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Is the Growth in Bank Credit a Serious Concern?

Despite the series of policy rate hikes and the corresponding hike in lending rates, the demand for bank credit seems to be robust. The banking system should be allowed to meet this demand in a non-disruptive way without fuelling inflationary pressures. Higher interest rates do not seem to be a deterrent to credit growth since the demand for credit is fuelled by economic activity and banks find their own way of handling additional risks. It would therefore be prudent for the Reserve Bank of India to continue with its anti-inflationary stance and the tightening of monetary policy. However, the pattern of credit growth suggests the need for redistribution in favour of agriculture and exports.

MONEY MARKET REVIEW

Is the Growth in Bank Credit a Serious Concern?

EPW Research Foundation

Against this backdrop, an attempt is made to review the recent trends and patterns in the growth of bank credit and to make an assessment from both demand and supply sides. After analysing the perceived downside risks, this note suggests an appropriate policy stance in the current context.

Despite the series of policy rate hikes and the corresponding hike in lending rates, the demand for bank credit seems to be robust. The banking system should be allowed to meet this demand in a non-disruptive way without fuelling inflationary pressures. Higher interest rates do not seem to be a deterrent to credit growth since the demand for credit is fuelled by economic activity and banks find their own way of handling additional risks. It would therefore be prudent for the Reserve Bank of India to continue with its anti-inflationary stance and the tightening of monetary policy. However, the pattern of credit growth suggests the need for redistribution in favour of agriculture and exports.

Team led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, R Rekha Rani Rao, V P Prasanth, Rema K Nair, Shruti J Pandey, Pallavi Oak and Sharan P Shetty.

1 Introduction

E
nsuring adequate flow of credit to the productive sectors of the economy has always been an integral part of the policy objective of the Reserve Bank of India (RBI) even during periods of monetary tightness to contain inflation. The Indian financial system is still bankoriented, and despite the growth in other avenues available to the industrial sector to raise resources, a lack of adequate and timely provision of credit from the banking system can disrupt productive activity. Hence, a credit crunch is always undesirable for all stakeholders in the financial system.

Even while anchoring inflation expectations, one policy stance of the RBI for the year 2010-11 was to “actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way”. In the later period, this explicit policy stance on bank credit has been missing. No doubt, credit growth has picked up even while the deposit growth of the banking system has remained somewhat sluggish and in that context concerns have been expressed regarding the downside risks of credit growth. The third Financial Stability Report (FSR) of June 2011 has also added a word of caution about the growth in credit backed by higher borrowings, including those from the RBI.

Despite the series of policy rate hikes, the demand for bank credit seems to be robust and the banking system should be allowed to meet this demand in a

1.1 Is the Economy Slowing Down?

The new gross domestic product (GDP) series at 2004-05 prices shows that after the dip during the financial crisis to 6.8% in 2008-09, the growth improved to 8% in 2009-10 and further to 8.5% in 2010-11, though these rates are still lower than the pre-crisis levels of above 9% during 200506 to 2007-08. The mainstream forecast of the growth rate for 2011-12 is in the range of 8%-8.5% (Table 1).

The growth in capital formation has nevertheless decreased from 13.8% in 2009-10 to 9.3% in 2010-11, and the falling trend in the production of capital goods as revealed by the index of industrial production confirms some slackening in investment and industrial activity. The trends in the quarterly GDP data up to March 2011 seem to confirm that growth in industry is sliding on the back of falling growth in gross capital formation since March 2010 (Graph A, p 72).

But the increase in advance tax collections by more than 75% in June and the capital expenditure data of the Centre for Monitoring Indian Economy (CMIE) mitigate this concern. The investment intentions consistently improved from Rs 52.49 lakh crore as of the quarter ending December 2009 to Rs 64.61 lakh crore for the quarter ending June 2011. The implementation ratio also increased from 45.5% to around 50% ever since June 2010 (Table 2, p 72). On balance, the above trends can at best be indicative of moderation, rather than of a structural slowdown in economic activity.

Table 1: Annual Growth Rates in Real GDP

non-disruptive way without Year Agriculture, Industry Services Gross Domestic Gross Capital Forestry & Product at Formationfuelling inflationary pressures. Fishing Factor Cost

While some moderation and 2005-06 5.1 9.7 11.0 9.5 16.3

2006-07 4.2 12.2 10.1 9.6 15.3

prudence may be necessary,

2007-08 5.8 9.7 10.3 9.3 17.2

an attempt to slow down

2008-09 -0.1 4.4 10.1 6.8 -3.1

credit growth may jeopardise

2009-10 0.4 8.0 10.1 8.0 13.8

the medium-term objective of

2010-11 6.6 7.9 9.4 8.5 9.3 sustained economic growth. Source: Central Statistical Office (CSO).

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july 23, 2011 vol XLVI No 30

MONEY MARKET REVIEW

Graph A: Quarterly GDP Growth Rates

29

24

19

14

9

4

-1

-6

Table 2: Investment Intentions and Implementation

Quarter Ending Investment Intentions Implementation (Rs Crore) Ratio (%)

09/07 12/07 03/08 06/08 09/08 12/08 03/09 06/09 09/09 12/09 03/10 06/10 09/10 12/10 03/11 Services GDP Agriculture Gross Capital Formation Industry
Sep-2008 47,04,677 40.65
Dec-2008 47,71,400 41.60
Mar-2009 52,50,238 40.52
Jun-2009 50,47,012 43.20
Sep-2009 50,87,112 44.08
Dec-2009 52,49,244 45.52
Mar-2010 53,68,000 47.59
Jun-2010 55,95,296 49.36
Sep-2010 56,66,182 50.92
Dec-2010 58,53,150 50.90
Mar-2011 61,84,982 49.60
Jun-2011 64,61,474 49.63

Source: CAPEX Data, CMIE.

1.2 Growth in Bank Credit

The trends in growth of non-food bank credit are in line with real economic activity. After a consistent and steep fall from January to September 2009, the growth kept up its rising phase until November 2010. Since then, and up to 1 July 2011, the growth in non-food credit has moderated, but the growth rate is still higher than the indicative projection of the RBI at 19% for the year 2011-12.

The monthly data on sectoral distribution of credit available since January 2011 shows that the moderation in non-food credit growth has come from some essential productive activities such as agriculture and allied activities, priority sector loans, export credit and service sectors. What is surprising is that the growth in industry and in the retail segment under personal loans, consumer durables, and housing and advances against fixed deposits, gained momentum during the same period. This calls for a

policy intervention to redistribute credit growth in favour of agriculture and exports (Table 3).

One concern raised in the context of the growth in credit is the subdued growth of deposits. However, of late, the deposit growth and credit growth rates have been converging, the former increasing and the latter moderating since around November 2010 (Graph B, p 73).

1.3 Concerns Raised by the FSR

The FSR of June 2011 has expressed some specific concerns about the current trends in credit growth. First, the credit growth rebounded in 2010-11 after a subdued performance in the previous year. While posing the question whether India is experiencing a credit boom which is normally followed by credit impairment, the FSR has analysed the relationship between the cyclical component and the average historical trend. The report defines excessive credit boom as a situation when the cyclical component of credit exceeds the average historical component by more than

1.75 times the standard deviation of the credit variable. In India, the credit growth has not exceeded such a limit in the recent

Table 3: Year on Year Growth Rates in Sectoral Distribution of Credit (%)

period, except during March 2006 to March 2007, when the credit growth could have come close to that limit.

The FSR also expresses caution about the increasing reliance of Indian corporates on foreign funding, resulting in currency mismatches. The availability of alternate channels of raising resources through external commercial borrowings, equity issues and corporate debt instruments in the market has resulted in corporates relying less upon domestic bank credit in recent years. This is due to two reasons (1) the domestic yields are higher than the interest rates in advanced economies, and (2) the corporate debt yields are lower than the bank lending rates.

In this context, it must be noted that these changes are part of a transition economy disintermediating from the banking system to capital markets and moving towards greater integration of the domestic economy with global markets. Prudential policies are expected to take adequate risk mitigating measures and the periodical FSR is a right step in that direction.

1.4 Are High Interest Rates a Deterrent to Credit Growth?

Though some bankers have expressed their concern that higher interest rates will cause some setback to credit growth, the evidence does not support this. Ever since the introduction of the base rate mechanism, the banks have been very responsive to policy rate changes and have accordingly raised their base rates.

The base rates of select 43 public, private and foreign banks show that between June 2010 and June 2011, the range of rates has shifted from 6.5% to 9% to a range of 9% to 11% (Table 4).

Correspondingly, the estimated mean lending rates of banks (based on the spread

Non-food credit Jan-2011 23.0 Feb-2011 22.8 Mar-2011 20.6 Apr-2011 22.1 May-2011 21.9 Table 4: Base Rate Changes Range Jul-2010 Jun-2011
Agriculture and allied activities 21.5 18.3 10.6 12.0 12.8 6.5-7.0 1 -
Industry (micro and small, medium and large) 26.5 26.5 23.6 25.9 26.7 7-7.5 8 -
Services 23.5 24.2 23.9 24.1 21.8 7.5-8.0 7 -
Personal loans 15.8 16.2 17.0 18.4 17.7 8.0- 8.5 22 -
of which: 8.5-9.0 5 -
Consumer durables 18.1 23.7 22.5 23.6 26.6 9.0-9.5 7
Housing (including priority sector housing) 15.1 15.2 15.0 17.3 17.4 9.5-10.0 10
Advances against fixed deposits* 21.8 22.4 24.4 24.8 26.3 10.0-10.5 - 24
Priority sector 19.2 20.2 15.2 13.8 15.9 10.5-11.0 - 2
Export credit 39.4 11.3 10.2 9.2 -2.7 No of Banks * 43 43
* Including FCNR (B), NRNR Deposits, etc. * includes public, private and foreign banks.
Source: RBI. Source: Compiled by EPWRF.
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MONEY MARKET REVIEW

Graph B: Monthly Growth Rates: Deposits, Credit and Investments

45 Non-food credit

35 25 15

5 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 04/11

Aggregate deposits Investments (SLR + Non-SLR)

slowdown in credit growth. The pattern of credit growth, however, suggests that reditribution in favour of agriculture and exports will be needed to sustain the medium-term growth path. In the current scenario of unrelenting inflationary pres sures and expectations, it

worked out as of July 2010) for the corresponding periods show that the lending rates have shifted upward by a considerable degree during the same period (Table 5).

Table 5: Mid-Point Lending Rate

Demand Loan Term Loan Jun-10 Jun-11 Jun-10 Jun-11

Less than 9.5

5.5-6.5 1 -5

6.5- 7.5 2 1 -

7.5-8.5 3 --

8.5-9.5 3 2 -

9.5-10.5 2 3 7 1

10.5-11.5 9 3 8 4

11.5-12.5 13 2 17 6

12.5-13.5 7 10 4 12

13.5-14.5 1 15 -16

14.5-15.5 1 4 1 2

More than 15.5 15.5-16.5 -1 -

16.5-17.5 1 1 1 1

17.5-18.5 -1 -1

No of Banks * 43 43 43 43

* includes public, private and foreign banks. Source: Compiled by EPWRF.

Now, it is well established that these rate changes have not caused any significant dent in credit growth. Taking only the conservative nationalised banks, it is seen that many banks were aggressive in both raising deposits and expanding their credit portfolio (Table 6). An analysis by the EPWRF shows a close and positive relationship between the growth rates in deposits as also advances with the estimated spread of lending rate over the base rate. This leads to the conclusion that banks which are aggressive in raising resources and deploying credit keep their spreads over the base rate relatively higher, so as to mitigate any credit impairment that may follow.

In sum, higher interest rates are not a deterrent to credit growth, as long as there is a demand for credit fuelled by economic activity and banks find their own way of handling additional risks.

1.5 Conclusions

While the rise in policy rates has resulted in a corresponding hike in lending rates, it has not contributed to any significant would be prudent for the RBI to continue with the anti-inflationary stance and to not give any pause at this stage to the tightening phase of monetary policy.

2 Money, Forex and Debt Markets

The liquidity conditions remained tight throughout the first quarter of the new fiscal for various reasons such as frontloading of market borrowing, credit pickup, huge advance tax payments, etc. During the month, bank credit expanded by a sizeable Rs 1.36 lakh crore, while securities and bills issuances absorbed another Rs 80,000 crore. The only major inflow came through the growth in aggregate deposits, which added a considerable Rs 1.67 lakh crore, and was a source of comfort to a system otherwise facing a cash crunch at the end of the month. The RBI too made some effort to ease the situation by injecting around Rs 1 lakh crore into the system through its Liquidity

Adjustment Facility (LAF) window on some intermittent days and also purchased securities through its open market window (OMO) after a gap of four months. Still, all rates on money market instruments crossed the informal corridor of the RBI and ruled in an upper trajectory throughout the month, particularly after the raise in the key policy rate by the RBI in its midquarter monetary policy review on 17 June.

Buoyant portfolio inflows into the country’s stock market and softening of global oil prices triggered the appreciation of the rupee and the domestic currency posted around 0.69% appreciation against the dollar during a period of one month. However, the adverse impact of the European debt crisis resulted in weak stock market movements which, in turn, restricted the further advancement of the rupee. The anticipation of more rate hikes and increase in market borrowing kept the securities yield in a higher range. The corporate bonds market activity showed some revival in the mobilisation of funds, while the secondary market activity was generally influenced by inflationary expectations and further policy rate hikes.

2.1 Money Market

The dependence of the banks on borrowed funds through short-term money market instruments increased to a large extent in June due to huge outflow of funds from the system after corporates paid higher advance tax for the first quarter of 2011-12. The additional 25 basis points (bps) hike in the repo rate on 17 June also influenced money market rates. In June, the weighted average rates of money market instruments ruled comparatively higher than those of the previous month, particularly the overnight and notice money rates, which lingered around the repo rate of the RBI.

The comparatively lower volatility and higher rates resulted in decreased daily

Table 6: Spread and Deposit/Credit Growth Rates of Nationalised Banks

Banks Spread* Spread* Deposits Growth Credit Growth
(Demand Loan) (Term Loan) Rates (2010-11) Rates (2010-11)
Allahabad Bank 4.13 2.88 24.4 30.8
Andhra Bank 2.25 3.50 18.60 27.3
Bank of Baroda 1.00 1.00 26.60 30.6
Bank of India 4.00 4.00 30.10 26.5
Bank of Maharashtra 0.13 1.25 5.60 16.3
Canara Bank 4.38 3.50 25.30 25.5
Central Bank of India 2.50 3.00 10.60 22.7
Corporation Bank 3.00 3.50 25.90 37.4
Dena Bank 4.25 3.25 25.10 26.4
Indian Bank 2.50 1.88 19.90 21.1
Indian Overseas Bank -1.25 4.75 31.10 41.6
OBC 3.00 3.25 15.60 13.5
Punjab National Bank 3.00 4.00 25.50 29.7
Punjab & Sind Bank 4.30 1.30 21.50 30.6
Syndicate Bank 2.13 2.63 15.90 18.1
Union Bank of India 5.50 2.88 19.10 26.5
United Bank of India 2.50 0.38 14.20 26.1
UCO Bank 3.75 3.75 18.70 20.1
Vijaya Bank 4.50 3.75 18.30 17.3
IDBI Bank Ltd 4.63 1.67 7.60 13.7

* Spread is calculated taking July 2010 Base Rate minus June 2010 mid-point lending rates of both demand and term loans. Source: RBI, Banks' website; compiled by EPWRF.

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Table 7: Money Market Activity (Volume and Rates) The Indian currency market experi-

June 2011 May 2011 Instruments Daily Average Monthly Range of Daily Average Monthly Range of Volume Weighted Weighted Average Volume Weighted Average Weighted Average (Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)

Call Money 9,983 7.47 6.21-7.71 10,508 7.21 6.33-7.43
Notice Money 2,685 7.49 5.96-9.15 2,158 7.23 6.10-7.54
Term Money @ 186 - 8.10-10.50 127 - 6.30-10.35
CBLO 39,264 7.06 2.15-7.60 40,172 6.91 5.52-7.29
Market Repo 16,183 7.29 5.00-7.57 15,697 7.04 3.00-7.25

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

traded volume in the overnight segment which showed a 5% fall in turnover during June. The collateralised borrowing and lending obligations (CBLO) reported a 2% fall, but market repo registered a growth of 3% in their average daily turnover. Overall, the trading activity in short-term term money market instruments experienced a slight fall, since the companies also favoured other short-term instruments like certificates of deposits (CDs) or Rs 64,000 crore per day, which suddenly went up to Rs 1 lakh crore in the following week. In the last week of the month, banks borrowed Rs 82,000 crore per day. As per the policy stance, the RBI should have activated the marginal standing facility in the second fortnight of June, but perhaps it decided to allow the normal LAF to meet the growing liquidity needs for fear of causing high volatility in

Table 8: RBI’s Market Operations (Rs crore)

enced a vibrant behaviour during June with the rupee showing an impressive performance against global currencies, predominantly taking advantages of capital inflows in the aftermath of the interest rate hike by the central bank, despite disrupting macro economic fundamentals (Table 9).

The domestic currency started the month with a notable appreciation of 14 paise against the dollar, but fell marginally on 2 June. However, huge portfolio inflows into the domestic market improved positive sentiments and the rupee appreciated by 22 paise till 6 June. The temporary reversal of foreign institutional investors (FIIs) on 7 June restricted the rupee to progress further, but the rupee recouped on the very next day and closed at Rs 44.61 per dollar on 8 June. The sudden spike in

commercial papers (CPs) (Table 7). A weak participation from mutual Month/YearJan-2011 OMO (Net Purchase(+)/Sale(-)) 17,510 LAF (Average Daily Injection (+)/Absorption(-)) 90,349 overseas crude oil prices, which crossed $120 per barrel, dented the market senti
funds, slower credit offtake and growth in Feb-2011 2 79,677 ments and the rupee shed 26 paise till
retail deposits have deterred banks from Mar-2011 -14 87,950 13 June. Despite the policy rate hike on

taking up high-cost bulk deposits like CDs in the recent period. According to the latest available data from the RBI, the volume of outstanding CDs issued by scheduled commercial banks decreased by Rs 1,143 crore during the period of one fortnight. However, over the month it increased marginally by Rs 772 crore and the outstanding amount at the end of the fortnight ending 3 June stood at Rs 4,32,144 crore with discount rates ranging between 8.65% and 10.25%. Contrary to CDs, the outstanding amount of CPs increased by around Rs 2,179 crore during the period ending 15 June over 31 May, but over 15 May it fell by around Rs 5,614 crore. The discount rates for these products continued their northward trend and ranged between 8.25% and 13.00% for the fortnight ending 15 June 2011.

The liquidity tightness resulted in a sharp rise in the net injected amount of the LAF repo window of the RBI during June. For the week ending 3 June, banks borrowed around Rs 44,000 crore on a daily basis, which increased substantially in the next week and the repo tendered amount averaged to Rs 75,000 crore. The second week of the fortnight ending 17 June witnessed an injection by the RBI of around

Apr-2011 16 4,264
May-2011 1 53,666
Jun-2011 981 72,204

Source: RBI’s Weekly Statistical Supplement.

short-term rates. After remaining practically inactive for four months, the RBI purchased securities worth Rs 981 crore through its OMO window during June (Table 8).

2.2 Forex Market

After showing signs of strength, the US dollar returned to its fragile behaviour

during June. Except the pound sterling, most of the major global currencies – including Asian currencies

– appreciated against the dollar. The dollar’s performance was better in the initial days of the month following the re-emergence of the euro debt crisis. The broad weakness in the dollar, mainly following the uncertainties about the US recovery, was reflected in a fall in the US dollar index by nine bps during the period of one month.

17 June, the currency continued to depreciate except for some intermittent sessions and was poised for crossing the psychological mark of Rs 45 on 20 June. The local currency recovered again by 17 paise in the next two days tracking ease in crude oil prices and persistent selling of dollars by banks and exporters on the back of weak dollar overseas and the surge in the euro. Thereafter, despite upbeat foreign inflows and positive stock market conditions, the rupee shed most of its gains as the hike in the price of diesel,

Table 9: Foreign Exchange Market: Select Indicators

Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex Dollar Index
Rate (Last Friday Depreciation (-) (Equity +Debt) (Month-end (Average)#
of the Month) of Rs/$ (in %) in $ Million Closing)
Jan-2011 45.74 -2.03 1,198 18,328 73.19

Feb-2011 45.37 0.82 -721 17,823 72.22

Mar-2011 * 44.65 1.61 1,535 19,445 71.02

Apr-2011 44.38 0.61 1,616 19,136 69.75

May-2011 45.21 -1.84 -948 18,503 69.85

Jun-2011 * 44.72 1.10 4,883 18,846 69.76

*: Data relates to last day of the month. #:Nominal Major Currencies Dollar Index. Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov.

Table 10: Average Daily Turnover in the Foreign Exchange Market* ($ billion)

Month Merchant Interbank Spot Forward Total

Jan-2011 16.2 (6.3) 51.6 (16.1) 32.0 (18.7) 35.8 (9.4) 67.8 (13.6)

Feb-2011 15.3 (5.7) 44.4 (12.8) 27.0 (5.7) 32.7 (15.6) 59.7 (10.9)

Mar-2011 14.5 (2.8) 39.4 (-1.8) 25.5 (-7.9) 28.3 (6.9) 53.8 (-0.7)

Apr-2011 14.1 (10.8) 40.1 (14.7) 27.7 (20.1) 26.5 (7.6) 54.2 (13.6)

May-2011 13.5(-16.7) 48.3 (-6.3) 28.9 (-9.7) 33.0 (-8.0) 61.9 (-8.8) *: Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are percentage change over the previous month. Source: RBI’s Weekly Statistical Supplement, various issues.

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cooking gas and kerosene underpinned and firm stock market activities and closed the sentiments. The rupee bounced back at Rs 44.72 per dollar on 30 June. Overall, again from 28 June onwards and recovered the rupee displayed a mixed movement by a considerable 38 paise against the dol-during June, but managed to post 0.69% lar on the back of sustained capital inflows appreciation against the dollar over 31 May.

Table 11: Details of Central Government Market Borrowing (Amount in Rs crore)

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

03-Jun-11 7.59% 2016 R 3,000 2.07 nil 8.40 96.80

8.13% 2022 R 6,000 2.14 nil 8.44 97.75

8.28% 2032 R 3,000 2.38 nil 8.60 96.90

10-Jun-11 7.83% 2018 R 3,000 2.25 nil 8.30 97.55

7.80% 2021 R 6,000 2.24 nil 8.25 97.00

8.26% 2027 R 3,000 2.40 nil 8.59 97.13

24-Jun-11 7.59% 2016 R 3,000 2.12 nil 8.34 97.06

8.08% 2022 R 6,000 2.42 nil 8.35 98.06

8.28% 2032 R 3,000 2.47 nil 8.60 96.92

The forward premia across the maturities moved in tandem with the rupee throughout the month, particularly the one-month premia. Anticipating further advancement of the rupee in the coming days, the one-month forward premia fell by 72 bps over 31 May and ended at 6.98% on 30 June. Similarly, the 3-month and 6-month premia softened by 67 bps and 75 bps and closed at 6.71% and 6.57%, respectively during the review period.

After recording a double-digit rise in its average daily turnover during April, trading activity in the foreign exchange market fell by 8.8% in May despite buoyant growth in exports and imports. The major

01-Jul-11 7.83% 2018 R 3,000 2.20 nil 8.39 97.14fall was reported in merchant transactions

7.80% 2021 R 6,000 2.10 nil 8.36 96.31(-16.7%) followed by spot (-9.7%) and for

8.26% 2027 R 3,000 2.23 nil 8.64 96.75ward (-8%). The inter-bank transactions

8.30% 2040 R 3,000 2.42 nil 8.66 96.20 also shed 6.3% of their daily turnover dur-Total For June 2011 51,000 2.26 8.43 97.10

ing a period of one month (Table 10, p 74).

Total For May 2011 48,000 2.19 8.48 96.74

After crossing a turnover of Rs 10 lakh

R: Reissue. Source: RBI press releases. crore in May 2011, the total traded volume

Table 12: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)

Descriptions June 2011 Previous Month Three Months Ago Six Months Ago

Last Week (24) First Week (3) Total for the Month (May 2011) (March 2011) (December 2010) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

1 Treasury Bills 7,045 4,773 22,595 19,135 23,024 12,903

A 91-Day Bills 6,671 8.09 4,016 8.07 18,798 8.07 11,929 7.89 14,098 7.04 7,883 6.99

B 182-Day Bills 21 8.16 168 8.16 1,639 8.15 2,245 7.95 3,889 7.20 2,191 7.16

C 364-Day Bills 352 8.17 590 7.92 2,159 8.13 4,962 8.14 5,037 7.38 2,828 7.17

2 GOI Dated Securities 52,167 8.27 62,041 8.38 2,49,571 8.33 1,27,796 8.36 1,58,390 8.05 1,56,556 8.04

Year of (No of Maturity Securities)

2011 3 335 8.30 745 8.26 1,733 8.29 315 7.96 1,307 7.43 1,160 7.50

2012 3 870 8.02 215 8.18 1,415 8.06 1,105 8.11 2,264 7.55 1,773 7.41

2013 2 85 8.11 180 8.14 295 8.19 819 7.65 69 7.53

2014 3 200 8.20 1 8.44 301 8.23 311 8.25 206 7.90 347 7.68

2015 4 185 8.27 1,190 8.43 2,059 8.37 1,650 8.37 7,664 7.92 12,298 7.92

2016 4 481 8.32 1,313 8.42 4,057 8.37 4,106 8.43 46 8.01 736 7.93

2017 2 287 8.33 85 8.44 3,142 8.37 405 8.38 9,091 7.93 38,088 7.95

2018 4 1,634 8.29 6,085 8.44 13,445 8.37 8,988 8.42 69 8.12 125 8.00

2019 1 0 8.49 1 8.16 1 8.30 0 8.18 203 8.07 12 8.14

2020 2 590 8.85 680 7.85 2,630 8.08 1,870 7.87 5,524 7.96 20,518 8.03

2021 2 34,735 8.23 35,686 8.34 1,42,798 8.29 49,678 8.28 82 8.10 8 8.11

2022 3 11,793 8.33 15,453 8.46 73,835 8.39 55,138 8.43 1,21,222 8.07 69,298 8.07

2023 1 1 7.88 337 8.62 4 8.18 7 8.20 2 8.32

2026 0 8.70 206 8.42

2027 2 484 8.50 2,590 8.57 2,740 8.61 7,198 8.36 8,769 8.42

2028 1 0 9.62 0 9.62 11 8.39 11 8.30

2032 3 431 8.58 74 8.61 1,119 8.59 333 8.61 517 8.37 243 8.42

2034 1 0 8.30 0 8.30 7 8.40 53 8.37 17 8.37

2035 1 4 8.37 5 8.33 11 8.34 68 8.38 2 8.42

2036 10 8.55 401 8.39 111 8.47

2040 1 55 8.55 174 8.68 256 8.64 833 8.60 1,414 8.40 2,969 8.47

3 State Govt Securities 907 8.55 291 8.63 2,587 8.58 2,708 8.58 4,983 8.34 2,264 8.36

Grand total (1 to 3) 60,118 67,105 2,74,753 1,49,639 1,86,396 1,71,723

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.

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MONEY MARKET REVIEW

in the currency derivatives market was sustained at high levels during June also. The ongoing uncertainty in the external sector outlook resulted in increasing hedging activity in the forex market. This prompted buoyancy in the currency derivatives market in the recent period. During the month, the total turnover in the currency derivatives market across the exchanges recorded a 4% rise over the previous month. The futures turnover increased by 5% but the options segment registered a 3% fall.

2.3 Government Securities Market

Despite tightening liquidity, the government’s anxiety to push through its borrowing programme could be seen from the completion of 54% of the targeted borrowing for the first half of the financial year 2011-12 by June end, almost hassle-free.

During the month (till 1 July), four reissues were made garnering Rs 51,000 crore as compared to Rs 48,000 crore of May 2011. Overall, better bid cover ratio of 2.26 times and lower yield of 8.43% revealed a better investor response. A total of eight securities were reissued, out of which five securities were with varied maturities ranging from 2016 to 2032, while 8.13% 2022, 8.08% 2022 and 8.30% 2040 were issued once. Trends in yields were mixed, perhaps reflecting investor preferences. Yields of three securities, out of those issued twice had hardened in the second auction. Securities with higher bid cover fetched lower yields and vice versa (Table 11, p 75).

In the secondary market, the turnover of central government securities experienced a whopping increase over the month and touched Rs 2,49,571 crore. Overall, yield rate for the month came down by four basis points to 8.33% over the previous month. In the first half of the month, traded volumes were on the higher side. The market factored in the 25 bps hike in the key policy rates on 16 June. From 21 June, the daily traded volume in government securities dipped below Rs 10,000 crore. During the month, 7.80% 2021, 8.13% 2022, 8.08% 2022 and 7.83% 2018 were the top traded securities, with volumes worth Rs 1,42,798 crore, Rs 49,872 crore,

Rs 23,962 crore and Rs 13,410

Table 13: Yield Spreads (Weighted Average) – Central Government Securities –

crore, respectively. Spread

June 2011 (basis points (bps))

Yield June 2011 Previous Three Six Months of yields between one and Spread in bps Last Week First Week Entire Month Month Months Ago Ago

10-year securities had

1 Year-5 Year 30 24 31 32 46 52

increased to 23 bps from 17

5 Year-10 Year -9 -8 -8 -15 9 18

bps in May as yield of secu

10 Year-15 Year ---42 32

rities with maturity of one

1 Year-10 Year 21 16 23 17 55 70 Source: As in Table 12. year fell by five bps while

yield increased by one bps in the case of 10-year securities (Tables 12 (p 75), 13 and 14).

Two issuances of state development loans (SDLs) were held on 7 June and 21 June for Rs 4,850 crore and Rs 4,150 crore respectively, with a marginal fall in the accepted amount over the previous month. Overall, cut-off and weighted yields softened despite a lower bid cover ratio at 2.54 times. Because of relatively higher yields and lower supply, SDL auctions met with better investor response as reflected in higher bid cover ratio, compared to central government securities (Table 15, p 77).

In the first auction, Jammu and Kashmir, Nagaland, Tamil Nadu, Tripura and West Bengal took part, raising Rs 700 crore, Rs 100 crore, Rs 1,000 crore, Rs 50 crore and Rs 3,000 crore, respectively. The governments of Jammu and Kashmir and Tamil Nadu have used the green shoe option worth Rs 125 crore and Rs 200 crore, respectively.

In the second auction, five states parti cipated – Andhra Pradesh, Gujarat, Uttar Pradesh, Punjab and Tamil Nadu – of which the first three states mopped up Rs 1,000 crore each while the remaining two raised Rs 650 crore and Rs 500 crore, respectively.

In the secondary market, traded volume of state loans was to the tune of Rs 2,587 crore with yield to maturity (YTM) of

Table 14: Predominantly Traded Government Securities (Amount in Rs crore)

Descriptions June 2011 Previous Month Three Months Ago Six Months Ago
Last Week (24) First Week (3) Total for the Month (May 2011) (March 2011) (December 2010)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
GOI Dated Securities
9.39 , 2011 335 8.30 745 8.26 1,700 8.28 265 7.95 679 7.41 945 7.52
7.40 , 2012 855 8.03 190 8.19 1,230 8.07 1,040 8.10 1,025 7.51 1,285 7.38
7.27 , 2013 85 8.11 180 8.14 295 8.19 810 7.65 68 7.53
7.17 , 2015 185 8.27 1,120 8.43 1,989 8.37 1,649 8.37 7,600 7.91 11,967 7.92
7.02 , 2016 10 8.44 10 8.44 10 8.37 25 8.02 699 7.93
7.59 , 2016 355 8.30 1,303 8.42 3,917 8.37 4,096 8.43 20 7.99 20 7.97
7.49 , 2017 7 8.29 25 8.41 567 8.34 262 8.43 3,872 7.93 4,051 7.97
7.99 , 2017 280 8.33 60 8.46 2,575 8.38 141 8.29 5,164 7.94 32,318 7.95
7.83 , 2018 1,629 8.29 6,085 8.44 13,410 8.38 8,901 8.42
7.80 , 2021 34,735 8.23 35,686 8.34 1,42,798 8.29 49,676 8.28
8.08 , 2022 4,742 8.34 9,521 8.45 23,962 8.40 24,889 8.45 63,339 8.08 28,302 8.06
8.13 , 2022 7,051 8.33 5,931 8.47 49,872 8.39 30,168 8.42 57,345 8.06 40,721 8.07
8.20 , 2022 1 8.30 80 8.47 537 8.12 266 8.12
8.26 , 2027 484 8.50 297 8.61 2,550 8.57 2,740 8.61 7,127 8.36 8,442 8.42
8.28 , 2032 429 8.58 74 8.61 1,108 8.59 248 8.64 194 8.39 160 8.43
8.30 , 2040 55 8.55 174 8.68 256 8.64 833 8.60 1,414 8.40 2,969 8.47
Total (All Securities) 52,167 8.27 62,041 8.38 2,49,571 8.33 1,27,796 8.36 1,58,390 8.05 1,56,556 8.04
YTM = Yield to maturity in percentage per annum.
(1) Yields are weighted yields, weighted by the amounts of each transaction.
Source: As in Table 12.
76 july 23, 2011 vol XLVI No 30 Economic & Political Weekly
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MONEY MARKET REVIEW

Table 15: Details of State Government Borrowings (Amount in Rs crore)

Date of Auction Number of Total Bid Cover YTM at Weighted Participating Amount Ratio Cut-Off Average States Accepted Price (%) Yield (%)

Total for June 2011 10 9,000 2.54 8.58 8.58

Total for May 2011 10 9,100 3.02 8.65 8.64

Source: RBI press releases. Table 16: Auctions of Treasury Bills (Amount in Rs crore)

Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs)

A: 91-Day Treasury Bills 01-Jun-11 8,000 2.22 8.19 8.19 98.00 98.00

08-Jun-11 8,000 2.07 8.23 8.19 97.99 98.00

15-Jun-11 8,000 2.92 8.27 8.23 97.98 97.99

22-Jun-11 8,000 2.82 8.19 8.19 98.00 98.00

29-Jun-11 6,000 4.22 8.19 8.19 98.00 98.00

Total for June 2011 38,000 2.78 8.21 8.19 97.99 98.00

Total for May 2011 32,000 2.30 8.05 8.03 98.03 98.04

B: 182-Day Treasury Bills 08-Jun-11 3,000 3.79 8.23 8.20 96.06 96.07

22-Jun-11 3,000 3.51 8.16 8.16 96.09 96.09

Total for June 2011 6,000 3.65 8.19 8.18 96.08 96.08

Total for May 2011 6,000 2.58 8.25 8.21 96.06 96.07

C: 364-Day Treasury Bills 01-Jun-11 3,000 3.04 8.32 8.31 92.34 92.35

15-Jun-11 3,000 2.53 8.34 8.31 92.32 92.35

29-Jun-11 3,000 2.65 8.29 8.26 92.36 92.39

Total for June 2011 9,000 2.74 8.32 8.29 92.34 92.36

Total for May 2011 6,000 2.74 8.25 8.22 92.40 92.42

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

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

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

29-Apr-11 6,000 1.82 7.66 98.41 (77)

05-May-11 6,000 2.54 8.00 98.34 (77)

28-Jun-11 6,000 2.93 8.09 99.23 (35)

04-Jul-11 8,000 3.40 8.16 99.07 (42)

Total for 2011-12 46,000

*: CMBs amount denotes notified amount. #: Figures in bracket represent maturity days for CMBs. Source: RBI’s press releases.

Table 17: Details of Private Placement in Corporate Bonds in NSE During June 2011

Institutional Category No of Issues Volume in Range of Range of Maturity
Rs Crore Coupon Rates in Years (y) and
(in %) Months (m)
FIs/Banks 8 3,210 9.45-9.95 1 y to 10 y
NBFCs 6 3,150 9.80-9.90 2 y to 10 y
Central Undertakings 6 6,618 9.45-9.90 1 y to 10 y
Corporates 1 1,500 11.40 perpetual
Total for June 2011 21 14,478 9.45-11.40 1 to perpetual
Total for May 2011 61 17,503 9.27-11.50 1 to perpetual

Source: www.nseindia.com

8.58% against the traded volume of May at Rs 2,708 crore with YTM of 8.58%.

2.4 Treasury Bills

In the current scenario of peaking shortterm rates, demand for treasury bills (TBs) remained high. The government took this opportunity to increase the supply. Bid covers were high and yield rates hardened, except in the case of 182-day bills.

Economic & Political Weekly

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july 23, 2011 vol XLVI No 30

Five issuances of TBs were held during the month, absorbing Rs 38,000 crore through 91-day TBs, Rs 6,000 crore from 182-day TBs and Rs 9,000 crore from 364day TBs. In the case of 91-day TBs, the yield had moved upward. Bid cover ratio turned out to be higher at 2.78 times as compared to 2.30 times of May 2011. There was a marginal increase in the prices of 182-day TBs with a consequent fall in the yield rates. Bid cover ratio for this category also saw an improvement to 3.65 times against 2.58 times of May 2011. The demand pattern suggests that there is scope for increasing the issuance of 182-day TBs. 364-day TBs were auctioned worth Rs 9,000 crore, with higher cut-off yield of 8.32% (Table 16).

Cash management bills (CMBs) with maturity of 35 days were also auctioned for Rs 6,000 crore on 28 June. This shorterterm instrument got higher cut-off price of Rs 99.23 (Cut-off yield of 8.09%). Table 16 provides details of CMBs issued during the financial year 2011-12.

In the secondary market, turnover of the TBs at Rs 22,595 crore showed a significant jump over Rs 19,135 crore in May. The traded amount in the 91-day TBs recorded a

whopping increase by 58% during the month at Rs 18,798 crore. The turnover in the other two categories of TBs had dipped. Yield rates during June remained higher, except in the case of 364-day TBs.

2.5 Corporate Bonds Market

With rising lending rates, the corporate bond market has remained active in the past few months. However, both the number of issues and the volume of funds mobilised declined in comparison with the previous month. Though expected, the 25 bps policy rate hike boosted the demand for these instruments significantly. Apart from the policy rate hike, the market sentiment from the supply side was low because of inflationary pressures. It is feared that the decision of the government to raise the subsidy to farmers on rice and oil seeds in its attempt to encourage their production could add to further inflationary pressure, since the government might default on its fiscal contribution. On the other hand, the 38% drop in the energy subsidy of the government, amidst high oil prices also caused dismay in the market. The IIP data for the month of April was also discouraging. A growth of only 6.3% was recorded against 13.1% in the previous year at the same time. Further, the market expects the bond yields to rise in the future too, if the government increased its borrowing programme in the later half of the fiscal.

There was some respite from the upwardly moving bond yields after the announcement by the RBI deputy governor of abandoning the policy hike once the core inflation levels were under control.

In all, there were only 21 issues in the month of June in comparison to 62 issues the previous month in the corporate debt private placement segment of the National Stock Exchange (NSE). The volume of funds mobilised also declined by about 17% in June, in comparison to the previous month. The coupon rates moved in the range of 9.45-11.40 in June. There was an increase of 18 bps in the lower bound of the coupon rates in June over the previous month (Table 17).

According to the data published by the Securities and Exchange Board of India, the total turnover reported by the Bombay Stock Exchange (BSE), the NSE and the Fixed Income Money Market and Derivatives Association (FIMMDA) together rose by about 69% in the month of June in comparison to the previous month. The individual increase in turnover in BSE, NSE and FIMMDA was 78%, 95% and 58% respectively in June in comparison to the previous month.

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