net invisibles account is expected to receive a setback on all accounts – travel, transportation and software receipts. Even private transfers, which have, in recent years, helped to contain the current account deficit, may see some strain. The first quarter data of balance of payments (BoP) have shown that the tempo of increases in private transfers has slowed down to an extent, but indications are that they may face greater strain in the coming months. Overall, the rising current account deficit may be contributing to the contraction in foreign exchange assets; it has already touched $10.7 billion during the first quarter as against the deficit of $17.40 billion during of whole of 2007-08.

Table 1: India’s Foreign Trade (in $ million)

Exports Imports Balance of Trade
April-March
2005-06 103091 149166 -46075
(23.4) (33.8)
2006-07 126414 185735 -59321
(22.6) (24.5)
2007-08* 155512 (23.0) 235911 (27.0) -80398
April-October
2007-08* 87144 132780 -45636
(23.1) (28.0)
2008-09* 107796 180789 -72993
(23.7) (36.2)

Figures in brackets are percentage variations over the previous year.

* Provisional figures.

MONEY MARKET REVIEW

Second, as for the capital account transactions so far, the picture has been a mixed one (Table 2). Undoubtedly, net investments by FIIs have experienced a steep decline by about $11.9 billion during April-October so far. In fact, since January 2008, net FII investments, as per SEBI data, have eroded by $12.9 billion. On the other hand, many other components of the capital account continue to register increases in inflows. Foreign direct investment (FDI), which began a sudden surge in 2006-07, even after excluding “reinvested earnings”, has kept up the tempo so far (Table 2). Even external commercial borrowings have not shown any significant decline; non-resident deposits have in fact risen. Overall, there does not appear to have been so far any negative impact on the reserves position from the capital account side, though the future appears uncertain.

Third, a new set of outflows, though as yet meagre, has begun. These constitute outward remittances under the liberalised remittance scheme (LRS) for resident individuals including those for bank deposits or investments abroad. The LRS scheme was introduced in February 2004 to facilitate resident individuals to freely remit up to $25,000 per calendar year, which was enhanced to $50,000 per financial year in December 2006, to $100,000 per financial year in May 2007, and to $200,000 per financial year in September 2007. During April-August this year, under this scheme, there has been an outflow of $380 million against $441 million during the whole of 2007-08.

Fourth, in the recent period, foreign currency assets have benefited from the persistent depreciation of the US dollar since 2006-07 and until the first quarter of 2008-09, and the consequential positive contribution made by valuation changes on the reserves (Table 3). But, interestingly, the phenomenon of dollar depreciation has stopped precisely after the global financial crisis has become a serious issue (Table 4); this has happened because the period has coincided with a sharp reduction in global petroleum prices and possible expectations of capital inflows into the US. As a result, the benefits of valuation changes on the external reserves may have been eliminated; instead, they have certainly contributed to the decline in reserves after August 2008, though it is difficult to measure the extent of the negative effects of valuation changes.

Fifth, the above valuation changes also get linked to the exchange rate fluctuations of the rupee. Overall, the rupee has considerably depreciated in effective terms since August. As shown in Table 5 (p 27), the loss in REER as well as NEER terms

works out to about 8% since August. In the domestic foreign exchange market, the rupee has been breaching the Rs 50 a dollar mark and the Reserve Bank of India (RBI) has been hard put to prevent it from happening beyond an officiallydesired exchange rate level, obviously an indeterminate quantity. But, what is most disquieting are the vast swings that the rupee value per dollar has faced in a short period, from a high of Rs 39.25 in March 2008 to a low of Rs 50.50 in November 2008, thus unsettling the business calculations of the exportimport trade and vast segments of the business community. That the RBI is seemingly unable to restore a degree of s tabi lity to the rupee’s ex change rate should be considered as very disturbing; in fact, it is RBI interventions to stabilise the rate that are causing fluctuations. The wider issues of the macro economy arising from a depreciated currency require a closer but separate scrutiny.

Finally, this brings us to the RBI’s operations in the foreign exchange market, which suggest that the scarcity of external flows has placed the institution in an extremely tight corner. To begin with, there has been a metamorphic change in the RBI’s operations in the current year. In contrast to cumulative purchases of $78.20 billion during 2007-08, the RBI has sold, in net terms, forex assets worth $28.3 billion during April-October this year as the domestic market has begun to face an acute shortage of dollars

Table 2: Capital Flows – Key Elements ($ million)

Item Period 2007-08 2008-09 2007-08 (Period Specified)

Foreign direct investment into India April-October 13,783* 20,792 32,435 Foreign direct investment abroad April-June -4,321 -2,019 -16,782

FIIs (net) April-October 22,341 -11,865 20,328

FIIs (net) (SEBI data equity only) April-October 15,815 -10,091 12,913

ADRs/GDRs April-October 5,516 1,142 8,769

External commercial borrowings (gross) April-September 15,612 10,962 30,958 External commercial borrowings (net) April-September 6,990 1,559 22,165 Short-term trade credit (net) April-June 1,804 2,173 17,683

Non-NRI banking capital (net) April-June -472 1,922 11,578

NRI deposits (net) April-October -75 1,081 179

Other capital April-June -843 518 9,627

* : April-November 2007. Data on FIIs presented in this table represent net inflows into the country.

Table 3: Sources of Accretion to Foreign Exchange Reserves ($ billion)

Items 2005-06 2006-07 2007-08 April-June April-June 2008 2007

I Current account balance -9.2 -9.8 -17.4 -10.7 -6.3

II Capital account (net) (a to f) 24.3 46.4 109.6 12.9 17.5

i) Foreign investment (i+ii) 17.2 15.6 44.8 5.9 10.1

  • (i) Foreign direct investment 8.5 15.5 10.1 2.6
  • (ii) Portfolio investment 7.1 29.3 -4.2 7.5
  • ii) Banking capital 1.4 1.9 11.8 2.7 -0.9

    of which: NRI deposits 2.8 4.3 0.2 0.8 -0.4

    iii) Short-term credit 1.7 6.6 17.7 2.2

    iv) External assistance 1.7 1.8 2.1 0.3 0.2

    v) External commercial borrowings 2.7# 16.2 22.2 1.6

    vi) Other items in capital account* -0.4 4.3 11 0.2 -0.7

    III Valuation change -5 11 18.3 0.2

    Total (I+II+III) 10.1 47.6 110.5 2.4 14.2

    *: Items under “Other Capital” apart from “Errors and Omissions” also include leads and lags in export, funds held abroad, advances received pending issue of shares under FDI and transactions of capital receipts not included elsewhere. # Including the impact of IMD redemptions amounting to $5.5 billion. Source : www.rbi.org.in

    Table 4: Appreciation (+) or Depreciation (-) of US Dollar against Major Currencies

    Countries 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Jul-08 28-Nov-08

    Major currencies per US dollar

    Euro 0.77 0.83 0.75 0.63 0.64 0.79 (-5.7) (7.1) (-9.1) (-15.8) (1.3) (22.7) British pound 0.53 0.58 0.51 0.50 0.50 0.65 (-2.6) (8.5) (-11.4) (-1.5) (0.4) (29.1)

    Canadian dollar 1.21 1.17 1.15 1.03 1.03 1.24 (-7.4) (-3.6) (-1.2) (-10.8) (-0.2) (20.6)

    Japanese yen* 106.82 117.40 117.65 100.10 107.99 95.25

    (2.8) (9.9) (0.2) (-14.9) (7.9) (-11.8)

    South Korean won* 1018.01 975.90 940.30 991.70 1008.50 1482.70 (-11.2) (-4.1) (-3.6) (5.5) (1.7) (47.0)

    Indian rupee 43.70 44.61 43.59 39.97 42.49 49.84

    (0.5) (2.1) (-2.3) (-8.3) (6.3) (17.3)

    Memo item: SDR per dollar 0.66 0.69 0.66 0.61 0.63 0.67

    * : For 100 units. Figures in brackets represent appreciation (+)/depreciation (-) of dollar in percentages over the previous period. Source : imf.org.in

    december 20, 2008

    MONEY MARKET REVIEW

    Table 5: Indices of Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) of the Indian Rupee

    (6-Currency Trade Based Weights)

    Year/Month Base:1993-94 Base:2006-2007 (April-March) =100 (April-March) =100 NEER REER NEER REER

    2005-06 72.28 107.30 104.02 101.64

    May 67.48 108.23 97.11 102.53

    June 66.38 108.20 95.52 102.50

    July 65.83 107.94 94.73 102.25

    August 67.22 110.97 96.73 105.12

    September 64.46 106.89 92.76 101.25

    October 62.08 101.98 89.33 96.6

    November 7-Nov 64.54 104.64 92.88 99.12

    14-Nov 62.5 101.12 89.94 95.78

    21-Nov 62.27 100.74 89.61 95.43

    Rise in indices indicate appreciation of rupee and vice versa.

    P : Provisional. Source: www.rbi.org.in

    and the rupee is under a severe downward pressure. The RBI’s dilemma in these operations could be gauged from the fact that in October alone the central bank has been forced to sell forex assets of $20.6 billion (or worth $18.67 billion in net terms), thus sucking out as much as over Rs 90,000 crore of rupee liquidity, just the time when concerted efforts are being made to augment liquidity in the system and help revive the economy. As for RBI’s forward transactions, while it is difficult to decipher their objectives in holding differing short (sale) and long (purchase) positions, the data (Tables 6 and 7) suggest that the central bank is struggling to maintain a fine balance between the two so much so that the net forward position has been reduced to an unusually meagre level (+ $90 million). However, maturity-wise, while purchase positions dominate short-term maturities, sale positions do so in longer term ones.

    Overall, the situation in the external sector has become extremely unenviable for the authorities. Foreign currency assets have begun to deplete and there is considerable uncertainty on the exchange rate front, with vast swings occurring in the rupee rate. The authorities are hard put to contain the depreciation of the rupee, and their operations, which seek to contain it, can only add to the vast swings in the rupee rate. Above all, if such large forex assets have to be deployed every month to protect the value of the rupee, the available

    Economic & Political Weekly

    EPW
    december 20, 2008

    foreign currency assets of $237 billion may (MSS). With a persistent fall in internabe depleted soon. tional crude oil prices and a decline in the

    domestic inflation rate, the expectations of 2 Money, Gilt-Edged and further monetary easing were reinforced. Forex Markets These expectations were also built as a After a tumultuous month of October, the dated security was allowed to partly outlook for money, government securities devolve on primary dealers (PDs), implyand forex markets improved significantly in ing that the RBI was not comfortable with November. Due to a slew of conventional and higher interest rates and the cut-off in the unconventional rupee liquidity augmenting six-year paper were kept lower than the measures, there was a shift in the liquidity ruling LAF repo rate. These sentiments were situation from “severely deficit” to “suffi-topped up with expectations of fiscal measciently easy”. In addition, the RBI under-ures, as growth remained a key objective. took a number of measures to enhance In the forex market, the pressure on dollar dollar liquidity as well as measures to sustain liquidity eased with the RBI introducing a the growth momentum against the back-number of measures. But with Citibank, a drop of a slowdown in economic activity. major American bank, announcing massive

    The improved liquidity manifested itself job cuts, the rupee remained under pressure. in the short-term money market rates fall-Subsequently, in the first week of Deceming rather sharply, and after a long hiatus, ber 2008, the US has officially declared they have ruled within the informal corri-that it had been in recession since Decemdor; the injection through the liquidity ber 2007. Apart from global concerns, the adjustment facility (LAF) repo fell rather terror attack on Mumbai, the financial sharply, and there was improved second-hub of India, adversely affected rupee ary market turnover

    Table 6: Sale/Purchase of US Dollar by the RBI ($ million)

    with yields dipping Year/Month Foreign Currency Cumulative Outstanding Total Purchase (+) Sale (-) Net Amount Net Forward Short Long

    to two-year lows.

    for Each Sales (-)/ Positions (-) Positions (+) The month began Financial Year Purchase (+) at the End of the with a repo rate cut Period

    by 50 basis points 2005-06 15,239 7,096.12 (+) 8,143 (+) 8,143 0 0 0
    and reductions of 2006-07 26,824 - (+) 26,824 (+) 26,824 0 0 0
    100 basis points each in the cash reserve ratio (CRR) 2007-08 2008-09 Apr-08 May-08 79,696 4,325 1,625 1,493 (+) 78,203 (+) 78,203 -(+) 4,325 (+) 4,325 1,477 (+) 148 (+) 4,473 (+) 14,735@(+) 17,095 (+) 15,470 0 0 0 15,320@ 17,095 15,470
    and the statutory Jun-08 1,770 6,999 (-) 5,229 (-) 756 (+) 13,700 0 13,700
    liquidity ratio (SLR). Jul-08 3,580 9,900 (-) 6,320 (-) 7,076 (+) 11,910 0 11,910
    However, it was Aug-08 3,770 2,560 (+) 1,210 (-) 5,866 (+) 9,925 100 10,025
    after the PSU banks Sep-08 2,695 6,479 (-) 3,784 (-) 9,650 (+) 2,300 5,780 8,080

    Oct-08 1,960 20,626 (-) 18,666 (-) 28,316 (+) 90 6,030 6,120

    met the finance

    (+) : Implies purchase including purchase leg under swaps and outright forwards. minister that some (-) : Implies sales including sale leg under swaps and outright forwards. @: This discrepancy as per source. Source : www.rbi.org.in

    of them cut their

    respective prime Table 7: Aggregate Short and Long Positions in Forwards and Futures in Foreign Currencies vis-à-vis the Domestic Currency (including the forward leg of currency swaps)

    lending rates. Fur

    ther, the RBI modu- Period Total Short Positions Up to 1 More Than More Than Total Long Positions Up to 1 More Than More Than
    lated liquidity by Month 1 Month 3 Months Month 1 Month 3 Months
    arranging dated and Up to 3 Months and Up to 1 Year and Up to 3 Months and Up to 1 Year
    security auctions 2007-08
    including the defer Mar-08 - - - - 15,320 1,455 2,995 10,870
    red auction in Octo 2008-09

    Apr-08 ----17,095 1,625 3,560 11,910

    ber in such a way

    May-08 ----15,470 1,770 3,675 10,025

    that they followed

    Jun-08 ----13,700 1,790 3,830 8,080

    liquidity injections

    Jul-08 ----11,910 1,885 3,905 6,120

    through unwinding

    Aug-08 100 -100 -10,025 1,945 3,815 4,265

    of dated securities

    Sep-08 -5,780 -1,530 -1,500 -2,750 8,080 1,960 3,860 2,260

    under the market

    Oct-08 -6,030 -1,400 -1,555 -3,075 6,120 1,855 3,060 1,205 stabilisation scheme Source : www.rbi.org.in [under Special Data Dissemination Standards (SDDS)].

    MONEY MARKET REVIEW

    Graph A: Trends in Weighted Averages of Call Rates, Repo Rates and repo rate (6%), except for a

    Call Money Borrowing – November 2008

    20– 16– 12– 8– 4– 0–

    movements. In the ensuing turmoil, the prime minister has assumed the responsibility of the finance ministry.

    With evidence of a slowing down of economic activity, the RBI instituted special measures to ease credit flow to small and medium enterprises, exporters and other such areas. Further, the RBI instituted special refinance facility and permitted its extensive use. The general provisioning requirements on standard advances for various sectors such as residential housing, commercial real estate, personal loans, capital market exposures and nondeposit taking NBFCs were reduced to a uniform level of 0.40% of risk-weighted assets except for agriculture and SMEs which continued to attract 0.25%. Further, the risk-weights on bank’s exposures to sectors such as commercial real estate and others have been revised downwards. Given growth uncertainty, all the liquidityaugmenting measures have been extended to June 2009 from March 2009.

    2.1 Call Money Market

    After a long gap, short-term money market rates ruled within the informal corridor set by the repo rate (7.50%) and reverse

    Table 8: Money Market Operations (RBI’s Daily Data)
    0 5 10 15 20 25 1/11 4/11 7/11 10/11 13/11 16/11 19/11 22/11 25/11 28/11 Call Rates Repo Rates – Outside the RBI – – – – – – Call Money Volume (Rs ‘000 Crore) (Right axis)

    few aberrations (Table 8). The standard deviation (SD), a measure of volatility, fell in November to 2.46 from 3.86 in October (Table 9), but in the latter half of the month the SD dipped to 0.25 in the week ending 21 November.

    The month began with weighted averages of call rates dipping from a peak of 17.54% on 1 November to 6.99% on 3 November following the array of liquidity-enhancing measures anno unced by the RBI. Despite the dated security auction coinciding with the first reporting Friday of the month, the overnight rate slipped to 5.88% on 7 November as liquidity remained in surplus due to injections through the market stabilisation scheme (MSS) and subdued demand from banks to cover their positions. Thereafter, the call rates firmed up and ruled in a range of

    money markets due to the terror attacks in Mumbai, low call rates were reported at 4.25% due to marginal activity in the market, but rose to 5.57% on 29 November (Graph A).

    With increased supply of securities, the turnover in Collateralised Borrowing and Lending Obligation (CBLO) and repo increased while that of call market declined in November.

    2.2 Forex Market

    Despite the RBI introducing a number of measures to improve rupee and dollar liquidity, and subdued capital outflows

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

    51 49 47 45 43 41 39

    (Daily)
    Working
    Days Nov 2008
    (Monthly Averages) (Jan 2001 to Oct 2008)

    5.14-7.81% as auction of the deferred dated security in October was conducted. With further RBI measures, the overnight rate ruled below 7% until 26 November that is, in the range of 6.26-6.96%. Even on the second reporting Friday, 21 November, the overnight rate ruled at 6.37 %, as there was subdued demand for funds. Following the closure of the short-term

    Table 9: Weighted Averages of Daily Call/Notice Rates in % 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 **
    October 2008
    All five weeks 10.21 3.86 37.79 7.98 5.92 74.21
    31 11.77 4.24 36.02 9.31 7.61 81.77
    24 (RF)* 5.80 0.98 16.93 3.79 3.48 91.61
    17 8.81 1.60 18.14 6.53 3.41 52.21
    10 (RF)* 11.84 3.92 33.12 11.12 7.25 65.23
    3 14.25 2.09 14.69 10.11 6.84 67.63
    November 2008
    All four weeks 7.17 2.46 34.31 5.66 4.70 83.05
    28 6.27 1.15 18.34 6.52 0.73 11.20
    21 (RF)* 6.56 0.25 3.87 3.99 4.49 112.71
    14 7.09 1.11 15.58 4.31 3.94 91.43
    7 (RF)* 8.59 4.43 51.51 7.75 6.98 90.01

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

    Average November 2008 Average October 2008 Items for Four Weeks 28 21 (RF) 14 7 (RF) for Five Weeks 31 24 (RF) 17 10 (RF)

    No of working days 22 5 6 5 6 24 4 5 6 5 4

    Call Money

    Weighted average of call rates: 4.25-17.54 4.25-6.99 6.26-6.96 5.14-7.81 5.88-17.54 4.16-18.53 8.56-17.89 4.16-6.78 6.60-10.04 8.21-18.53 11.47-16.51 per cent (weekly range) per annum (6.37) (5.88) (5.81) (18.53)

    Daily averages (Rupees crore) 10,450 10,818 10,798 8,497 11,422 11,072 10,394 9,538 13,766 12,254 8,147 Total call market borrowings (241) (729) (284) (548)

    Notice Money

    Weighted average of notice money rates: 6.00-21.00 6.00-7.75 6.52-9.80 6.89-7.50 6.22-21.00 6.05-19.74 8.65-18.60 6.05-6.80 6.40-9.65 10.49-19.74 12.66-15.11 per cent (weekly range) per annum (6.52) (6.22) (6.12) (19.74)

    Daily averages (Rupees crore) 2,823 4,393 1,950 3,192 2,081 3,231 5,552 3,891 3,405 2,950 174 Total notice market borrowings (11,427) (12,340) (19,195) (14,192)

    Turnover in Term Money Market 202 83 300 75 311 165 101 283 176 81 (borrowings) $$ (565) (173) (1,035) (200)

    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.

    december 20, 2008

    MONEY MARKET REVIEW

    following mixed performance of the stock c onsequences (Graph B, p 28). The foreign

    markets, the rupee-dollar exchange rate currency outflows were lower at $5,077 mil

    depreciated in November. It touched the low-lion in November as compared to $30,874

    est level of Rs 50.52 on 20 November. How-million in October; even the FII outflows

    ever, the depreciation was short-lived due were lower at $644 million in November

    to RBI’s interventions and the rate edged against $3,805 million in the previous month.

    up somewhat to Rs 49.84 on 28 November The pressure on banks with overseas opera

    despite the fears of terrorist attack tions eased on 7 November as the RBI allowed forex swaps to them with

    Graph C: Annualised Forward Premia in Percentage for the US Dollar in the Domestic Inter-Bank Market and Weighted Averages of Call Rates for November 2008 tenors of up to three months, which could be funded through rupee borrowing under LAF repo for the corresponding period. Further, housing finance companies (HFCs) registered with the National Housing Bank (NHB), were permitted to raise short-term foreign currency borrowings.

    Table 10: 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 Yield 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) 0 1 2 3 4 5 6 7 8 9 0 2 4 6 8 10 3/11 6/11 9/11 12/11 15/11 18/11 21/11 24/11 27/11 – – – – – – – – – – – – – – – – 6 month 1 month Weighted Averages of Call Rates (Right axis)

    Even the buyback of foreign currency convertible bonds was allowed. Further, the interest rates on foreign currency deposits were increased by 75 basis points.

    Within a month of its operation, the total turnover on MCX_SX at Rs 22,545 crore exceeded the turnover on the National Stock Exchange (NSE) at Rs 15,969 crore while the turnover on CDX of the BSE ruled at Rs 57 crore.

    With a widening interest rate differential following a sharp federal funds rate cut by the US Federal Reserve, and relati vely less reduction in domestic benchmark rates, the forward premia for dollars firmed up. However, the one-month premia ruled higher than the premia for three-month and six-month maturities (Graph C).

    3 Primary Markets

    Yields offered in the primary gilt-edged market declined rather sharply.

    3.1 Dated Securities

    In November, the government mobilised

    2007 Rs 29,000 crore including the deferred
    October 31 November 7 3,500.00 3,500.00 86 (3) 96 (2) 3,701.78 (380.99) 7,154.50 (600.00) 28 (3) 1 (2) 500.00 (380.99) 500.00 (600.00) 0.00 0.00 98.21 [98.22] 98.21 [98.21] 7.31 [7.27] 7.31 [7.31] 64,684.00 61,284.00 auction in October as well as advancing the December month auction as against the scheduled calendar of issuances of Rs 16,000
    November 14 November 21 3,500.00 2,000.00 79 (1) 65 (4) 6,860.57 (203.00) 2,437.85 (970.00) 48 (1) 11 (4) 3,500.00 (203.00) 500.00 (970.00) 0.00 0.00 98.16 [98.17] 98.16 [98.17] 7.52 [7.48] 7.52 [7.48] 62,684.00 60,104.00 crore. However, as part of the RBI’s liquidity enhancing measures, the MSS bonds were unwound preceding dated securities
    November 28 2,000.00 67 (3) 2,618.50 (994.47) 10 (3) 500.00 (994.47) 0.00 98.16 [98.16] 7.52 [7.52] 57,548.00 auctions thereby nullifying the impact of
    2008
    November 5 5,000 122 12,732.65 61 5,000.00 0.00 98.19 7.39 66,709.00
    (1) (141.19) (1) (141.19) [98.21] [7.31]
    November 12 5,000 132 8,873.07 88 5,000.00 0.00 98.20 7.35 67,312.00
    (1) (753.00) (1) (753.00) [98.22] [7.27]
    November 19 5,000 134 (2) 14,842.52 (1,762.00) 83 (2) 5,000.00 (1,762.00) 0.00 98.21 [98.23] 7.31 [7.23] 69,074.00

    November 26 5,000 155 11,617.88 68 5,000.00 0.00 98.25 7.14 71,779.00

    (2) (1,313.79) (2) (1313.79) [98.26] [7.10]

    Figures in parenthesis 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 11: Auctions of 182-Day Treasury Bills (Amount in rupees crore)

    Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount
    Auction Amount Devolved Price Yield Outstanding
    No Face Value No Face Value on PDs (Rupees) Rate on the Date
    (Amount) (Amount) (Amount) (%) of Issue
    2007
    October 31 3,500.00 75 3,165.00 18 500.00 0.00 96.36 7.58 30,991.00
    (0) (0.00) (0) (0.00) [96.37] [7.55]

    these massive mobilisations on the market. The cut-off yields set for all the auctions were much below their previous (re-)issuances reflecting RBI’s preference for softer yields; in case of longer term securities (maturities 13-year and 26-year), yields saw a sharp decline while those on shortterm maturities saw relatively less decline. In the first dated securities held on 7 November, the issue was allowed to be partly devolved on primary dealers. During the month, state governments raised Rs 8,170 crore by offering yields in the range of 7.77-8.54% against a range of 7.97-8.89% offered in October.

    November 14 2,500.00 81 3,071.00 14 500.00 0.00 96.35 7.60 29,991.00
    (0) (0.00) (0) (0.00) [96.36] [7.58] November 28 1,500.00 71 2,310.00 18 500.00 0.00 96.30 7.71 28,755.00 3.2 Treasury Bills
    (0) (0.00) (0) (0.00) [96.32] [7.66] In sync with the fall in secondary market
    2008 November 12 2,000.00 102 5,322.25 21 2,000.00 0.00 96.53 7.21 (0) (0.00) (0) (0.00) [96.55] [7.17] 24,000.00 gilt-edged yields, the yields across TBs eased over the month. Yet, the weighted
    November 26 2,000.00 94 6,566.00 27 2,000.00 0.00 96.60 7.06 24,800.00 average yield on 91-day TBs at 7.30%
    (0) (0.00) (0) (0.00) [96.61] [7.04] 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. exceeded that on 182-day at 7.13% and 364-day TB at 7.23%, implying that the
    Economic & Political Weekly december 20, 2008 29
    EPW

    MONEY MARKET REVIEW

    curve continued to remain inverted international markets, mobilisations from the market. For instance, Reliance Indus(Tables 10, 11, p 29 and Table 12, p 31). corporate bonds in the domestic market tries accessed the market, as it preferred jumped to Rs 5,200 crore in November the bond route, which turned out to be

    3.3 Corporate Bonds Market from Rs 1,380 crore in October. Apart from cheaper than bank loans as their prime With the drying up of external sources of the banks and financial institutions, the lending rates were higher than the funds due to the freezing of credit lines in central PSUs and corporates too tapped p revailing bond yields. Due to the decline

    Appendix Table: Secondary Market Operations in Government Papers: NDS and NDS-OM Deals (Amount in rupees crore)

    Descriptions Weeks Ending November 2008: Yield to Maturity on Actual Trading Total for the Month

    1 Treasury Bills AMT 28 YTM CY AMT 21 YTM CY AMT 14 YTM CY AMT 7 YTM CY of NAMT ovember 2008 YTM CY
    A 91-Day Bills B 182-Day Bills 2832.68 481.13 6.86 7.02 4209.94 379.41 7.08 7.06 1925.26 307.31 7.14 7.12 1743.64 764.00 7.08 7.18 10711.51 1931.85 7.037.11
    C 364-Day Bills 667.11 6.82 1285.74 7.00 3093.18 7.14 1168.83 7.27 6214.86 7.10
    2 GOI Dated Securities
    A Regular (in % Year)
    5.48 , 2009 610.00 7.05 5.53 184.00 6.93 5.52 - - - 757.00 7.15 5.53 1551.00 7.09 5.53
    6.65 , 2009 105.37 6.89 6.66 21.50 6.88 6.66 617.20 6.86 6.66 725.00 7.06 6.66 1469.07 6.96 6.66
    7.33 , 2009 OMC SB 25.00 8.23 7.35 55.00 8.38 7.35 - - - - - - 80.00 8.33 7.35
    5.87 , 2010 - - - 397.01 6.88 5.93 1331.60 6.95 5.94 941.00 7.19 5.96 2669.61 7.02 5.94
    7.55 , 2010 15.50 6.75 7.47 360.10 6.89 7.48 110.00 7.26 7.52 244.32 7.17 7.51 729.92 7.04 7.50
    11.30 , 2010 212.06 7.08 10.61 18.89 7.31 10.64 0.85 7.40 10.65 276.65 7.34 10.63 508.45 7.23 10.62
    12.25 , 2010 0.05 7.02 11.37 145.00 6.98 11.36 275.04 7.31 11.40 3.04 7.20 11.37 423.13 7.19 11.38
    6.27 , 2011 180.00 6.86 6.61 95.00 7.00 6.63 200.00 7.17 6.65 780.00 7.30 6.37 1255.00 7.19 6.47
    8.00 , 2011 - - - 200.01 7.03 7.83 125.03 7.36 7.89 - - - 325.03 7.16 7.86
    9.39 , 2011 - - - 20.00 7.08 8.91 - - - 50.00 7.39 8.97 70.00 7.30 8.95
    11.50 , 2011 30.00 7.10 10.40 2.30 7.66 10.44 - - - 930.00 7.45 10.41 962.30 7.44 10.41
    12.00 , 2011 50.00 7.26 10.70 0.06 7.70 10.80 0.18 7.96 10.87 20.00 7.30 10.69 70.24 7.27 10.69
    11.03 , 2012 0.06 9.73 10.62 - - - 0.60 7.96 10.07 2050.00 7.50 9.92 2050.66 7.50 9.92
    7.27 , 2013 25.00 7.17 7.24 420.25 7.31 7.28 995.50 7.46 7.33 1527.00 7.48 7.33 2967.75 7.45 7.32
    9.00 , 2013 - - - 55.24 7.35 8.47 0.24 8.07 8.70 2.00 7.88 8.64 57.48 7.37 8.48
    12.40 , 2013 275.12 7.33 10.34 10.31 7.41 10.36 0.21 8.13 10.63 0.05 7.72 10.47 285.69 7.34 10.34
    7.37 , 2014 740.00 7.18 7.31 90.00 7.46 7.40 154.90 7.47 7.40 490.50 7.53 7.42 1475.40 7.34 7.36
    7.56 , 2014 7237.65 7.06 7.38 6913.92 7.30 7.47 2611.38 7.40 7.50 3723.27 7.45 7.52 20486.23 7.26 7.45
    11.83 , 2014 30.00 7.51 9.82 - - - 0.64 8.10 10.07 - - - 30.64 7.52 9.83
    7.28 , 2015 390.00 7.27 7.34 - - - 251.00 7.60 7.47 125.00 7.60 7.36 766.00 7.43 7.39
    10.47 , 2015 10.00 7.59 9.18 - - - 15.00 7.85 9.29 - - - 25.00 7.75 9.25
    7.59 , 2016 361.43 7.31 7.47 - - - 207.00 7.61 7.60 180.50 7.69 7.63 748.93 7.48 7.55
    7.95 , 2016 - - - - - - 90.00 7.59 7.95 - - - 90.00 7.59 7.95
    7.49 , 2017 199.01 7.35 7.43 - - - 310.98 7.62 7.55 95.00 7.68 7.58 604.99 7.54 7.51
    7.99 , 2017 1740.80 7.39 7.70 2988.95 7.48 7.74 376.24 7.64 7.82 316.84 7.80 7.90 5422.83 7.48 7.74
    8.07 , 2017 20.00 7.42 7.76 117.64 7.48 7.80 180.70 7.61 7.86 30.80 7.71 7.90 349.14 7.57 7.83
    5.69 , 2018 - - - 27.80 7.68 6.59 - - - - 27.80 7.68 6.59
    6.25 , 2018 8.75 7.51 6.81 14.35 7.61 6.85 13.50 7.89 6.99 7.25 7.96 7.02 43.85 7.73 6.91
    8.24 , 2018 22402.00 7.14 7.67 27622.28 7.35 7.78 17217.04 7.61 7.91 15718.85 7.64 7.93 82960.16 7.40 7.81
    10.45 , 2018 - - - 25.00 7.69 8.84 - - - - - - 25.00 7.69 8.84
    5.64 , 2019 11.50 7.59 6.53 8.50 7.74 6.60 70.50 7.87 6.67 50.00 7.95 6.71 140.50 7.87 6.67
    7.94 , 2021 6005.29 7.37 7.59 3335.06 7.58 7.72 732.62 7.82 7.87 936.00 7.92 7.93 11008.96 7.51 7.68
    8.13 , 2021 OMC SB 1.06 8.40 8.30 9.36 8.89 8.63 10.00 9.26 8.88 - - - 20.42 9.05 8.74
    8.15 , 2022 - - - 0.50 9.37 8.99 - - - 30.00 9.55 9.13 30.50 9.55 9.12
    8.15 , 2022 FCI SB 44.62 9.04 8.76 171.39 9.36 8.99 179.15 9.50 9.09 1590.04 9.52 9.10 1985.20 9.49 9.08
    8.20 , 2022 177.00 7.55 7.79 349.00 7.72 7.89 20.00 7.89 8.00 - - - 546.00 7.68 7.86
    8.35 , 2022 10.50 7.69 7.92 64.25 7.56 7.84 1.21 8.15 8.22 - - - 75.96 7.59 7.85
    6.17 , 2023 4.30 7.71 7.12 10.54 7.94 7.27 5.50 8.12 7.39 6.30 7.96 7.28 26.64 7.95 7.27
    8.20 , 2023 OMC SB 1400.00 7.94 8.02 - - - - - - - - - 1400.00 7.94 8.02
    8.30 , 2023 FERT SB 168.38 9.13 8.89 97.29 9.22 8.96 32.70 9.50 9.17 19.70 9.35 9.06 318.07 9.21 8.95
    6.03 , 2024 FCI SB 817.00 9.03 6.58 - - - - - - - - - 817.00 9.03 6.58
    8.03 , 2024 FCI SB 49.22 9.04 8.77 2.20 9.34 9.00 76.09 9.48 9.11 333.32 9.53 9.15 460.83 9.47 9.10
    8.20 , 2024 OMC SB 88.00 8.32 8.29 - - - - - - - - - 88.00 8.32 8.29
    7.95 , 2025 OMC SB - - - 26.40 8.71 8.51 - - - - - - 26.40 8.71 8.51
    7.95 , 2026 FERT SB 112.61 9.10 8.83 282.44 9.19 8.90 24.27 9.46 9.11 152.18 9.38 9.05 571.49 9.23 8.93
    8.24 , 2027 1065.00 7.77 7.89 1432.65 7.88 7.97 217.00 8.15 8.18 301.15 8.23 8.24 3015.80 7.90 7.98
    6.01 , 2028 21.40 7.85 7.35 45.85 8.07 7.46 4.00 8.25 7.65 9.80 8.17 7.57 81.05 8.03 7.45
    7.55 , 2032 - - - 358.50 7.72 7.56 - - - - - - 358.50 7.72 7.56
    7.95 , 2032 5123.26 7.73 7.76 9020.25 7.87 7.88 1865.90 8.19 8.15 1417.42 8.13 8.10 17426.84 7.88 7.89
    8.28 , 2032 1950.00 7.77 7.86 3381.46 7.93 7.99 2202.51 8.30 8.30 1177.15 8.37 8.36 8711.12 8.05 8.09
    7.50 , 2034 171.06 7.77 7.73 25.40 8.08 8.00 - - - - - - 196.46 7.81 7.77
    7.40 , 2035 18.75 7.82 7.77 16.00 7.90 7.83 1.00 8.50 8.37 - - - 35.75 7.88 7.81
    8.33 , 2036 1844.97 7.83 7.89 2409.96 7.96 8.00 190.00 8.18 8.20 76.00 8.24 8.25 4520.93 7.92 7.97
    Sub-total 53795.68 7.35 7.65 60885.25 7.53 7.77 30764.97 7.65 7.81 35122.72 7.72 7.98 180568.62 7.53 7.78
    B RBI’s OMO: Sales 41.00 - - - - - 78.00 - - 8.00 - - 127.00 - -
    Purchase 670.00 - - - - - 79.00 - - 8.00 - - 757.00 - -
    Sub-total 711.00 - - 0.00 - - 157.00 - - 16.00 - - 884.00 - -
    (A+B) 54506.68 7.35 7.65 60885.25 7.53 7.77 30921.97 7.65 7.81 35138.72 7.72 7.98 181452.62 7.53 7.78
    3 Market Repo 100179.30 118009.90 69561.52 75619.35 363370.07
    4 State Govt Securities 509.72 7.74 8.14 564.15 7.91 8.15 401.31 8.18 8.22 134.49 8.10 8.29 1609.67 7.94 8.18
    Grand total (1 to 4) 159176.61 185334.39 106210.56 114569.03 565290.59

    (-) 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 20 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.

    december 20, 2008

    MONEY MARKET REVIEW

    in yields on gilt-edged securities and rise in corporate bonds of corresponding maturities, the spread between them widened reflecting the heightened uncertainty. Despite an improvement in liquidity, the yields ruled higher. For instance, Housing Development Finance Corporation (HDFC) had to offer 11.95% for 10 years in November while in September for the same maturity, it had offered only 11.25%.

    4 Secondary Market

    It is for the first time in the current financial year so far that the weekly average turnover of dated securities touched a peak of Rs 58,591 crore, reflecting the better liqui dity situation as well as improved market sentiments spurred by the falling inflation rate evoking expectations of further monetary easing measures. These sentiments were further reinforced with evidence of slowing economic activity despite better than expected GDP first quarter results. The investment-deposit ratio for all scheduled commercial banks ruled around 30% in November, though the RBI reduced the mandatory SLR rate by 1% to 24% in order to prompt banks to increase their credit portfolios.

    The yield curve is a leading indicator of a given phase in the business cycle in developed countries, but in India the picture appears more complex; though the macroeconomic fundamentals appear to be faltering, the yield curve turned somewhat upward sloping, which reflects differing maturity preferences of improvement in the long run (Graph D). The spread between one-year and 10-year papers narrowed from 58 basis points in the first week of the month to 25 basis points in the last, while the spread between the same 10-year paper and 24-year paper widened from 48 basis points to 58 basis points (see also Appendix Table, p 30).

    4.1 RBI Reverse Repos, OMOs and MSS

    Given the strained liquidity situation, the RBI embarked on expanding the basket of channels through which liquidity was injected under the LAF. Apart from the usual repo and reverse repo under the LAF and the second LAF, liquidity for mutual funds and NBFCs was injected under special fixed rate repo and under forex swap facility for banks with international

    o perations. It was after a gap of four months that the average reverse repo absorptions

    Table 12: Auctions of 364-Day Treasury Bills (Amount in rupees crore)

    exceeded injections through the repo, reflecting the improved liquidity situation. The aggregate repo bids tendered and accepted under various schemes were at Rs 137,055 crore while reverse repo bids

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

    Yield (% per annum) 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 20 24 27 28 Years to Maturity Week ending 28 November Week ending 7 November

    were at Rs 217,910 crore (Table 13). Of the total repo injections, Rs 11,220 crore were infused for extending credit lines for mutual funds and NBFCs and Rs 1,040 crore under the forex swap facility.

    In addition, under the special refinance facility [under section 17 (3B) of the RBI Act 1934], all scheduled commercial banks have been provided refinance and in November, the limit amounted to Rs 56,075 crore, while the actual utilisation was unknown.

    4.2 Commercial Bonds

    The aggregate secondary market trading

    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
    November 7 3,000.00 92 4,425.00 64 3,000.00 0.00 92.82 7.76 61,040
    (0) (0.00) (0) (0.00) [92.86] [7.71]
    November 21 3,000.00 90 4,550.00 17 1,000.00 0.00 92.84 7.73 60,040
    (0) (0.00) (0) (0.00) [92.84] [7.73]

    in corporate bonds as reported by the Securities Exchange Board of India (SEBI) declined from Rs 7,803 crore in October to Rs 5,189 crore in November. Likewise, the daily average turnover on NSE slipped to Rs 92 crore in November from Rs 148 crore

    2008 in October. Despite the government’s November 5 2,000.00 85 5,310.00 16 2,000.00 0.00 93.15 7.37 52,049

    effort to increase their limits, FIIs appear

    (0) (0.00) (0) (0.00) [93.22] [7.29] November 19 2,000.00 136 8,735.00 22 2,000.00 0.00 93.40 7.09 53,049 to be cautious in holding further positions

    (0) (0.00) (0) (0.00) [93.42] [7.06]

    due to concerns over slowing corporate

    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. growth and possible default risks.

    Table 13: Operations of RBI’s Liquidity Adjustment Facility ** (Amount in rupees crore)

    For the Week Range of Repo (Injection) # Reverse Repo (Absorption) * Net Injection Net (October-Repo / RR Period Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding November 2008) Days Number Amount Number Amount Number Amount Number Amount Daily Absorption (-) Amount

    Averages of of Liquidity at the Bids Accepted Weekend@ 1 2 3 4 5 6 7 8 9 10 11 12 13

    29 Sept - 03 Oct 08 2-3 243 2,72,520 243 2,72,520 0 0 0 0 0 2,72,520 -90,725

    06 Oct - 10 Oct 08 1-3 297 3,04,020 297 3,04,020 6 7,350 6 7,350 1,838 2,96,670 -91,500

    13 Oct - 17 Oct 08 1-15 220 2,02,475 220 2,02,475 25 16,120 25 16,120 3,224 1,86,355 -8,640

    20 Oct - 24 Oct 08 1-15 24 18,345 24 18,345 146 1,35,995 146 1,35,995 33,999 -1,17,650 10,805

    27 Oct - 31 Oct 08 1-14 206 1,70,720 206 1,70,720 3 70 3 70 23 78,380 -73,590

    03 Nov - 07 Nov 08 1-14 60 38,285 60 38,285 91 92,945 91 92,945 18,589 -54,660 7,625

    10 Nov - 14 Nov 08 1-14 51 42,245 51 42,245 5 95 5 95 24 42,150 -15,720

    17 Nov - 21 Nov 08 ^ 1-90 29 27,900 29 27,900 86 91,620 86 91,620 18,324 -63,720 4,020

    24 Nov - 28 Nov 08 ^ 1-88 28 28,625 28 28,625 58 33,250 58 33,250 6,650 -4,625 -9,880

    ^ includes repo under forex swap facility . # includes Special Repo from 14 October 2008. * Reverse Repo Rate is 6% and the Repo Rate with effect from 20 October 2008 is 8% and therafter with effect from 3 November 2008 the Repo Rateis 7.50%. @ Net of Repo and Reverse Repo Outstandings. ** Includes Second LAF conducted on every Reporting Friday up to 16 September; thereafter Second LAF has been every day.

    Economic & Political Weekly

    EPW
    december 20, 2008

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