A New Orientation to Directed Credit

A New Orientation to Directed Credit

EPW Research Foundation

other sector that will require special attention. In fact, when the policies for directed credit were evolved, these three sectors were rightly accorded signiﬁcant priority. However, the present framework for directing and targeting credit under the priority sector lending policy has lost much of its original thrust. Third, therefore we argue that there is a need for revisiting the priority sector guidelines and reprioritising such targets in conjunction with the parallel policy developments under ﬁnancial inclusion.

1.1 Agriculture and Exports

Despite the RBI’s conservative projection of the gross domestic product (GDP) growth rate at 8% for the year 2011-12, the EPWRF views strongly that the country has the potential of achieving a growth rate of at least 8.5% provided the contribution from agriculture and export sectors is sustained. Given the forecast of the Indian Meteorological Department of a normal monsoon this year, the agricultural sector can be expected to show a growth of 4.5% in 2011-12 against a growth estimate of 5.4% in 2010-11. Achieving this order of growth in agriculture will be feasible only if the output of food and cash crops compares favourably with the record of 2010-11. Agriculture should not be allowed to face the negative monetary shock.

The outstanding amount of direct ﬁnance to agriculture during 2000-01 to 2007-08 showed an annual growth of 27.6% compared to a meagre 8.2% in the 1990s. Loans disbursed during the same period also showed a better growth of 32.3% compared to 15% in the earlier decade. Data for different farm size groups shows the rates of growth were impressive for

The policies for directed credit that were introduced in the 1970s accorded signiﬁcant priority to agriculture, exports and micro, small and medium enterprises. However, the present framework for directing and targeting credit under the priority sector lending policy has lost much of its original thrust because of the demand of the banking system to sustain its proﬁtability and meet tighter prudential standards. The current priority sector guidelines suffer from multiple and complex categorisations incorporating several objectives. A strategic reprioritisation of directed credit to agriculture, exports and micro, small and medium enterprise sectors can moderate the costs of correcting the adverse redistributive effects of inﬂation. It is also imperative that the priority sector be redeﬁned more from the objectives of growth and employment while the equity angle be left to be best served through the policy of ﬁnancial inclusion.

1 Introduction

ver since the two rounds of nationalisation of major commercial banks in 1969 and 1980, directed credit has continued to be an integral part of monetary policy. As monetary policy in India has the twin objectives of growth and price stability, the growth objective in a way is embodied in the credit targets. Even as the interest rate channel has gained more prominence in the recent past, the credit channel remains active, with credit targets being stipulated from year to year. There are two dimensions to credit – quantum and direction. The Reserve Bank of India (RBI) governor Subbarao has admitted that there might be a need to sacriﬁce a bit of growth in the context of raising policy rates to contain inﬂation in the immediate context, with the objective of sustaining high growth over the medium term. But this cost of adjustment to inﬂation may perhaps be minimised if a renewed focus is given to operating the credit channel of monetary policy with some strategic changes.

We argue here that given the current growth prospects, and the need to moderate the loss to the growth momentum, there must be an added thrust to directing credit ﬂow to agriculture and export sectors in a pro-cyclical way. Second, given the role played by micro, small and medium enterprises (MSME) in promoting both employment and exports, MSME will be the

Table 1: Trend Growth Rates of Scheduled Commercial Banks' Direct Finance to Farmers (Short-term and Long-term Loans) (in %)

Up to 2.5 acres	Up to 2.5 to 5 acres	Above 5 acres	Total
Accounts	Amount	Accounts	Amount	Accounts	Amount	Accounts	Amount
Loan outstanding
1980s	8.61	19.33	11.8	21.48	7.41	16.96	9.17	18.39
1990s	-3.69	7.65	-1.58	8.95	-0.92	8.05	-2.27	8.17
1999-2000 to 2007-08	13.21	30.95	12.84	29.83	13.11	24.86	13.06	27.59
Team led by K Kanagasabapathy and supported	Loans disbursed
by Bipin K Deoker, Shruti J Pandey,	1980s	7.51	18.38	11.45	21.55	7.21	17.51	8.51	18.61
Anita B Shetty, Sonal Sheth, Vishakha G Tilak,	1990s	2.16	11.84	5.72	15.88	8.55	16.31	4.95	15.01
V P Prasanth, Rema K Nair, R Rekha Rani Rao	1999-2000 to 2007-08	15.67	32.98	13.42	31.36	15.61	32.45	14.96	32.31
and Sharan P Shetty.	Compiled by EPWRF Source: Report on Currency and Finance 2000-01.
100	may 28, 2011	vol XLVI No 22		Economic & Political Weekly

MONEY MARKET REVIEW

farm sizes up to 5 acres compared with the group of above 5 acres (Table 1, p 100). This shows the greater need for credit for smaller farms has been met and there has been better distribution of credit. The growth rate in banks’ ﬁnance to agriculture and allied activities between March 2007 and March 2009 had been in the range of 19.6% and 32.4%. These would not have been possible but for the aggressive strategy of directing credit ﬂow from the banking system to agriculture in the last few years. This no doubt helped in reaping the record foodgrains production in 2010-11. The current strategy of ensuring adequate ﬂow of credit to agriculture and allied sectors should be persevered with.

The other sector that should be insulated from negative monetary shock is exports. Exports during March 2011 were 43.8% higher in dollar terms than the level during March 2010. The cumulative value of exports for the period April-March 2010-11 also registered a growth of 37.5% in dollar terms and 32.3% in rupee terms over the same period. The robust growth in India’s exports reﬂects a diversiﬁcation of products from labour-intensive manufactures to higher value added products in engineering and petroleum sectors and to destinations across emerging markets and developing economies. While this has contributed to a moderation in the trade deﬁcit during 2010-11, the latter still remains high at 8.2% of the GDP. As a result of improvements in exports, the current account deﬁcit in highlighted the scope of strengthening certain critical industries, viz, engineering and chemicals, drugs and pharmaceuticals, electronic sector, gems and jewellery, and some light manufacturing sectors like leather products and textiles, etc.

Export credit is not vigorously targeted as priority except in the case of foreign banks which have a target of 12% under the priority sector guidelines. Export credit targeting should become broad-based. If necessary, the norms for export credit reﬁnance window need to be reviewed and better aligned with the requirement of higher growth of exports. It is observed that the export credit reﬁnance outstanding increased from a meagre Rs 42 crore for the year ending March 2010 to Rs 4,418 crore in January 2011. This shows that there is a need for funds from the banking system to support export growth and the RBI should meet such requirements. Relaxing export credit reﬁnance at this stage should not be viewed as compromising on a tighter monetary regime.

1.2 MSME

Another sector that may have to bear the brunt of negative monetary shock is the MSME which operate in both manufacturing and services. The share of the MSME sector in the country’s industrial output stood at about 45% in 2008-09. Exports by MSME amounted to Rs 2,02,017 crore in 2007-08, contributing to about 16% of total exports.

The MSME sector is the second largest employer in the economy following agriculture. It employed about 695.4 lakh people in 2009-10, and its rate of employment growth is more than 5%. According to the 2006-07 MSME census, the employment of MSME in respect of registered units alone worked out to 92.04 lakh. In respect of unregistered units, all of which could be termed broadly belonging to the micro enterprises sector, the employment was 594.6 lakh, constituting about 85% of total employment.

In terms of number of units, only 6% of the total units were registered and the remaining 94% were unregistered. Despite such a signiﬁcant share in output, employment and exports, the share of the MSME sector in credit intake is very low.

Data on credit ﬂow from commercial banks (Table 2) shows that MSME as a whole received only about 11% of non-food bank credit since 2007-08 and this share has remained ﬂat. In comparison, the share of large industry increased from 27.9% in 2007-08 to 32.9% in 2010-11. The share of services sector also remained ﬂat at around only 25% which was disproportionately low compared to its contribution to GDP. These trends show that the MSME sector requires an added attention in directing the ﬂow of credit, particularly in times of monetary tightening. In order to better target the MSME sector, it is also important to keep in mind that about 92%

Table 2: Sector-Wise Bank Credit of All Scheduled Commercial Banks (Rs crore)

2010-11 is likely to be around only 2.5% of March-11 March-10 March-09 March-08 March-07 the GDP. This downward drift in external

Non-food Credit (1+2+3+4) 36,67,354 30,40,007 26,01,825 22,04,802 17,95,357

1 Agriculture and Allied Activities 4,60,333 4,16,133 3,38,656 2,75,343 2,30,180

balance can easily reverse if the current

(12.6) (13.7) (13.0) (12.5) (12.8)

spurt in crude oil prices persists. Further

2 Industry (micro and small, 16,20,849 13,11,451 10,54,390 8,58,344 6,91,483 more, any adverse shock coming from vol-medium and large) (44.2) (43.1) (40.5) (38.9) (38.5)

atility in capital ﬂows would require the cushion of building up balances through exports in the medium term.

According to a report by the Ministry of Commerce and Industry, if merchandise exports and imports continue to grow as they have in the recent past, in the next three years, merchandise trade is forecasted to reach 48% of GDP from its current level of 35% of GDP. The report has suggested

2.1 Micro and small	2,29,101	2,06,401	1,68,997	1,32,698
	(6.2)	(6.8)	(6.5)	(6.0)
2.2 Medium	1,84,599	1,32,636	1,22,155	1,10,800
	(5.0)	(4.4)	(4.7)	(5.0)
2.3 Large	12,07,148	9,72,415	7,63,238	6,14,846
	(32.9)	(32.0)	(29.3)	(27.9)
3	Services	9,00,801	7,26,790	6,46,299	5,49,496	4,18,191
		(24.6)	(23.9)	(24.8)	(24.9)	(23.3)
4	Personal loans	6,85,372	5,85,633	5,62,479	5,21,618	4,55,503
		(18.7)	(19.3)	(21.6)	(23.7)	(25.4)
Memo:
5	Priority Sector	12,58,386	10,92,179	9,32,459	7,48,074	6,32,647

doubling exports from the estimated $225 billion in 2011-12 to $450 billion in next three years. This target requires exports to grow at a compound average growth rate of 26% per annum. The report has	5.1 Micro and small enterprises/SSI 5.2 Export credit 5.3 Other priority sector Figures in brackets are % share to Non-food Credit. Source: RBI.	4,54,995 31,821 (0.9)	3,73,530 28,866 (0.9)	2,59,998.03 27339 (1.1)	2,04,892 25,233 (1.1)	1,16,908 1,05,177
Economic & Political Weekly		may 28, 2011	vol XLVI No 22					101

Graph A: Priority Sector Advances (Percentage Share) population untouched. This has led to the parallel devel-

Others

45 35 25

opment of new policy initiatives in the arena of ﬁnancial inclusion. It is imperative that the priority sector be redeﬁned more from the objectives of growth and employment and the equity angle be left to be

1980-81 1990-91 1999-2000 2001-02 2003-04 2005-06

to 95% of units in both the registered as well as unregistered sector operate in the form of proprietary ﬁrms.

1.3 Reprioritising Priority Sector

The philosophy of directed credit is rooted in the concept of priority sector, but the framework has undergone transformational changes since its introduction in the early 1970s. The original thrust given to agriculture, small industries and exports has been completely diluted because of the demand of the banking system to sustain its proﬁtability and meet tighter prudential standards since the beginning of the 1990s. As a result, the share of priority sector lending to agriculture and small-scale industrial sector has come down from 42% and 38% respectively in 1980-91 to 37% and 18% in 2009-10. While the trend seemed to have reversed a little since 2004-05 due to a renewed emphasis from the policymakers, the position seemed to have reversed again in 2009-10 (Graph A).

The problem with the present priority sector guidelines is its multiple and complex categorisation incorporating several objectives, viz, growth, employment, and equity. There are sectoral classiﬁcations combined with beneﬁciary-oriented categorisation. The added complexity also comes from the bifurcation of direct and indirect ﬁnancing under major categories. Though there are sub-targets, because of the complexity of categorisation banks are able to comply with the overall targets for priority sector norms, effectively diluting the thrust of policy on directed credit. The current guidelines incorporated in the master circular updated to June 2010 are an amalgamation of about 22 circulars issued from 1977 onwards. Despite the avowed intention of banking outreach to the vulnerable groups in the population, priority sector targeting as per the present framework has left a major part of this

102

2007-08 2009-10

best served through the policy

of ﬁnancial inclusion. One suggestion could

be to include sectoral classiﬁcation and

leave the beneﬁciary-oriented groupings to

be served by the ﬁnancial inclusion strategy.

If one follows this principle, infrastruc

ture ﬁnancing should gain a signiﬁcant

priority and innovative ways should be

explored to allow the banking system to

ﬁnance infrastructure.

Directed credit has been a mainstay of

monetary and banking policies in India

ever since nationalisation of major com

mercial banks. It also keeps alive the oper

ation of the credit channel of monetary

policy along with increasing prominence

of the interest rate channel. But the priority

sector guidelines which form the basis of

exercising this policy have lost their initial

thrust. A reprioritisation is expedient from

the angle of minimising the adverse shocks

emanating from monetary and external

shocks. The sacriﬁce of growth for con

taining inﬂation and the cost of correcting

adverse redistributive effects of inﬂation

need not be that large, if reprioritisation of

directed credit is strategically attempted.

2 Money, Forex and Debt Markets

The new ﬁnancial year 2011-12 beginning

April brought some respite on the liquidity

front while the system is still facing a

moderate liquidity shortage. Anticipation

of further hike in key policy rates coupled

with an uncertain growth scenario kept

the market sentiments down. The global

outlook is still under recovery mode, but the

downgrading of United States (US) credit

outlook by Standard & Poor’s and expecta

tions of rising inﬂation, particularly a spike

in commodity and crude oil prices weighed

down on market sentiments.

The liquidity in the system turned into

a surplus during April by around Rs 1 lakh

crore against a deﬁcit of about Rs 1.25 lakh

crore in March. Liquidity remained com

fortable during the beginning of April but

may 28, 2011

the system again faced a shortage in the later part of the month. Aggregate deposits added Rs 1.25 lakh crore to the banking kit but around Rs 70,000 crore was absorbed from the system by the government’s market borrowings including cash management bills (CMBs) of Rs 26,000 crore. In just a single month the government has raised 10% of its budgeted borrowings and also issued CMBs pre-empting funds before a possible rise in cost after the monetary policy due in early May.

The government securities market observed issuance of two new securities maturing in 7 and 10 years, respectively during April. In the secondary market yields ﬁrmed up on the back of higher than expected inﬂation at 8.98% for March.

The forex market experienced a falling trend, with the Indian currency showing overall weakness against most of the global currencies though it strengthened against the US dollar, supported by buoyant portfolio inﬂows into the domestic stock market.

2.1 Money Market

The ﬁnancial year 2011-12 began with relief in liquidity conditions after a span of six months of tightness, affecting the ease in short-term money market rates. However, the situation was not able to sustain and the system again faced a shortage of liquidity from the second week of April. Consequently, the money market rates also moved upward and mostly ruled above the 6% mark. The volatility was high as measured by standard deviation that remained above 0.4% during April resulting in increased volume of transactions.

The overnight call rates ruled in a wider range of 5.45% and 6.78% in the ﬁrst week of the month. As it was also the second week of the reporting fortnight, the call rates eased at the end of the week as banks had already met their reserve requirements and the liquidity conditions were also at comfortable levels. However, the rates again continued to rule above 6% level till the end of the month except for the last day of the fortnight ending 21 April. The heightened anticipation of further hike in key policy rates dented the market sentiments and the commencement of market borrowings by the government started to drain liquidity from the system. In addition, RBI issued CMBs from the third week which

vol XLVI No 22

MONEY MARKET REVIEW

again caused temporary liquidity shortage. Still, the weighted average call rates eased by 51 basis points (bps) during April compared to March. Similar to call money rates, the other four short-term money market rates also softened during the review period.

The traded volumes in the short-term money market instruments witnessed a mixed trend. Volatility caused enhanced trading activity and total volume increased by 29% during April over March. The

Table 3: Money Market Activity (Volume and Rates)

Facility (LAF) during April. During the ﬁrst week of the month, the RBI injected Rs 3,970 crore while absorbing Rs 62,000 crore from the system on a daily average basis. However, the situation got reversed from the second week onwards and the repo window recorded Rs 26,300 crore of daily injection of funds by the RBI for 12 market days. Overall, the LAF window showed ease in liquidity and the RBI’s daily liquidity injection moderated to around

		April 2011			March 2011
Instruments	Daily Average	Monthly	Range of	Daily Average	Monthly	Range of
	Volume (Rs Crore)	Weighted Average Rate (%)	Weighted Average Daily Rate (%)	Volume (Rs Crore)	Weighted Average Rate (%)	Weighted Average Daily Rate (%)
Call Money	11,999	6.62	5.45-6.94	9,823	7.12	6.30-8.61

Notice Money 2,280 6.34 5.40-6.87 2,425 7.55 5.86-9.01

Term Money @ 107 -7.00-9.25 184 -7.0-11.55

CBLO 58,903 5.63 1.03-6.85 41,967 6.46 2.85-7.84

Market Repo 16,053 5.56 3.72-6.74 14,646 6.56 1.73-7.80

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

collateralised borrowing and lending obli-Rs 4,200 crore in April against Rs 88,000 gations’ (CBLO) segment recorded the crore in March. The open market operahighest rise of 40% in turnover followed tions window of the RBI continued to by overnight segment and market repo remain practically inactive (Table 4).

segments registering 22% and 10% rise, Table 4: RBI’s Market Operations (in Rs crore) data further fuelled the sentiments. Sustaining its upward trend, the euro appreciated substantially against the dollar by 5.46% supported by expectations of rate hike by policymakers following rising inﬂation trends. Tracking the strong euro, most of the Asian currencies also appreciated against the greenback. The US dollar index which tracks the greenback against the six major US trading currencies fell sharply by nearly 3 percentage points during a period of one month signifying weakness in the US currency.

In line with Asian currencies, the Indian rupee appreciated against the dollar, but weakened against most of the other major global currencies including Asian currencies. The fall in domestic currency has been mainly attributed to the rising crude oil prices and weak domestic fundamentals, such as subdued stock market activity and moderated domestic growth outlook. Despite these, the rupee continued to strengthen against the greenback on anticipation of further policy rate hike by the central bank in an effort to control

respectively. However, notice money trad-Month/Year OMO LAF (Average Daily inﬂation. Huge portfolio investments also

(Net Purchase(+)/Sale(-)) Injection (+)/Absorption(-))

ing recorded a fall of 6% during the same boosted gains (Table 5).

November-10 8,354 98,001 review period (Table 3). December-10 41,383 1,16,355 The rupee began the new ﬁnancial year

The volume of outstanding certiﬁcates January-11 17,510 90,349 at Rs 44.45 per dollar and appreciated by

of deposit (CDs) issued by scheduled com-February-11 2 79,677 45 paise till 6 April, inﬂuenced by robust

mercial banks decreased by Rs 6,231 crore during the period of one fortnight while over the month it increased marginally and the outstanding amount at the end of 25 March stood at Rs 4,24,740 crore against Rs 4,18,524 crore in the corresponding period of the previous month. Still, the discount rates were ruling in an upper range of 7.65% and 10.60%. Contrary to CDs, the outstanding amount of commercial papers (CPs) increased by around Rs 25,000 crore over 31 March and amounted to Rs 1,05,518 crore at the end of 15 April 2011. The rates were also ruling higher at 7.15% and 12.30% as in the past several months.

According to the Fixed Income Money Market and Derivatives Association (FIMM-DA), the average daily traded volume in CDs showed a considerable decline of 9% during April compared to March. During the same period, CPs trading activity improved by 7%.

The easing of liquidity conditions was reﬂected in the net injected amount of the repo window of the Liquidity Adjustment

March-11 -14 87,950

April-11 16 4,264

Source: RBI’s Weekly Statistical Supplement.

The average daily traded turnover in the interest rate futures (IRF) segment of the National Stock Exchange (NSE) declined by 50% during April and the total turnover amounted to Rs 9.28 lakh. IRFs in 91-day treasury bills (TBs) are still not getting any response from the market, while the NSE has extended the waiver for transaction charges in respect of IRFs till 31 March 2012.

2.2 Forex Market

The expectation of unwinding of the quantitative easing by policymakers

portfolio inﬂows into the country’s share market. However, the speculation about dollar purchases by the oil reﬁners to pay for costlier crude imports weakened the domestic currency and the rupee lost 48 paise in just three days and the reference rate for rupee against dollar remained at Rs 44.52 per dollar on 15 April. Thereafter, the rupee recouped marginally, tracking revival in the stock market activity buoyed by enhanced foreign institutional investment (FII) inﬂows. However, the trend did not sustain, as rising crude oil prices in the international markets continued to batter market sentiments and the rupee again lost

Table 5: Foreign Exchange Market: Select Indicators

across countries weighed heavily on market sentiments and the	Month	Rs/$ Reference Rate (Last Friday of the Month)	Appreciation (+)/ FII Flows BSE Sensex Depreciation (-) (Equity +Debt) (Month-end of Rs/$ (in %) in $ Million Closing)	Dollar Index
US	dollar	depreciated	sharply	Nov-2010	45.74	-2.62	4,785	19,521	81.19
against most of the global cur	Dec-2010	44.81	2.08	710	20,509	79.03
rencies during April as in March.	Jan-2011	45.74	-2.03	1,198	18,328	77.86
Downgrading of the long-term	Feb-2011	45.37	0.82	-721	17,823	76.92
credit	outlook for the	US	by	Mar-2011	* 44.65	1.61	1,535	19,445	76.07
Standard & Poor’s added pressure while negative employment	Apr-2011 44.38 *: Data relates to 31 March 2011. www.futurestradingcharts.com.	0.61	1,616	19,136	73.11

Economic & Political Weekly

may 28, 2011 vol XLVI No 22

29 paise and closed at Rs 44.59 per dollar. growth was 32% and 17%, respectively. The trade contributed 95% of the total futures Still, the local currency rebounded on turnover in merchant and forward seg-trading while trading in EURO-INR, JPY-INR 27 April tracking broad weakness in US ments showed a massive rise of 30% each, and GBP-INR remained lacklustre. dollar overseas after the weak credit out-while, inter-bank and spot transactions look of the US. Overall, the rupee managed increased by 28% and 27%, respectively, 2.3 Government Securities Market to end the month on a positive note and the during a period of one month (Table 6). Pending annual policy announcement in

early May, the central government started

Table 6: Turnover in the Foreign Exchange Market* (in $ billion)

its borrowing programme with a bang,

Month Merchant Interbank Spot Forward Total

Oct-10 398.9 (30.3) 1,047.6 (27.8) 708.3 (26.7) 738.1 (30.3) 1,446.4 (28.5) by mopping up Rs 36,000 crore in three

Nov-10 369.2 -(7.4) 926.2 -(11.6) 634.1 -(10.5) 661.3 -(10.4) 1,295.4 -(10.4) auctions of Rs 12,000 crore each. Two

Dec-10 279.4 -(24.3) 769.5 -(16.9) 507.0 -(20.0) 541.9 -(18.1) 1,048.9 -(19.0) securities of 7- and 10-year maturities

Jan-11 281.3 (0.7) 802.1 (4.2) 553.7 (9.2) 529.8 -(2.2) 1,083.5 (3.3) were newly issued in the ﬁrst auction of

Feb-11 289.1 (2.8) 786.9 -(1.9) 510.2 -(7.9) 565.9 (6.8) 1,076.0 -(0.7) the ﬁnancial year held on 8 April, namely,

Mar-11 351.3 (21.5) 1,021.7 (29.8) 619.9 (21.5) 753.1 (33.1) 1,373.0 (27.6) 7.83% 2018 and 7.80% 2021. These securi

*: Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are percentage change over the previous month.

ties were reissued in the third auction on

Source: RBI’s Weekly Statistical Supplement, various issues.

21 April, but the response was poorer, Table 7: Details of Central Government Market Borrowing (Amount in Rs crore) besides the yields cutting off at higher

Date of Auction Nomenclature of Loan Notified Amount Bid-Cover Ratio Devolvement on YTM at Cut-off Cutt-off Price

rates. The second auction held on 15 April

Primary Dealers Price (in %) (In Rupees)

08-Apr-11 7.83% 2018 N 4,000 2.99 nil 7.83 -also saw devolvement of Rs 875 crore in

7.80% 2021 N 5,000 3.20 nil 7.80 -respect of one security 7.59% 2016, with a

8.30% 2040 R 3,000 2.15 nil 8.41 98.78 bid-cover ratio of only 1.39 times. Overall,

15-Apr-11	7.59% 2016 R	4,000	1.39	875	8.21	97.50
	8.08% 2022 R	5,000	2.11	nil	8.25	98.74
	8.26% 2027 R	3,000	2.30	nil	8.47	98.15
21-Apr-11	7.83% 2018 R	3,000	2.30	nil	8.10	98.60
	7.80% 2021 R	6,000	2.04	nil	8.06	98.26
	8.30% 2040 R	3,000	2.22	nil	8.50	97.84
Total for April		36,000	1.92		8.14

R: Reissue. N: New issue. Source: RBI press releases.

currency closed at Rs 44.38 per dollar on 29 April posting a marginal appreciation of 0.6% over March.

Following the limited appreciation of the rupee, the forward premia across the three tenures hardened during April compared to March, hinting at depreciation of the rupee in coming months. The movements in all tenures of premia tracked rising crude oil prices along with the uncertainties about the growth prospects on the back of a fall in the index of industrial production (IIP) numbers. The one-month premia touched its high of 8.07% on 26 April while closing at 7.57% on 29 April adding 58 bps over 31 March. Similarly, the 3-month and 6-month premia ﬁrmed up by 49 bps and 63 bps respectively, during the same period, and closed at 7.48% each.

According to the RBI data, the overall turnover in the forex market recorded a signiﬁcant rise of 28.5% during March over February owing to a whopping rise in foreign trade activity in March. India’s exports and imports grew by 22% and 8.5% respectively, on a month-on-month basis while on a year-on-year basis, the

On the back of fewer working days in April, the total traded turnover in the currency derivatives market recorded a 17% fall compared to March. However, the average daily turnover increased by 14% during the same period due to volatility in the currency market. During April, the futures trading registered 9% rise in its average daily trading while options trading recorded an impressive 62% jump illustrating increased hedging activity. Since March, the options trading has picked up in the currency derivatives segment, thus exchanges that are trading in these products also increasing their total market share. The NSE dominated with its trading activity and cornered 48% of the total currency derivatives turnover while the contribution of the Multi-Commodity Exchange (MCX-SX) the yield rates ﬁrmed up in the second and third auctions over the ﬁrst auction. The 10- year bond 7.80% 2021 got the highest bid cover ratio of 3.20 times in the ﬁrst auction (Table 7).

In the secondary market also, yields ﬁrmed up through the month. Higher than expected inﬂation rate of 8.98% for March prompted investors to factor in another upward revision of key policy rates by at least 25 bps in the forthcoming monetary policy review on 3 May. Lower IIP growth numbers at 3.6% for February also added to market concerns. Besides primary issues of dated securities, the government also issued CMBs worth Rs 26,000 crore.

Overall, traded amount for April in central government dated securities plunged by more than 36% to Rs 1,00,608 crore over the previous month. Top three traded securities of the month were 8.08% 2022, 7.80% 2021 and 8.13% 2022 contributing to more than 75% of the total traded volume. The trades of 8.08% 2022 and 8.13% 2022 came down by more than 55% and 60% respectively, to Rs 26,681 crore and Rs 22,978 crore over the previous month.

remained at 37%. However,

the United Stock Exchange Date of Auction Number of Total Bid-Cover YTM at Weighted Participating Amount Ratio Cut-off Price Average (USE) is making its presence States Accepted (in %) Yield (%)

Table 8: Details of State Government Borrowings (Amount in Rs crore)

07-Apr-11 4 4,700 3.17 8.36 8.35

felt in these instruments

20-Apr-11 1 1,773 2.58 8.44 8.40

recording a 14% share in

26-Apr-11 3 1,950 2.87 8.47 8.45

total trading. Among the

Total for April 8 8,423 2.98 8.40 8.38

products traded on the ex -

Total for March 22 9,766 2.38 8.42 8.39 changes, USD-INR contracts Source: RBI press releases.

may 28, 2011 vol XLVI No 22

MONEY MARKET REVIEW

Table 10: Predominantly Traded Government Securities (Amount in Rs crore)
Table 9: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)
Descriptions		April 2011		Previous Month	Three Months Ago	Six Months Ago
	Last Week (29th)	First Week (8th)	Total for the Month	(March 2011)	(January 2011)	(October 2010)
	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM
1 Treasury Bills	3,183.71		7,582.39		17,843.12		23,023.78		15,545.52		18,512.63
A 91-Day Bills	2,563.71	7.29	5,638.02	6.96	12,652.76	7.09	14,097.85	7.04	11,385.82	7.01	12,014.55	6.42
B 182-Day Bills	565.00	7.37	511.87	6.81	2,525.81	7.19	3,889.29	7.20	1,694.25	7.22	1,533.24	6.60
C 364-Day Bills	55.00	7.67	1,432.50	7.19	2,664.55	7.37	5,036.64	7.38	2,465.45	7.22	4,964.84	6.73
2 GOI Dated Securities	31,511.10	8.12	30,025.49	8.02	1,00,607.70	8.09	1,58,389.52	8.05	1,24,461.98	8.15	2,40,054.67	7.96
Year of	(No of
Maturity	Securities)
2011	4	1,050.00	7.60	48.37	7.71	1,353.37	7.58	1,306.54	7.43	780.62	7.34	2,335.27	6.60
2012	5	1,385.00	7.85	262.72	7.46	3,452.76	7.73	2,263.82	7.55	1,777.04	7.52	6,107.90	7.12
2013	2	185.00	7.88	50.80	7.58	370.80	7.79	819.43	7.65	1,308.13	7.64	1,946.86	7.26
2014	4	230.20	8.05	5.43	7.83	795.63	7.98	205.78	7.90	126.60	7.93	1,815.42	7.55
2015	6	440.00	8.20	897.26	7.87	2,284.91	8.02	7,664.21	7.92	12,923.87	8.03	18,618.92	7.76
2016	3	556.29	8.19	30.58	7.95	2,844.55	8.17	45.81	8.01	205.27	8.04	1,131.63	7.90
2017	4	523.93	8.17	2,638.70	7.95	4,113.63	8.01	9,091.40	7.93	17,371.12	8.07	31,222.78	7.94
2018	4	1,326.99	8.13	877.43	7.86	3,941.46	8.00	69.01	8.12	13.32	8.23	104.04	8.05
2019	3	0.54	8.37	0.32	8.01	15.52	7.91	203.10	8.07	31.13	8.07	213.65	8.03
2020	3	380.00	7.90	654.00	7.99	1,759.20	7.98	5,524.33	7.96	19,299.17	8.18	76,663.81	7.97
2021	3	15,771.97	8.09	2,061.57	7.82	24,633.88	8.03	81.67	8.10	23.00	8.17	96.05	8.03
2022	4	8,569.10	8.26	21,731.79	8.05	51,697.01	8.16	1,21,222.12	8.07	61,817.99	8.17	88,841.83	8.07
2023	1			1.94	8.20	1.94	8.20	6.75	8.20			5.05	8.35
2024								12.42	8.23
2026								206.10	8.42			0.52	8.41
2027	2	442.34	8.47	628.32	8.32	1,926.84	8.41	7,198.42	8.36	6,495.62	8.48	7,451.47	8.34
2028	1			2.00	8.47	4.00	8.31	10.58	8.39	1.35	8.56	2.10	8.30
2032	3	2.25	8.47	3.00	8.30	8.35	8.37	516.65	8.37	67.43	8.45	216.76	8.35
2034	1					2.15	8.46	52.78	8.37	5.25	8.36	34.41	8.27
2035	1	56.00	8.43	12.00	8.28	104.75	8.37	67.92	8.38
2036								401.02	8.39	9.39	8.35	80.50	8.32
2040	1	591.49	8.48	119.26	8.41	1,296.95	8.46	1,413.82	8.40	2,205.64	8.52	3,165.66	8.42
3 State Govt Securities	328.51	8.40	890.60	8.33	1,785.01	8.30	4,983.04	6.42	3,265.12	8.45	2,368.83	8.35
Grand total (1 to 3)	35,023.32		38,498.48		1,20,235.83		1,86,396.34		1,43,272.62		2,60,936.13

(-) 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. (2) Trades were negligible in maturities of 2023 to 2026 in the recent period. Source: Compiled by EPWRF; base data from RBI, CCIL.

Descriptions		April 2011		Previous Month	Three Months Ago	Six Months Ago
	Last Week (29th)	First Week (8th)	Total for the Month	(March 2011)	(January 2011)	(October 2010)
	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM	AMT	YTM
GOI Dated Securities
9.39 , 2011	1,050.00	7.60	0.42	7.49	1,180.42	7.58	679.09	7.41	392.32	7.34	1,480.01	6.64
7.40 , 2012	1,385.00	7.85	125.13	7.44	2,665.17	7.77	1,025.31	7.51	1,506.24	7.49	4,266.00	7.14
7.27 , 2013	185.00	7.88	50.00	7.58	370.00	7.79	810.00	7.65	1,273.02	7.63	1,940.50	7.26
7.32 , 2014					350.00	8.00	65.00	7.87	25.00	7.79	1,110.00	7.55
7.17 , 2015	435.00	8.20	896.02	7.87	2,277.52	8.02	7,599.74	7.91	12,799.28	8.03	17,324.59	7.76
7.02 , 2016			25.00	7.95	32.50	7.94	25.00	8.02	205.00	8.04	1,076.00	7.89
7.59 , 2016	556.20	8.19	5.58	7.93	2,811.96	8.17	20.22	7.99
7.46 , 2017	2.29	8.19	23.07	8.15	190.36	8.02	48.29	7.95	805.25	8.09	2,869.90	7.94
7.49 , 2017	292.64	8.17	1,949.98	7.96	2,412.62	7.99	3,871.62	7.93	7,718.86	8.04	0.00	9.50
7.99 , 2017	198.00	8.18	665.00	7.93	1,479.00	8.03	5,163.50	7.94	8,831.32	8.10	28,315.36	7.94
7.83 , 2018	1,326.00	8.13	876.78	7.86	3,929.80	8.00
7.80 , 2020	80.00	8.11	487.00	7.97	892.00	8.02	2,767.83	7.97	13,107.97	8.17	76,151.93	7.97
7.80 , 2021	15,771.90	8.09	2,061.27	7.82	24,633.51	8.03	2,767.83	7.97
8.08 , 2022	5,379.10	8.26	9,741.04	8.06	28,680.74	8.18	63,339.13	8.08	31,844.88	8.18	19,529.75	8.07
8.13 , 2022	3,188.50	8.25	11,955.00	8.05	22,978.02	8.13	57,345.40	8.06	29,923.60	8.16	68,923.61	8.07
8.20 , 2022	1.50	8.32	35.00	8.10	36.50	8.11	537.25	8.12	47.56	8.20	388.25	8.11
8.26 , 2027	432.88	8.47	624.58	8.32	1,913.64	8.41	7,127.15	8.36	6,370.24	8.48	7,275.32	8.35
8.28 , 2032			1.00	8.35	4.00	8.36	194.48	8.39	41.95	8.50	53.54	8.36
8.30 , 2040	591.49	8.48	119.26	8.41	1,296.95	8.46	1,413.82	8.40	2,205.64	8.52	3,165.67	8.42
Total (All Securities)	31,511.10	8.12	30,025.49	8.02	1,00,607.70	8.09	1,58,389.52	8.05	1,24,461.98	8.15 2,40,054.67	7.96

(-) 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 9.

Economic & Political Weekly

may 28, 2011 vol XLVI No 22

Recently issued 10-year security 7.80% 2021 ranked second with traded amount of Rs 24,634 crore. Yields ﬁrmed up more for securities with shorter maturities than longer maturities, narrowing yield spreads between one and 10-year and one and ﬁve-year maturities to 30 bps and 44 bps respectively, from 55 bps and 46 bps in the previous month.

There was a fall in the issuance of state development loans (SDLs) by 16% in April with three issues of the SDLs worth Rs 8,423 crore against Rs 9,766 crore in the previous month. The bid-cover ratio improved to

2.98 times compared to 2.38 times in the previous month. The yield rate remained almost ﬂat (Table 8, p 104).

The traded volume in the secondary market of SDLs plunged by 64% at Rs 1,785 crore from Rs 4,983 crore in March (Tables 9, 10, p 105 and 11).

2.4 Treasury Bills

There was a fall in the issuance of TBs of all maturities. 91-day, 182-day and 364-day TBs were sold worth Rs 20,000 crore, Rs 5,000 crore and Rs 5,000 crore, the amounts lowered by Rs 5,000 crore, Rs 1,000 crore and Rs 1,000 crore, respectively. The ﬁrst two auctions received better responses than the last two auctions. Category-wise, bid-cover ratio improved for only 91-day TBs during the month. Yields across maturity also moved up (Table 12).

In the secondary market, traded amount dipped by 23% to Rs 17,843 crore in April from Rs 23,024 crore of March. The highest decline was recorded in 364-day TBs by 47% followed by 182-day TBs and 91-day TBs.

2.5 Corporate Bonds Market

The activity in the corporate bonds market in the month of April appeared dull with the market witnessing only seven issues in the private placement segment. The issues that entered the market were

Table 11: Yield Spreads (Weighted Average) – Central Government Securities – April 2011 (bps)
Yield		April 2011		Previous Month	Three Months	Six Months Ago	mostly in the ﬁrst and second week of
Spread in bps 1 Year-5 Year	Last Week39	First Week 57	Entire Month 46	62	Ago 52	98	April. The second fortnight of April did
5 Year-10 Year	12	3	9	4	18	33	not witness a single issuance. The coupon
10 Year-15 Year	-	39	32	22	-	-	rates ranged between 9.18% and 9.60%
1 Year-10 Year	51	60	55	66	70	131	and the volume of funds mobilised
Source: As in Table 9.				amounted to Rs 3,480 crore. With inﬂa-
Table 12: Auctions of Treasury Bills (Amount in Rs crore)				tionary pressures prevailing in the economy,
Date of Auction	Bids Accepted	Bid-Cover	Cut-off Yield (%)	Weighted	Cut-off	Weighted	the market expected the RBI to raise the
		Ratio		Average Yield (%)	Price (Rs)	Average Price (Rs)
A: 91-Day Treasury Bills				key policy rates at least by 25 basis points
06-Apr-11	4,000	3.53	7.14	7.10	98.25	98.26	in its forthcoming monetary policy review
13-Apr-11	4,000	2.65	7.19	7.19	98.24	98.24	to be announced on 3 May 2011. As a
20-Apr-11	5,000	2.15	7.44	7.39	98.18	98.19	result, institutions stayed away from the
27-Apr-11	7,000	2.11	7.52	7.48	98.16	98.17	market as the cost of borrowing would
Total for April	20,000	2.51	7.36	7.32	98.20	98.21
Total for March	25,000	2.14	7.23	7.20	98.23	98.24	increase with policy rates moving in the

B: 182-Day Treasury Bills 13-Apr-11 2,000 3.87 7.45 7.42 96.42 96.43

northward direction. Three institutions entered the market

27-Apr-11 3,000 2.33 7.75 7.71 96.28 96.30

to mobilise funds and notably all of them

Total for April 5,000 2.95 7.63 7.59 96.34 96.35

were ﬁnancial corporations. Infrastruc-

Total for March 6,000 4.28 7.49 7.47 96.40 96.41

ture Development Finance Company and

C: 364-Day Treasury Bills 06-Apr-11 2,000 4.18 7.55 7.52 93.00 93.02Housing Development Finance Corporation

20-Apr-11 3,000 2.63 7.76 7.73 92.82 92.84 entered the market thrice and mobilised

Total for April 5,000 3.25 7.67 7.65 92.89 92.91

Total for March 6,000 3.71 7.61 7.60 92.95 92.96

D: Cash Management Bills 19-Apr-11 (63) 8,000 2.89 7.27 7.21 98.76 98.77

20-Apr-11 (70) 6,000 2.96 7.35 7.35 98.61 98.61

21-Apr-11 (49) 6,000 2.57 7.37 7.37 99.02 99.02

Rs 750 crore and Rs 1,730 crore respectively. Power Finance Corporation entered the market with the single largest issue amounting to Rs 1,000 crore. All the issues carried triple-A rating (Table 13).

29-Apr-11 (77) 6,000 1.82 7.66 7.61 98.41 98.42 According to the data published by the

Total for April 26,000 Securities and Exchange Board of India, Figures in brackets are the maturity days of cash management bills.

the average daily turnover reported by

Source: RBI's press releases.

the BSE, NSE and FIMMDA

Table 13: Profile of Private Placement Bonds in NSE

Issuing Company Coupon Rate Redemption Date Amount Credit Ratingtogether declined by about (%) (Rs crore)

11% in comparison to the

Infrastructure Development Finance Company 9.28 15-Apr-26 (15 y) 250 ICRA-LAAA-Fitch : AAA(ind)

previous month. The aggre-

Power Finance Corporation 9.18 15-Apr-21 (10y) 1,000 CRISIL-AAA/STA,ICRA-LAAA

gate turnover also declined

Housing Development Finance Corporation 9.40 13-Apr-21 (10y) 285 CRISIL-AAA/STABLE,ICRA-LAAA Infrastructure Development Finance Company 9.55 12-Apr-13 (2y) 350 ICRA-LAAA-Fitch : AAA(ind) by a signiﬁcant 32%. The

Infrastructure Development Finance Company 9.50 11-Apr-14 (3y) 150 ICRA-LAAA-Fitch : AAA(ind) turnover in BSE, NSE and

Housing Development Finance Corporation 9.60 11-Apr-13 (2y) 695 CRISIL-AAA/STABL,ICRA-LAAA FIMMDA declined by 45%, Housing Development Finance Corporation 9.60 07-Apr-16 (5y) 750 CRISIL-AAA/STAB,ICRA-LAAA

16% and 37% respectively

Total 3,480

in comparison to the previ-

Figures in bracket denotes maturity period of the bonds. Source: www.nseindia.com ous month.

may 28, 2011 vol XLVI No 22