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Upwardly Sticky Bank Lending

The Reserve Bank of India's recent Report on Trend and Progress of Banking in India, 2008-09 places considerable emphasis on bank lending in the context of the country returning to a higher growth path. But credit growth has dropped unusually to a low of less than 10% for the period ending 30 October, which is about half of the RBI's projection for the current year and roughly about one-third of the growth rate witnessed a year ago. Banks seem to be reluctant to expand their credit portfolio. What of this phenomenon of upwardly sticky lending?

MONEY MARKET REVIEW

positively on export demand in the com-

Upwardly Sticky Bank Lending

ing months. The decline in commodity prices, in particular, oil prices, the continued sluggishness in export demand pend-EPW Research Foundation ing global recovery, and depressed domes-

The Reserve Bank of India’s recent Report on Trend and Progress of Banking in India, 2008-09 places considerable emphasis on bank lending in the context of the country returning to a higher growth path. But credit growth has dropped unusually to a low of less than 10% for the period ending 30 October, which is about half of the RBI’s projection for the current year and roughly about one-third of the growth rate witnessed a year ago. Banks seem to be reluctant to expand their credit portfolio. What of this phenomenon of upwardly sticky lending?

Team led by K Kanagasabapathy and supported by V P Prasanth, Bipin Deokar, Rema K Nair, Anita B Shetty, Shruti J Pandey, Vishakha G Tilak and Sharan P Shetty.

Economic & Political Weekly

EPW
november 21, 2009

“Going forward, the challenge for

the banking sector would be to

support credit growth, as the Indian economy moves closer to the higher growth trajectory, while ensuring the efficiency and soundness of the sector”. This is how the recent issue of the Report on Trend and Progress of Banking in India, 2008-09, released by the Reserve Bank of India (RBI) places the emphasis on bank lending in the context of the country returning to the higher growth path. The Indian financial system is still bank-oriented, and despite the growth in other avenues of raising resources by the industry, lack of adequate and timely provision of credit from the banking system can jeopardise the road to recovery. It is in this context, that the credit growth dropping unusually to a low of less than 10% for the period ending 30 October, about half of the RBI projection for the current year and roughly about one-third of the growth rate witnessed a year ago, should be viewed as a matter of serious concern. A few months ago, we talked about the downwardly sticky lending rates, reflecting inadequate interest rate responses to policy signals. This situation continues though the lending rates relented a bit in the recent past. On the other hand, now the problem seems to lie with the quantum channel, where banks seem to show reluctance in expanding their credit portfolio. The situation is intriguing and it will be of interest to see the dynamics of the demand and supply side of this phenomenon of upwardly sticky lending, while both bankers and the industry have been hoping that the trend could reverse soon.

1 Bank Lending

1.1 The Demand Side

There are definite signs of industrial revival and the upside bias to the growth rate of the economy in 2009-10 has increased. The global recovery should also impact

vol XLIV No 47

tic demand in the backdrop of poor monsoons and lower economic activity in general may still be contributing to dampened demand for credit from industry. Domestic demand now comes essentially from the government sector, but as growth gains momentum, private sector and household demand are expected to show up. However, the index of industrial production has been rising faster than market expectations for the past few months. Even allowing for some lag, by this time of the year, the demand for credit should have shown signs of picking up. But, bank credit has been showing consistently a declining trend from May 2009 onwards, despite high deposit growth and evidence of ample liquidity present in the economy. Bank deposits have been showing higher growth rates in the range of 19% and 23% (Graph A, p 28, top).

At their current levels, the prime lending rates of banks, though not coming down to the extent of policy rate signals, have decreased from the peak of 13.75-14.0% as on September 2008, to 11.0-12.0% as on October 2009. Even if the RBI starts giving tightening signals, it is likely to be in babysteps and any upward revisions in lending rates will only be at a moderate scale in the near term. As per an Indian Banks Association study, the cost of borrowing for firms, as a percentage of gross profit, has dropped from an average of 35% in the third quarter of fiscal 2009 to 23% in the fourth quarter. The industry seems to have enough room to leverage through additional borrowings from the banks. This should be particularly possible in the backdrop of huge rise in public issues in the recent past.

Immediately after the intensity of the global financial crisis was felt in India in September 2008, there was a choking of flow of both domestic and external resources to the commercial sector. Since early 2009 however, foreign flows have recovered and there had also been significant access to the domestic primary capital market both through equity and

MONEY MARKET REVIEW

debt instruments. The buoyed stock market, thanks to foreign institutional investment (FII) flows and increased business confidence, combined with excess liquidity in the system enabled corporates to smoothly raise funds through such non-bank sources. A quick revival in global risk appetite enabled companies to access risk capital from abroad through various instruments, perhaps at a lower cost.

Thus, while the bank credit has shown a receding trend, the resources raised by companies through public issues, rights issues and qualified institutional placements (QIPs), which came down to a paltry sum of Rs 14,908 crore during 2008-09 from a high of Rs 1,12,554 crore in 2007-08, again picked up momentum during 2009-10, with aggregate mobilisation touching as much as Rs 33,159 crore from April to August, this fiscal. The External Commercial Borrowings/Foreign Currency Convertible Bonds (ECB/FCCB) routes also remained buoyant throughout, the current fiscal bringing in another Rs 35,577 crore till September, almost equivalent to

1.2 The Supply Side Graph A: Trends in IIP and Select Banking Indicators

Table 1: Resources Raised by Companies through Public & Rights Issues and ECB and FCCB and Corporate Bonds (Amount in Rs crore) The spread between mid-

Sr No A Particulars Public Issues 2006-07 29,797 2007-08 54,511 2008-09 2,082 2009-10 (Apr-Aug) 11,693 deposit rates and midlending rates has wid
1 IPOs 28,504 42,595 2,082 11,664 ened from 3 percentage
2 FPOs 1,293 11,916 0 30 points as on 2 January
B Rights Issues 3,711 32,518 12,637 227 2009 to 4.62 percentage
C QIP 4,963 25,525 189 21,239 points as on 23 October

Sub Total (A,B&C) 38,471 1,12,554 14,908 33,159 2009 (Graph B, p 29). D ECB/FCCB #@ 1,14,010 1,24,727 83,632 35,577

Thus, the banks have

E Domestic Corporate Debt * 15,100 20,320 40,562 39,534

the capacity to sustain

Sub Total (D&E) 1,29,110 1,45,046 1,24,194 75,111

low lending rates even in

Total (A to E) 1,67,581 2,57,600 1,39,103 1,08,270

the face of policy tight

@:The US dollar values converted into rupees at average FEDAI indicative rates.

#: April-September 2009-10, *: April to October 2009-10 Source: RBI and SEBI Bulletin, various issues.

the amount raised during the full year 2008-09 (Table 1). The companies were also able to generate internal surpluses.

Banks have been investing in nonstatutory liquidity ratio (non-SLR) securities (including mutual fund units, thanks perhaps to tax benefits) at an unprecedented rate, ranging from 31% to 92% The supply side can be looked at from two angles: one is the pricing factor and the other is the asset allocation tendencies in the banking system.

Taking the pricing factor, strangely enough, the banks have been reducing their deposit rates faster than their lending rates, keeping their margins intact or even increasing. The cutting down of deposit rates continued even after clear signals that policy rates have reached their bottom and the RBI was about to hike policy rates. This tendency shows that by way of liability

3/27/2009

management, banks are trying to avert large accretion to deposits which, they are afraid, cannot be deployed beneficially. In the last few fortnights, there has been a mild deceleration

in the growth of deposits.

19.8 22.5 22.6 21.6 21.8 20.5 19.8 19.0 17.5 18.1 16.1 15.2 15.9 14.2 13.0 10.3 0.3 1.1 2.1 8.2 7.2 11.0 9.1 0.0 5.0 10.0 15.0 20.0 25.0 Aggregate Deposits Non-food credit Index of Industrial Production
25.2 37.7 43.4 53.7 81.4 88.8 45.8 91.9 20.0 21.3 23.1 33.3 33.3 34.8 39.5 28.2 31.4 25.9 26.3 36.4 40.0 42.2 40.3 36.5 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Non-SLR Investment SLR Investment Total Investment 4/24/2009 5/22/2009 6/26/2009 7/31/2009 8/28/2009 9/25/2009 10/23/2009

ening for some time to

come, till the industry responds vigorously to revival signals.

Also, banks have probably become more careful in the pricing of credit risk. They have been reporting that their Non-Performing Assets (NPA) levels are on the rise and, but for the restructuring of loans,

Table 2: Money Market Activity (Volume and Rates)

the NPAs would have been much higher. As at end 2008-09, banks’ financial position looks good. One has to wait and see whether banks will go back to their old way of averting commercial risk and taking safe bets to avoid higher capital contributions and provisioning – the so-called lazy banking.

Coming to asset allocation, banks have generally been increasing their investment portfolio of both SLR and non-SLR securities, and cutting back their lending. Bankers have expressed the view that there is a lack of demand for credit. Industry also has been complaining more about lending rates but has not, so far, raised the issue of credit availability as such. But, when the credit demand picks up, both cost and availability of credit will turn into crucial issues.

The data on credit deployment up to August 2009 shows a mixed picture. Between 29 August 2008 and 28 August 2009, the data on gross bank credit shows that credit card outstandings and consumer

October 2009

September 2009

since March 2009 (Graph A, bottom). Instruments Daily Average Monthly Weighted Range of Weighted Daily Average Monthly Weighted Range of Weighted Volume (Rs crore ) Average Rate (%) Average Daily Rate (%) Volume (Rs crore) Average Rate (%) Average Daily Rate (%)

While one could argue that there is some

Call Money 6,831 3.26 1.68-3.91 8,043 3.25 2.13-3.71

circularity in the funds flow, some part of Notice Money 1,170 3.20 2.44-3.30 1,807 3.24 2.25-3.34

banks’ investment in mutual funds financing Term Money 39 -3.00-6.80 106 -2.50-7.05 CBLO 57,735 2.63 0.03-3.90 63,838 2.63 1.27-3.36

industry indirectly cannot be ruled out, and

Market Repo 22,961 2.78 1.74-3.54 28,818 2.75 1.79-3.06

any fungible nature of these funds needs

@: Range of rates during the month. to be closely watched. Source: www.rbi.org.in. and www.ccilindia.com.

november 21, 2009 vol XLIV No 47

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Economic & Political Weekly

MONEY MARKET REVIEW

16 14 12 10 8 6 4 2

durables financing contracted by 14.3% and 16.7%, respectively. While credit to agriculture had increased faster by 25.6% compared to 18.6% last year, the growth in credit to industry came down sharply from 32.9% to 17.9%. In the case of services

Table 3: RBI’s Market Operations (Amount in Rs crore)

Month/ Year OMO (Net Purchase(+)/ LAF (Average Daily Sale(-)) Injection (+)/Absorption(-))

April-09 20,292 -95,915

May-09 16,959 -1,29,997

June-09 6,451 -1,23,153

July-09 5,243 -1,26,740

August-09 12,073 -1,24,488

September-09 14,275 -1,24,812

October-09 1,082 -1,04,047

Source: RBI’s Weekly Stastical Supplement.

credit growth came down sharply from 33.7% to 11.0%. Strangely, the real estate loans continued to show a rise of 41.5% against 43.1% a year ago and credit to nonbanking financial companies (NBFCs) though came down to 30.8% from 51.8%, the rate of growth was still high. Priority sector loans also moderated to 17.5% against 22.7% last year. Growth in infrastructure financing remained robust at 44.7% compared to 36.1% a year ago.

Government has been the major beneficiary during the period concluding smoothly more than 80% of their annual borrowing programme. The banks have ended up with excess SLR investments of Rs 2.91 lakh crore as at 9 October 2009 from a meagre Rs 26,933 crore a year ago.

1.3 Looking Ahead

It is not yet very clear whether the factors contributing to low bank credit growth understanding of credit flow, the RBI should seriously consider operationalising a credit monitoring mechanism and such data should be available to the public. Under the current

Graph B: PLR Deposit Rate Spread

8.638.508.638.638.889.139.389.509.509.389.389.639.639.509.259.259.138.638.388.257.757.757.507.387.257.257.136.886.886.88 12.5012.5012.5012.6313.0013.0013.0013.0013.6313.6313.8813.8813.2513.2512.8812.2512.2512.2512.0012.0012.0011.8811.6311.6311.6311.5011.5011.5011.5011.50 3.874.003.874.004.123.873.623.504.134.254.504.253.623.753.633.003.123.623.623.754.254.134.134.254.384.254.374.624.624.62 Mid-Deposit Rate Spread Mid-PLR 28/3/08 6/8/08 4/7/08 1/8/08 15/8/08 26/9/08 14/11/08 5/12/08 9/1/09 6/2/09 3/4/09 1/5/09 19/6/09 31/7/09 23/10/09 30/10/09

scenario, industry, including exporters, may place higher demand for credit with the banking system and, to sustain growth, banks should be prepared to increase their lending portfolio. Any undue risk aversion from the banks creating sluggishness in credit dispensation may slow down the process of industrial and export recovery, and growth prospects in general.

2 Money, Forex and Debt Markets

2.1 Money Market

Overall, on a net basis, there were liquidity inflows into the banking system of the order of Rs 37,300 crore during the month of October, compared to an outflow of Rs 1,30,500 crore in September. The aggregate bank deposits increased by a robust amount of Rs 33,000 crore and the inflow on account of non-SLR investments amounted to nearly Rs 20,000 crore. There were also inflows on account of coupon payments and RBI credit to government to an extent of about Rs 25,000 relatively larger amounts of treasury bills at relatively lower cut-off rates. The market activity in general remained subdued. The daily average volume of call money transactions was less by about 15% in October compared to the previous month, the volume showing a decrease from Rs 8,043 crore to Rs 6,831 crore. The daily average notice money volume also came down from Rs 1,807 crore to Rs 1,170 crore. The major collateralised instruments, viz, collateralised borrowing and lending obligations (CBLO) and market repo volumes also showed similar trends. The CBLO and market repo volumes de creased from Rs 63,838 crore to Rs 57,735 crore and from Rs 28,818 crore to Rs 22,961 crore, respectively (Table 2, p 28 and Graph C, p 30).

The outstanding certificates of deposit stood at Rs 2.27 lakh crore as on 11 September 2009, less by about Rs 6,000 crore compared to 28 August 2009. There was also a significant decrease in volume of outstanding commercial paper by about Rs 9,000 crore between 15 and 30 September 2009.

The daily average volume of liquidity absorption in liquidity adjustment facility (LAF) auctions peaked in the second week to Rs 1.35 lakh crore and in the last week it came down to Rs 95,000 crore, the daily average absorption showing a significant decline from Rs 1.25 lakh crore in September to Rs 1.04 crore in October. After a few months of vigorous open market operations (OMO) purchases since April 2009, aggregating Rs 75,200 crore till September,

crore. There was hardly Table 4: Foreign Exchange Market: Select Indicators

Rs/$ Appreciation(+)/ FII Flows Net Purchases BSE Sensex

any increase in bank credit

Exchange Rate Depreciation (-) ($ Million) by RBI (Closing) and government securities (Month End) in % ($ Million)

October 46.96 2.30 3,428 NA 15,896

issues and redemption

September 48.05 1.75 4,263 (+) 539 17,127

caused a net outflow of

August 48.90 -1.50 945 (+) 619 15,667

only Rs 42,000 crore

July 48.20 -0.60 2,727 (+) 800 15,670

against Rs 60,500 crore in

June 47.90 -1.20 1,059 (+) 745 14,494

the previous month.

May 47.30 5.80 3,577 (+) 131 14,625

Opportunity was taken

April 50.20 1,790 (-) 1071 11,403 by the government to issue Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.org.in)

Table 5: Turnover in the Foreign Exchange Market (Amount in $ billion)

Month Merchant % Change Interbank % Change Spot % Change Forward % Change Total Turnover % Change

comes more from the demand or the supply side. Unfortunately the credit monitoring system which was strong during the period of operation of the Credit Authorisation Scheme seems to have been given up and data on loan applications, sanctions and disbursements are lacking now. For a better September 211.8 9.5 580.6 6.8 August 193.5 -7.5 543.8 -22.2 July 209.2 -9.9 699.1 -1.0 June 232.1 8.3 705.9 4.5 May 214.2 20.2 675.3 16.9 April 178.2 -577.4 -*: Includes trading in FCY/ INR and FCY/FCY. Source: Weekly Statistical Supplement, various Issues.. 421.1 368.0 439.4 453.0 411.0 317.2 14.4 -16.3 -3.0 10.2 29.6 - 371.4 369.4 468.9 485.0 478.5 438.5 0.5 -21.2 -3.3 1.4 9.1 - 792.4 737.4 908.3 938.0 889.5 755.6 7.5 -18.8 -3.2 5.4 17.7
Economic & Political Weekly november 21, 2009 vol XLIV No 47 29
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MONEY MARKET REVIEW

Graph C: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO rupee weakened to Rs 46.58 Rates – October 2009

on 12 October following

4–

demand pressure from

3.5 –

importers. However, the

3–

rupee again streng thened

2.5 –

till middle of the month

2–

breaching the 46-mark to

1.5 –

Rs 45.91 per dollar on 15

1

October after JPMorgan

Chase & Co reported better

0.5

than expected earnings.

0 26/9 30/9 4/10 8/10 12/10 16/10 20/10 24/10 28/10 30/10

But, the rupee fell dramati-

gains on speculation that

6 60

Call Rates Repo Rates – Outside the RBI CBLO Rates

Graph D: Spot Quotations and Annualised Forward Premia for the US Dollar cally, reversing earlier in the Domestic Inter-Bank Market

Monthly Averages (Apr 2007 to September 2009) (Daily) Working Days Oct 2009 Spot 1-month 6-month

Premia in percentage

5 4 3 2 1 0 -1

the Reserve Bank’s OMO purchases during October were only about Rs 1,100 crore (Table 3, p 29). Overall, the money market in general remained easy throughout October and the rates remained flat or eased across instruments.

2.2 Forex Market

The US dollar remained strong against most of the major currencies in October. But, the rupee strengthened against the dollar during the month, as in the previous month, mainly due to the continued inflow of FII investments to the extent of around $3.4 billion in October on top of $4.3 billion in September. In spite of the relatively dull stock market performance, the Bombay Stock Exchange (BSE) Sensex decreasing by 7% in October, the rupee hit its highest level during the month, influenced strongly by investor’s confidence about India’s improved growth prospects in the backdrop of global economic recovery.

The month began with the rate of Rs 47.86 per dollar following an appreciation by 1.75% in September backed by huge foreign portfolio inflows. The trend continued till 8 October as the rupee rose to Rs 46.28 per dollar owing to expectations of monetary tightening from the RBI. But, the importers were buying foreign exchange to save on

50

costs. The rupee continued

40 its downward trend except on intermittent occasions

30 till 29 October to end at Rs 47.52 per dollar respond

20

ing to poor stock market performance but again

10

bounced back to close the

month at Rs 46.96 per

0

dollar. Overall, the rupee appreciated in nominal terms by 2.3% during the month, despite the fact that RBI appeared to be consistently purchasing US dollars on a net basis (Table 4, p 29).

An upward trend in forward premia was experienced in the initial part of the month. The 1-month, 3-month and 6-month premia for the month-end stood at 2.43% (2.62% in September-end), 2.73% (2.79%) and 3.02% (2.91%),

also witnessed the same trend, showing respectively a 14.4% and 0.4% rise in their total market turnover. The tremendous improvement in each segment of the foreign exchange market helped to propel the total market turnover by 7.5% in September over the previous month (Table 5, p 29).

A tremendous growth in trading activity in the currency futures market was also witnessed during the month of October. The average daily turnover in the Multi-Commodity Exchange – Stock Exchange (MCX-SX) and National Stock Exchange (NSE) was Rs 7,681 crore and Rs 7,542 crore respectively, amounting to a total of Rs 15,224 crore, reflecting a growth of 33% in volume against September. The total number of contracts and notional value increased respectively, by 40% and 45% during October over the previous month. The MCX-SX retained its position to top the currency futures segment during the month.

2.3 Dated Government Securities

In the run-up to RBI’s second quarter review, there were frequent and often conflicting statements about the stance of monetary policy coming from government circles causing yield rates to fluctuate a bit. There was also a false hope regarding the hike in Held to Maturity (HTM) limit for banks in government securities to make absorption of the remaining part of record government borrowings easier by

Table 6: Details of Central Government Market Borrowings (Amount in Rs crore)

respectively (Graph D).

Date of Auction Nomenclature Notified Bid Cover Devolvement on YTM at Cut-off A reversal of the of Loan Amount Ratio Primary Dealers Price (in %)

09-Oct-09 7.02% 2016 R 3,000 2.51 nil 7.28% (Rs 98.60)

declining trend was

6.90% 2019 R 4,000 1.66 576 7.31% (Rs 97.13)observed in the activity 8.28% 2032 R 3,000 1.95 155 8.34% (Rs 99.37)

of the foreign exchange 16-Oct-09 6.35% 2020 R 4,000 2.53 nil 7.92% (Rs 89.14) 7.35% 2024 R 3,000 1.81 210 8.35% (Rs 91.58)

market during September.

5 year 2014 N 3,000 3.14 nil 7.32%

Interbank transactions

23-Oct-09 7.02% 2016 R 3,000 2.08 nil 7.48% (Rs 97.56) in the foreign exchange 6.90% 2019 R 4,000 1.82 nil 7.45% (Rs 96.05) 8.28% 2032 R 3,000 2.07 nil 8.43% (Rs 98.50)

market increased during

Total for October 30,000 2.16 942

the month of September

Total for September 23,000 2.46 1,883

to $581 billion from $544

Unlike in the case of treasury bills and state development loans the weighted average prices of central government dated securities auctions are not disseminated and hence, weighted average yields are not available.

billion recorded in the

R: Re-issue, N: New issue. month of August, a jump Source: RBI Press Releases.

of 6.8%. The volume of Table 7: Details of State Government Borrowings (Amount in Rs crore)
merchant transactions also picked up by 9.5% to $212 billion in September from $194 billion recorded in August. The spot and forward markets Date of Auction Number of Participating States 06-Oct-09 11 29-Oct-09 10 Total for October 21 Total for September 13 Source: RBI Press Releases. Notified Amount 9,501 4,515 14,016 17,500 Bid Cover Ratio 1.86 2.95 2.21 2.42 YTM at Cut-off Price (in %) 8.27 8.11 8.22 8.20 Weighted Average Yield (%) 8.19 8.06 8.15 7.92
november 21, 2009 vol XLIV No 47 Economic & Political Weekly
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MONEY MARKET REVIEW

providing respite to banks preventing their mark-to-market losses by some proportion. The hike in the SLR by 1 percentage point in the second quarter review came as a surprise to the market; so also was the absence of an auction in central government securities in the last week of October. All these kept government securities market yields volatile during the month though the yield firmed up in general at the longer end.

Continued central and state government borrowings combined with discontinuation of OMO auctions calendar for purchases of securities by the RBI have led to a rise in yields as cut-off prices of the government securities have declined in the auctions during the month.

During the month of October 2009, central government securities were auctioned thrice, on 9, 16 and 23 October 2009 with the aggregate notified amount of Rs 10,000 crore in each auction. One new security with maturity of five years was auctioned on 16 October; otherwise, all securities were reissued. The total auctioned amount of Rs 30,000 crore was significantly higher compared to Rs 23,500 crore in September (Table 6, p 30).

Overall, the demand for securities in primary auctions appeared dampened. The bid-cover ratio for the month fell to

2.16 compared to 2.46 in the previous month. There were “devolvements” on primary dealers involving three securities for an amount of Rs 942 crore. Despite this, primary market yields saw an upward pressure during the month.

The cut-off yield on the 10-year benchmark security, 6.90% 2019 increased to 7.45% in the auction held on 23 October from 7.31% in the auction held on 9 October. Another government security, 8.28% 2032, also witnessed a yield of 8.43% in the auction held on 23 October against a yield of 8.34% in the auction held on 9 October. Government securities 7.02% 2016 and 6.35% 2020 also witnessed similar trends in primary yields.

State development loans with maturity of 10 years were auctioned twice in the month of October. In the first auction, 11 states, and in the second auction, 10 states have participated. Andhra Pradesh, West Bengal, Tamil Nadu, Rajasthan and Punjab have accessed the market twice during the month. The cut-off yield at the aggregate remained flat at 8.21% compared to 8.20% in September. The weighted average yield at 8.15% in October was however significantly higher compared to 7.92% in September. The narrowing difference between the cutoff and the weighted average yields from 28 bps to 7 bps reflects the bunching of bids

Table 8: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)

Descriptions October 2009 Previous Month Three Months Six Months

Last Week (30th) First Week (2nd) Total for the Month (September) Ago (July) Ago (April) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

1 Treasury Bills 3257.96 2803.25 20328.86 19527.42 18917.27 32493.77

A 91-Day Bills 2351.68 3.18 2003.25 3.06 16187.65 3.08 13645.52 3.36 15027.51 3.12 19332.11 3.69

B 182-Day Bills 453.14 3.42 400.00 3.55 2070.62 3.33 2376.36 3.63 1171.35 3.29 4571.31 3.74

C 364-Day Bills 453.14 3.42 400.00 3.55 2070.59 3.33 3505.54 3.69 2718.41 3.54 8590.35 4.12

2 GOI Dated Securities 61315.48 7.34 21714.78 6.95 181789.14 7.27 220736.99 7.17 260678.64 6.81 219578.20 6.54

Year of Maturity (No of Securities) 2009 -----------4964.70 4.14

2010 9 585.00 4.08 2085.00 4.27 5800.00 4.01 7205.72 4.34 5506.79 3.85 5693.22 4.56

2011 8 625.00 5.78 210.00 5.74 2303.83 5.83 7621.35 5.91 4171.00 5.08 3063.54 5.31

2012 4 2667.33 6.54 520.00 6.53 5263.33 6.58 7251.07 6.64 3661.34 5.74 1387.39 5.88

2013 4 230.15 7.00 60.10 6.86 918.56 6.97 2071.1 6.92 3756.93 6.31 9132.97 6.21

2014 7 1404.00 7.17 105.00 7.13 4713.02 7.24 4841.20 7.13 57784.40 6.46 36547.38 6.22

2015 3 2316.66 7.44 4345.79 7.17 18076.14 7.29 30944.94 7.17 25990.29 6.57 846.02 6.54

2016 4 11638.90 7.38 4401.58 7.18 30210.40 7.31 46583.61 7.25 8538.40 6.78 4327.29 6.66

2017 4 334.35 7.58 0.00 -789.92 7.55 648.50 7.50 1208.78 7.03 9886.72 6.81

2018 5 105.25 7.66 51.00 7.23 342.34 7.71 51.43 7.64 1654.78 7.48 271.85 6.74

2019 3 30481.06 7.32 5697.24 7.17 73677.92 7.29 68276.96 7.22 34930.20 6.86 98882.95 6.47

2020 1 9417.00 7.75 3591.25 7.59 31145.87 7.75 21662.75 7.58 8856.60 6.87 -

2021 3 140.70 7.87 150.00 6.84 592.10 7.58 14351.16 7.83 74813.47 7.21 5739.45 7.13

2022 2 40.00 8.08 42.05 7.98 192.05 8.05 216.20 8.02 9322.04 7.34 2480.39 7.48

2023 4 0.00 -0.18 7.63 14.48 8.18 76.65 8.15 942.24 7.90 4313.68 7.94

2024 5 108.75 8.18 231.88 8.05 1763.30 8.24 2618.17 8.23 3223.42 7.39 9012.91 7.87

2025 2 0.00 -0.02 8.03 10.02 8.25 15.33 8.20 8.24 7.86 1434.15 8.00

2026 4 0.86 8.36 36.90 8.25 476.66 8.25 43.12 8.11 2149.16 7.89 206.27 7.69

2027 2 566.79 8.25 131.39 8.15 2364.81 8.25 5361.34 8.12 9728.83 7.72 5235.98 7.33

2028 ---------18.85 7.54 61.16 7.41

2032 3 581.03 8.37 54.90 8.19 2880.40 8.38 705.63 8.19 46.30 7.83 3411.05 7.53

2034 1 ----53.50 8.13 73.94 8.09 2158.32 7.79 7448.61 7.53

2035 1 --0.50 8.08 45.84 8.28 76.92 8.12 2053.58 7.82 155.90 7.75

2036 1 72.65 8.21 --154.65 8.29 39.90 8.14 32.68 7.78 991.51 7.60

2039 ---------122.00 7.87 4083.12 7.34

3 State Govt Securities 974.15 7.97 21.29 7.98 2497.04 8.00 3806.84 7.98 5959.99 7.64 7047.95 7.58

Grand total (1 to 3) 65547.59 24539.32 204615.04 244071.25 352493.18 259119.92

(-) means no trading. YTM = Yield to maturity in per cent per annum. NDS = Negotiated Dealing System. OM = Order Matching Segment. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: Compiled by EPWRF; base data from RBI, CCIL.

Economic & Political Weekly

EPW
november 21, 2009 vol XLIV No 47

MONEY MARKET REVIEW

at the higher end in October compared to whether they are small or large, and the Graph E: Yield Curves for Dated Securities – Weighted Averages for October 2009

September. It may be added that while the demand pressure is more for smaller

8.5

auction system for central government issues. Overall, the bid-to-cover-ratio for securities was changed to the uniform price the second auction was much higher at 2.95 7.5

method for quite some time, for state gov-compared to the first auction at 1.86, pos-

0123456789 10 11 12 13 14 15 16 17 18 19 23 25 26 27 30 Current month Previous month 3-month ago

ernment securities the auctions continue to sibly because there were no central governfollow the multiple price auction method. ment issues in the last week of October,

In the first auction Mizoram, Tripura, when the second tranche of state loans for

Yield (% per annum)

6.5

5.5

and West Bengal, with relatively small noti-the month was concluded (Table 7, p 30). 4.5 fied amounts, had four times bid-to-cover-Higher cut-off yields in the primary ratio as compared to states like Andhra auctions during the month, despite ample 3.5 Pradesh, Bihar, Gujarat, Maharashtra, liquidity in the system, reflected the Tamil Nadu and Uttar Pradesh, with noti-reduced interest in government securities; of government securities have seen confied amounts of more than or equal to added to that was the expectation that the siderable increase in the last week to Rs 1,000 crore, which had bid-to-cover-accommodative policy has come to an end Rs 61,315 crore as compared to first week ratios only up to 2.15 times. Similarly in and the interest rate will take a northward at Rs 21,714 crore. Though yields of most the second auction, where Goa, Jharkhand, course. This has resulted in a dip in trad-of government securities have firmed up Punjab, Rajasthan and West Bengal, with ing volumes in the secondary market for over previous month’s figures, the shift in smaller notified amounts, had bid-to-cover-government securities in October which the yield curve was prominent in longer ratios higher than three times, states like came down by 17.6% to Rs 1.82 lakh crore as maturities. Ample liquidity and continua-Andhra Pradesh and Tamil Nadu, with compared to Rs 2.21 lakh crore in September. tion of low policy rates kept the short-term notified amounts of Rs 1,000 each, have met Weighted yield of the traded securities interest rates at bay (Graph E). with bid-to-cover-ratios of 2.66 and 2.39, inched up by about 10 bps to 7.27% from The 10-year benchmark security 6.90% respectively. These results clearly establish 7.17% during the same period. 2019 had the highest traded volume of that investors in general are interested in The week-wise traded volumes have around Rs 73,700 crore with a weighted diversifying their portfolio across states, varied quite significantly as traded volume yield of 7.29% as compared to previous

Table 9: Predominantly Traded Government Securities (Amount in Rs crore)

Descriptions October 2009 Previous Month Three Months Six Months Last Week (30th) First Week (2nd) Total for the Month (September) Ago (July) Ago (April) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

GOI Dated Securities

7.55 , 2010 430.00 4.29 10.00 4.31 1,290.00 4.39 927.00 4.57 2,017.79 4.03 1,266.00 4.26

11.30 , 2010 --390.00 4.58 825.00 4.54 2,057.50 4.62 180.00 4.01 738.14 4.61

  • 11.50 , 2010 --990.00 4.41 990.00 4.41 1,700.00 4.54 25.00 4.00 25.93 4.06
  • 12.29 , 2010 --400.00 3.50 1,295.00 3.41 1,745.00 3.81 610.00 3.70 600.00 5.11
  • 6.57 , 2011 125.00 5.52 60.00 5.61 195.00 5.56 1,780.00 5.69 805.00 4.88 667.24 5.54

  • 9.39 , 2011 305.00 5.86 150.00 5.80 1,183.73 5.84 4,810.76 5.96 1,686.00 5.16 966.00 5.34
  • 10.95 , 2011 10.00 5.85 --10.00 5.85 315.29 5.95 275.00 5.00 100.30 5.65
  • 6.85 , 2012 45.00 6.60 25.00 6.56 191.00 6.61 127.00 6.58 35.09 5.66 -
  • 7.40 , 2012 2,622.33 6.54 495.00 6.53 5,032.33 6.57 6,564.00 6.62 3,490.00 5.73 1,012.09 5.91
  • 7.27 , 2013 140.00 6.94 60.00 6.86 828.30 6.96 1,816.10 6.90 3,666.93 6.31 8,062.97 6.13

  • 6.07 , 2014 55.00 7.44 5.00 7.10 239.39 7.26 4,507.33 7.13 54,198.20 6.45 -
  • 7.32 , 2014 1,251.00 7.15 --4,005.13 7.23 -----
  • 7.37 , 2014 ----30.00 7.40 190.00 7.15 711.20 6.53 511.97 6.29

    7.56 , 2014 45.00 7.33 100.00 7.13 355.00 7.31 103.80 7.22 2,595.00 6.62 34,285.82 6.21

  • 6.49 , 2015 2,316.66 7.44 4,345.79 7.17 18,071.11 7.29 30,619.59 7.17 25,974.21 6.57 -
  • 7.02 , 2016 11,633.90 7.38 4,370.00 7.18 30,102.80 7.31 46,320.50 7.25 ---
  • 7.59 , 2016 --21.56 7.20 92.56 7.29 245.00 7.35 8,537.67 6.78 4,277.27 6.66

    7.46 , 2017 180.00 7.58 --625.37 7.55 300.00 7.53 567.39 7.00 6,578.25 6.79

    6.90 , 2019 30,470.51 7.32 5,697.00 7.17 73,620.74 7.29 68,207.56 7.22 32,438.50 6.85 -

  • 6.35 , 2020 9,417.00 7.75 3,591.25 7.59 31,145.87 7.75 21,662.75 7.58 8,841.00 6.87 -
  • 7.94 , 2021 135.70 7.87 125.00 6.61 542.10 7.55 14,299.42 7.83 74,806.47 7.21 5,739.45 7.13
  • 8.13 , 2022 10.00 8.10 --10.00 8.10 --85.00 7.44 -
  • 7.35 , 2024 99.01 8.18 78.20 7.75 1,495.65 8.25 74.59 7.79 3,128.87 7.38 -
  • 8.24 , 2027 546.79 8.25 126.39 8.15 2,319.81 8.25 5,126.94 8.12 9,516.49 7.72 5,235.98 7.33
  • 8.28 , 2032 571.03 8.38 19.90 8.18 2,830.40 8.38 483.88 8.21 30.00 7.82 356.39 7.42

    7.50 , 2034 ----53.50 8.13 73.94 8.09 1,803.32 7.87 7,448.61 7.53

    7.40 , 2035 --0.50 8.08 45.84 8.28 76.92 8.12 2,053.58 7.82 155.90 7.75

    Total (All Securities) 61,315.48 7.34 21,714.78 6.95 1,81,789.14 7.27 2,20,736.99 7.17 2,60,678.64 6.81 2,19,638.99 6.54

    (-) Means no trading. YTM = Yield to maturity in percentage per annum. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: As in Table 5.

    november 21, 2009 vol XLIV No 47

    EPW

    Economic & Political Weekly

    MONEY MARKET REVIEW

    month’s traded volume of around Rs 68,300 month to Rs 2,497 crore with a weighted crore with a weighted yield of 7.22%. The yield of 8% in October against Rs 3,806 traded volume in the one year maturity crore with a weighted yield of 7.98% in the segment in October was Rs 5,800 crore previous month (Table 8, p 31, Table 9, with a weighted yield of 4.01% against p 32 and Table 10). previous month’s traded volume of Rs 7,206 crore and weighted yield at 2.4 Treasury Bills 4.34%. As a result, the yield spread With the demand for short maturities, between one-year and 10-year maturities in particular treasury bills, showing has increased to 328 bps in October considerable increase, as evident from against 288 bps in the previous month, higher bid-cover ratios and falling cut-off anticipating firming up of yields at the yields and the demand for medium to longer end. Similarly, the spread in yield long-term securities waning, as evident of one-year and five-year maturities has from lower bid-cover ratios and rising also widened to 323 bps in October as cut-off yields, the central government against 280 bps in September. rightly showed strong preference for

    Total traded volume of state govern-borrowing through treasury bills. ment securities also went down during the Amounts auctioned during the month of October surged for all

    Table 10: Yield Spreads (Weighted Average): Central Government Securities

    (October 2009, bps) maturities of treasury

    Yield Current Month Previous Three Six Months

    bills. 91-day treasury

    Spread in bps Last Week First Week Entire Month Month Months Ago Ago

    bills were auctioned for

    1 Year - 5 Year 309 286 323 280 261 166

    Rs 30,000 crore while 182

    5 Year - 10 Year 15 4 5 9 40 25

    10 Year - 15 Year 87 88 95 101 54 140 day and 364-day treasury

    1 Year - 10 Year 324 290 328 288 301 191 bills were auctioned for

    Source: As in Table 5.

    Rs 5,000 crore and Rs Table 11: Auctions of Treasury Bills (Amount in Rs crore) 4,000 crore, respectively.

    Date of Auction Notified Bid Cover Cut-off Weighted Cut-off Weighted

    91-day treasury bills cut-

    Amount Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs) off yield in October has

    A: 91-Day Treasury Bills

    fallen to 3.23% from

    1-Oct-09 2,000 5.19 3.15 3.15 99.22 99.22

    3.39% in the previous

    9-Oct-09 7,000 3.50 3.23 3.23 99.20 99.20

    month. For 182-day

    16-Oct-09 7,000 2.79 3.23 3.23 99.20 99.20

    treasury bills the cut-off

    23-Oct-09 7,000 3.39 3.23 3.23 99.20 99.20

    yield has dropped to

    30-Oct-09 7,000 2.91 3.23 3.19 99.20 99.21 Total for October 30,000 3.284 3.23 3.22 99.20 99.20

    3.97% from 4.02%. In

    Total for September 19,500 3.282 3.40 3.39 99.16 99.16 the case of 364-day

    B: 182-Day Treasury Bills treasury bills, however, 1-Oct-09 1,000 3.08 3.80 3.78 98.14 98.15

    yield in October has

    16-Oct-09 2,000 3.08 4.05 3.99 98.02 98.05

    increased to 4.57% from

    30-Oct-09 2,000 4.68 3.97 3.93 98.06 98.08

    the previous month’s

    Total for October 5,000 3.72 3.97 3.92 98.06 98.08

    4.47% (Table 11).

    Total for September 4,500 4.72 4.02 3.37 98.04 98.25

    C: 364-Day Treasury Bills In contrast to dated 9-Oct 2,000 3.02 4.59 4.56 95.62 95.65

    government securities, the

    23-Oct 2,000 2.70 4.54 4.51 95.67 95.70

    traded volume of treas-

    Total for October 4,000 2.86 4.57 4.53 95.65 95.68

    ury bills remained almost

    Total for September 5,000 3.48 4.47 4.42 95.66 95.73

    flat at around Rs 20,300

    Source: RBI's Press Releases.

    crore in October as

    Table 12: Details of Commercial Bond Issues

    compared to Rs 19,500

    Institutional Category No of Issues Volume in Range of Range of Rs Crore Coupon Rates Maturity in Years crore in September. The

    FIs/Banks 3 600 6.90-9.86 2-10

    overall shift in investor

    NBFCs 3 825 7.87-9.00 3-15

    interest to short term

    State Undertakings 1 500 8.40 10

    securities is reflected in

    Central Undertakings 2 1,200 7.73-8.80 3-16

    91-day treasury bills

    Corporates 3 5,000 8.45-9.60 1.10-10

    contributing to the major

    Total for October 12 8,125 6.90-9.86 1.10-16

    chunk of traded volume

    Total for September 24 5,765 8.32-11.25 2-15 Source: Various Media Sources. which increased to around

    Economic & Political Weekly november 21, 2009 vol XLIV No 47

    EPW

    Rs 16,200 crore in October from Rs 13,600 crore in September.

    2.5 Corporate Bond Market

    The corporate bond market activity witnessed a significant improvement in the month of October compared to the previous month. The total volume of primary issues jumped by 41% to Rs 8,125 crore compared to the previous month’s Rs 5,765 crore and Rs 1,880 crore in the same month last year. The remarkable growth in volume came essentially from a significant 62% share by three corporates. The issues by financial institutions (FIs)/banks, NBFCs, state undertakings and central undertakings constituted 7.4%, 10.2%, 6.2% and 14.8% of total issues, respectively. Essar Communication Holdings, an ‘AAA (SO)’ (by Fitch)-rated company, topped the list in bond issues worth Rs 4,500 crore. The company issued non-convertible debentures (NCDs) yielding coupon rates of 9.15% and 9.25%, respectively for 22 months and 25 months maturity. The National Housing Bank was the only one to offer a green shoe option of Rs 200 crore in October. The company had raised Rs 150 crore through issuance of bonds by offering 6.90% for three years maturity (Table 12).

    The RBI in its Second Quarter Review of Monetary Policy, 2009-10 announced that it may frame regulations on issuance of NCDs with maturity of less than one year, as they fall under the definition of “money market instruments” of chapter IIID of the Reserve Bank of India (Amendment) Act, 2006. Following the announcement, RBI has already placed in its web site a set of draft guidelines for posting comments. While this is an attempt in filling regulatory gaps in money and bond markets, companies would no longer enjoy the benefit of unrestricted debt capital that made issuing NCDs with maturity of less than one year viable, despite the higher transaction costs compared to other short-term debt instruments such as commercial paper.

    Contrary to the primary market scenario, the secondary market trading in bonds declined marginally by 10% in October. The daily average volume traded in the bond segment of NSE in October amounted to Rs 597 crore in comparison to Rs 662 crore in September.

    33

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