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A New Way of Looking at WPI Inflation

An attempt is made here to reclassify the commodities covered by the Wholesale Price Index series, first, into two groups, namely, the consumer and non-consumer items, and then further split them into convenient subgroups, and analyse inflation behaviour since April 2005 after dividing the period into increasing and decreasing phases of WPI inflation. The analysis throws up interesting results and provides important lessons.

MONEY MARKET REVIEW

A New Way of Looking at WPI Inflation

EPW Research Foundation

An attempt is made here to reclassify the commodities covered by the Wholesale Price Index series, first, into two groups, namely, the consumer and non-consumer items, and then further split them into convenient subgroups, and analyse inflation behaviour since April 2005 after dividing the period into increasing and decreasing phases of WPI inflation. The analysis throws up interesting results and provides important lessons.

The EPWRF team led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, V P Prasanth, R Krishnaswamy, Shruti J Pandey and Sharan P Shetty.

Economic & Political Weekly

EPW
february 25, 2012

1 Introduction

F
or historical reasons, India has followed the unique practice of using an inflation rate based on the Wholesale Price Index (WPI) for policy purposes against the common international practice of using a Consumer Price Index (CPI). This is for a variety of reasons: first, the available CPI series is not representative of consumption all classes of people; second, CPI coverage is limited to consumption basket, whereas the coverage of the WPI is all inclusive, and third, until recently, the WPI series was available at a high frequency of weekly intervals and with a shorter time lag compared to the CPI. Since the most popular CPI is for industrial workers, CPI (IW) is extensively used for wage indexation, while for a variety of other policy purposes, WPI is largely used.

The WPI series has other advantages. Classification of various items under different groups and subgroups is done as per the latest revised National Industrial Classification (NIC) which in turn is comparable to the International Standard Industrial Classification (ISIC). Industry group-wise analysis is enabled by this procedure. Another advantage of the WPI series is that the commodity-wise series are available for all selected commodities. This comprehensive coverage makes it possible to regroup these commodities conveniently for analytical purposes. For instance, one popular classification of series is into food and non-food items to study the trend and impact of food inflation on the overall inflation rate. Nonfood manufacturing inflation is evidently used by the Reserve Bank of India (RBI) to represent core inflation for policy purposes. Similarly, it may be possible to identify commodities subject to volatile movements due to global impact and segregate their influence on overall inflation.

vol xlviI no 8

In this note, an attempt is made to reclassify the commodities covered by the WPI series into basically two groups, namely, consumer items and non-consumer items, further split them into some convenient subgroups and analyse inflation behaviour since April 2005, after dividing the period into increasing and decreasing phases of WPI inflation. The analysis throws up interesting results and provides important lessons.

1.1 Reclassification of Commodities

The classification structure basically adopted in the WPI since 1970-71 series broadly falls into three groups, namely,

  • (1) Primary Articles (further subdivided into Food Articles, Non-food Articles and Minerals);
  • (2) Fuel and Power (further subdivided into Coal Mining, Mineral Oil and Electricity); and
  • (3) Manufactured Products (further subdivided into Food Products, Beverages, Tobacco, and Tobacco Products, Textiles Wood and Wood Products, Paper and Paper Products, Leather and Leather Products, Rubber and Plastic Products, Chemicals and Chemical Products, Non-Metallic Mineral Products, Basic Metals, Alloys and Metal Products, Machinery and Machine Tools and Transport Equipment and Parts).
  • The classification of “manufactured products” is similar to the classification adopted in the Index of Industrial Production (IIP) except that the subgroup of

    Table 1: WPI – Distribution of Commodities as Reclassified and Weights

    No of Weight
    Commodities
    1 All commodities (2 + 7) 673 100.0
    2 Consumer items (3+6) 277 43.8
    3 Consumer food items (4+5) 112 24.3
    4 Primary food articles 55 14.3
    5 Manufacturing: food products 57 10.0
    6 Consumer items – non-food 165 19.5
    7 Non-consumer items (8+9+10) 396 57.1
    8 Basic goods 136 30.7
    9 Intermediate goods 174 18.7
    10 Capital goods 86 7.7
  • (i) Weights will not add up to 100 because of rounding off.
  • (ii) Commodities reclassified and indices compiled by EPWRF using respective weights. A few seasonal items have been omitted. visit http://www.epwrf.in for detailed commodity-wise list and respective indices.
  • MONEY MARKET REVIEW

    Graph A1: Trend in Monthly Inflation in CPI (IW) and Consumer Items (WPI)

    18 16

    CPI (IW)

    14

    12

    10

    8

    6

    4

    Consumer items (WPI)

    2 0

    Graph A2: Movements in Monthly Inflation: WPI and CPI (IW)

    18 16

    CPI (IW)

    14 12 10 8 6 4

    WPI (All Commodities)

    2 0

    The new series with 2004-05 as the base has 676 items in the commodity basket and as many as 5,482 price quotations. The weighting diagram for the new series has been derived on the basis of the gross value of output after obtaining the output value at current prices from the Central Statistics Office (CSO) at an appropriate level of desegregation. These have been reallocated and aggregated to conform to the structure of the WPI basket. The weights of the WPI do not correspond to the contribution of the goods concerned either

    A reclassification adopted in this note is presented in Table 1 (p 105). It shows that there were as many as 277 items constituting of consumer items with a weight of around 43% and 396 items comprising non-consumer items with a weight of 57%. The consumer goods group has further been divided into food and non-food categories. It is notable that among consumer items there were as many as 165 non-food items with a weight of 19.5%.

    The non-consumer items have been split into three groups following usebased classification of basic goods, intermediate goods and capital goods. It is notable that basic goods covered 136 items with a weight of about 30%.

    1.2 Trends in CPI (IW) and Consumer Items (WPI)

    Movements in monthly inflation rates of

    04/0508/0512/0504/0608/0612/0604/0708/0712/0704/0808/0812/0804/0908/0912/0904/1008/1012/1004/1108/1112/11

    to value added or final CPI (IW) and consumer items (WPI) are

    use. The universe of the presented in Table 2 and illustrated in

    “Other Manufacturing” has not been WPI is defined as comprising as far as Graph A. The graph also shows the retained and its traded value has been possible all transactions at first point of trends in CPI (IW) and all commodities imputed in the remaining subgroups. bulk sale in the domestic market. index of WPI. It reveals that irrespective

    of differences in coverage of commodities

    Table 2: Movements in Monthly Inflation: CPI (IW) and Consumer Items (WPI) (in %)

    and nature of price quotations, the CPI

    2005-06 2006-07 2007-08 2008-09 2009-10

    2010-11

    2011-12 CPI Consumer CPI Consumer CPI Consumer CPI Consumer CPI Consumer CPI Consumer CPI Consumer (IW) mimics consumer items (WPI) very (IW) Item (WPI) (IW) Item (WPI) (IW) Item (WPI) (IW) Item (WPI) (IW) Item (WPI) (IW) Item (WPI) (IW) Item (WPI)

    closely. It is apparently clear that the

    Apr 5.0 2.3 5.0 4.1 6.7 6.6 7.8 5.2 8.7 6.4 13.3 11.0 9.4 8.3

    large divergence observed between CPI

    May 3.7 1.8 6.3 5.2 6.6 5.7 7.8 5.6 8.6 6.8 13.9 11.1 8.7 7.9

    and WPI inflation rates during the period

    Jun 3.3 2.3 7.7 5.7 5.7 4.2 7.7 6.7 9.3 6.9 13.7 11.0 8.6 8.2 Jul 4.1 2.9 6.7 4.4 6.5 5.2 8.3 6.6 11.9 7.2 11.3 11.1 8.4 8.1 August 2008 to August 2010 is explained Aug 3.5 1.8 6.3 5.7 7.3 4.4 9.0 6.5 11.7 8.6 9.9 9.1 9.0 9.0 by variations in non-consumer items Sep 3.6 2.4 6.8 6.7 6.4 3.1 9.8 7.4 11.6 8.7 9.8 9.5 10.1 8.9 most of which were subject to global Oct 4.2 3.0 7.3 6.3 5.5 3.0 10.5 8.2 11.5 8.5 9.7 9.0 9.4 8.9

    influence following the crisis.

    Nov 5.3 2.3 6.3 5.9 5.5 2.9 10.5 8.1 13.5 11.5 8.3 6.4 9.3 8.0 Dec 5.6 2.8 6.9 6.8 5.5 2.4 9.7 7.8 15.0 13.2 9.5 8.5 4.7

    1.3 Behaviour of Consumer and

    Jan 4.8 4.0 6.7 6.5 5.5 2.5 10.5 8.6 16.2 12.7 9.3 8.9

    Non-Consumer Items in WPI

    Feb 5.0 4.3 7.6 6.5 5.5 3.5 9.6 6.7 14.9 13.1 8.8 6.7 Mar 5.0 3.9 6.7 6.7 7.9 5.1 8.0 5.8 14.9 12.1 8.8 7.1 The trend in inflation rate of consumer and Compiled by EPWRF. non-consumer goods of WPI is illustrated

    Table 3: Average and Range of Monthly Inflation in Different Phases: Category-wise (in %)

    All Consumer Consumer-Primary Food Manufacturing: Consumer Items – Non-Consumer Intermediate Basic Goods Capital Goods Commodities Items Food Item

    Articles

    Food Products

    Non-Food

    Items Goods Phase Average

    Average

    Average Average Average Average Average

    Average Average

    Average Inflation Inflation WC Inflation WC Inflation WC Inflation WC Inflation WC Inflation WC Inflation WC Inflation WC Inflation WC

    April 05-Oct 07 Ļ 5.3 4.4 35.6 6.0 27.3 8.0 22.0 3.1 5.3 2.3 8.2 5.9 64.3 4.7 15.9 7.0 41.7 4.5 6.7 Range 3.2-7.1 1.8-6.8 1.5-10.0 1.8-14.2 (-)0.2-7.0 1.0-4.1 3.2-8.5 0.3-8.3 2.0-2.3 3.7-5.4 Nov 07-August 08 Ĺ 7.5 4.7 27.3 5.7 18.9 5.0 10.4 6.8 8.5 3.4 8.5 9.1 69.8 6.3 16.8 11.9 48.0 4.3 5.0 Range 3.7 -11.1 2.4-6.7 2.2-8.0 0.8-7.0 2.5-9.9 1.7-5.1 4.2-14.2 4.7-8.5 3.4-19.5 3.1-5.1 Sept 08-July 09 Ļ 4.5 7.3 -74.6 9.9 -75.3 10.7 -55.2 8.7 -20.1 3.6 0.6 2.4 170.7 3.5 10.9 1.7 156.8 3.6 3.1 Range (-)0.4-10.8 5.8-8.6 7.3-12.1 8.0-14.4 6.3-10.7 1.7-4.9 (-)5.4-12.7 (-)0.3-8.0 (-)9.9-17.5 1.1-4.8 Aug 09-April 10 Ĺ 6.1 11.0 167.9 16.8 149.7 17.9 99.0 14.9 50.7 2.8 18.3 2.7 -61.6 4.9 12.7 1.8 -76.9 1.2 2.7 Range 0.5-10.9 8.5-13.2 12.7-20.2 12.5-21.8 9.1-19.3 2.3-3.6 (-)4.7-10.5 0.2-10.0 (-)8.5-12.5 0.2-3.3 May 10-Dec 11 Ļ 9.4 8.5 40.1 9.5 27.5 12.1 22.0 5.2 5.5 7.0 12.6 8.9 52.9 7.6 14.4 10.9 36.1 3.3 2.5 Range 7.5-10.5 4.7-11.1 2.6-15.9 0.7-21.4 (-)0.1-8.8 4.0-8.8 7.2-10.6 4.7-10.9 8.6-13.9 2.3-4.3 Ĺ - Increase Ļ - Decrease WC - Weighted Contribution

    Source: Compiled by EPWRF.

    106 february 25, 2012 vol xlviI no 8 EPW Economic Political Weekly

    MONEY MARKET REVIEW

    Graph B: Trend in Monthly WPI Inflation: Consumer and higher than 10% dur

    Non-Consumer Categories (% growth)

    in Graph B. It shows that between December 2005 and December 2007, there was not much divergence between the trends and so also during the period after around April 2010. During the intervening period between December 2007 and December 2009, while the inflation rate of consumer goods showed an almost consistent upward movement, the non-consumer items showed gyrations. It will be shown later that this gyration came essentially from basic goods, which were subject to global influence as also the policy on administered prices after the crisis. This caused high volatility in the overall inflation rate as well. The consistent rise in consumer goods inflation is however explained greatly by food inflation during the intervening period.

    It may also be seen that the inflation rate of consumer items has shown a steep fall in recent months, since August 2011, thanks to fall in food prices.

    An internal quantitative exercise done by the EPWRF has not shown any significant contemporaneous, or lead and lag relationships between inflation rates of consumer items vis-à-vis non-consumer items of the WPI.

    1.4 Contribution of Different Groups to Inflation

    Table 3 (p 106) presents the average and range of category-wise inflation rates as also their respective weighted contribuing all phases till date;

    -10 -5 0 5 10 15 04/0508/0512/0504/0608/0612/0604/0708/0712/0704/0808/0812/0804/0908/0912/0904/1008/1012/1004/1108/1112/11 All commodities Non-consumer items Consumer items

    (ii) the average inflation however remained in the range of 4.5% to 7.5% except during the current phase where it is very high at 9.4%;

    (iii) food items in general including those of manufactured goods had a negative influence on inflation between September 2008 and July 2009, but between

    August 2009 and April 2010, these items contributed positively to a very significant extent of about 150% to inflation rate;

    (iv) during the phases covered under item (iii) above, the contribution of nonconsumer items, in particular of basic goods, behaved exactly opposite to food items, contributing significantly and positively in the first, but contributing negatively in the latter period; and (v) Graph C (p 108) which shows the category-wise non-consumer inflation reflects that the inflation rate of capital goods remained low and within around 5% and it was basic goods which showed high volatility.

    1.5 Concluding Observations

    The foregoing analysis shows that one useful way of studying the behaviour of WPI inflation is to analyse the pattern of inflation rates in consumer and non-consumer categories and within these, the behaviour of food items under consumer goods category and the behaviour of basic goods under the non-consumer category. As both these categories are beyond the control of the monetary authority and subject to shock – of either domestic or global market conditions – it can help to draw meaningful conclusions for policymaking.

    Table 4: Money Market Activity (Volume and Rates)

    The recent change in the periodicity of disseminating WPI data has led to a significant loss of information at least to the public and the withholding of such information is tantamount to non-transparency. Weekly information flow on prices is a boon available to India by discretion or otherwise. Since the consumer items (WPI) closely mimics the CPI, it would greatly help markets to form realistic expectations if the weekly data on consumer items and non-consumer items are released in a timely manner. This would serve as a lead indicator for consumer price inflation in general.

    There is already a suggestion to include services as part of the WPI series. If this is done, the value of weekly release of consumer items (WPI) will further be enhanced.

    2 Money, Forex and Debt Markets

    Financial markets recouped their confidence in January 2012 taking cues from the recent pause to the tighter monetary stance by the RBI, combined with several other measures by the government to propel the economy and prop up the rupee. In addition, some revival in industrial production numbers, soothing headline inflation, better corporate results, the cut in cash reserve ratio (CRR) and nascent recovery signs in global economy further helped to rejuvenate market sentiments. However, the expected contraction in gross domestic product (GDP) growth for

    Table 5: RBI’s Market Operations (Rs crore)

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

    Dec-2011 33,687 1,12,599

    Jan-2012 34,772 1,28,471

    Source: RBI’s Weekly Statistical Supplement.

    Instruments January 2012 December 2011
    Daily Average Volume Monthly Weighted Range of Weighted Average Daily Average Volume Monthly Weighted Average Range of Weighted Average
    (Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)
    tion to the overall inflation rate. The trend is anlaysed after dividing the period since April 2005 into falling and rising phases of inflation. The following observations can be made: (i) the period since November 2007 shows inflation rates peaking at Call Money 14,049 8.89 Notice Money 3,856 8.96 Term Money @ 381 -CBLO 29,588 8.55 Market Repo 9,639 8.66 @: Range of rates during the month. Source: www.rbi.org.in. and www.ccilindia.com 8.37-9.28 7.60-9.48 7.70-10.80 7.56-8.90 8.30-8.87 10,959 3,292 297 27,400 10,571 9.01 9.00 -8.40 8.61 8.21-9.68 7.10-9.83 7.75-10.60 6.99-9.11 8.39-9.20
    Economic Political Weekly february 25, 2012 vol xlviI no 8 107
    EPW

    MONEY MARKET REVIEW

    Graph C: Trend in Monthly WPI Inflation: Non-Consumer Categories
    -10 -5 0 5 10 15 20 04/0508/0512/0504/0608/0612/0604/0708/0712/0704/0808/0812/0804/0908/0912/0904/1008/1012/1004/1108/1112/11 Intermediate goods Basic goods Capital goods

    the BSE Sensex adding around 1,700 points also supported the rupee.

    Escalation in government borrowing programme exerted pressure on government securities markets. However, easing of inflation to 7.47% in December and improved market outlook kept the yields of securities range-bound.

    the current fiscal combined with a precarious fiscal position remained areas of concern for the investors.

    Money market conditions generally appeared stable in January owing to a pause in the policy rate hike by the RBI. But, the liquidity crunch in the system exacerbated in January for a couple of reasons and prompted the RBI to cut the CRR by 50 basis points (bps) in its Third Quarter Policy Review. While the release of Rs 32,000 crore by the CRR cut cheered the market generally, the system experienced its worst cash shortage ever predominantly due to large-scale forex market intervention by the RBI. This is evident from the more than Rs 1 lakh crore fall in foreign currency assets during the month. In addition, securities auctions by the government drained around Rs 75,000 crore while, deposit growth dwindled by around 60,000 crore. However, to cope with the situation, the RBI continued to infuse liquidity through the open market operations (OMO) window and released around Rs 34,500 crore in January. In the liquidity adjustment facility (LAF) window also banks borrowed more than Rs 1.3

    In fact, overall yield eased marginally during the month. The Corporate bond market witnessed reduced activity both in primary and secondary segments.

    2.1 Money Market

    Despite the liquidity crunch, short-term

    money market instruments experienced a slight fall in their weighted average rates in the aftermath of the pause to policy tightening by RBI. Signs of a softening trend began in the last week of December and the trend continued in January. The weighted average overnight rates ruled below 9% levels on most of the trading days. Still, owing to severe liquidity tightness in the system, the call and notice money rates hardened towards the end of the month and crossed 9% levels on some days. However, collateralised instruments like collateralised borrowing and lending obligations (CBLO) and market repo rates inched up by 14 bps and 5 bps, respectively during a period of a month.

    A severe fund shortage resulted in increased borrowing needs of banks causing heightened trading activity in the short-term money market instruments. Excepting market repo, the remaining four segments collectively recorded a 14% jump in the average daily turnover. Among them, call money market registered the highest 28% rise in its daily trading in January 2012, compared to December 2011. However, market repo segment reported a fall of 9% in its average daily turnover during the same review period (Table 4, p 107).

    Table 6: Foreign Exchange Market: Select Indicators

    Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Index Rate (Last Friday Depreciation (-) (Equity+Debt) (Month-end (Month-end of the Month) of Rs/$ (in %) (in $ million) Closing) Closing)#

    Jul-2011 44.16 1.27 2,399 18,197 68.53

    Aug-2011 46.05 -4.12 -7,903 16,677 68.85

    Sep-2011 48.93 -5.87 -1,866 16,454 72.81

    Oct-2011 48.82 0.21 634 17,705 70.52

    Nov-2011 52.17 -6.41 -586 16,123 72.37

    Dec-2011 53.26 -2.05 4,195 15,455 73.33

    Jan-2012 49.68 7.20 5,087 17,194 72.60

    #:Nominal Major Currencies Dollar Index. Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov.

    Table 7: Average Daily Turnover in the Foreign Exchange Market* ($ billion)

    Month Merchant Interbank Spot Forward Total

    Jul-2011 14.0 (9.5) 45.1 -(6.3) 28.5 (4.0) 30.5 -(8.8) 59.0 -(3.0)

    Aug-2011 17.0 (21.6) 46.6 (3.3) 30.3 (6.2) 33.3 (9.0) 63.5 (7.66) Sep-2011 15.1 -(11.2) 44.8 -(3.8) 29.6 -(2.3) 30.3 -(9.0) 59.8 -(5.8) Oct-2011 12.6 -(16.7) 40.0 -(10.6) 26.7 -(9.8) 25.9 -(14.4) 52.6 -(12.1)

    Nov-2011 12.3 -(2.2) 41.0 (2.5) 26.6 -(0.3) 26.7 (3.07) 53.3 (1.4)

    Dec-2011 11.2 -(8.4) 35.6 -(13) 22.8 -(14.2) 24.0 -(10.0) 46.8 -(12.1)

    *: 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.

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

    lakh crore on a daily average basis. Fol-Date of Auction Nomenclature of Loan Notified Amount Bid-Cover Ratio Devolvement on YTM at Cut-off Cutt-off Price Primary Dealers Price (in %)

    lowing the stringent liquidity situation,

    06-Jan-12 7.83% 2018 R 4,000 2.48 Nil 8.34 97.53RBI decided to reintroduce additional repo 8.79% 2021 R 7,000 2.56 Nil 8.33 103.01

    under LAF (second LAF repo) on reporting 8.28% 2032 R 3,000 2.49 Nil 8.66 96.40

    Fridays with effect from 10 February 2012.

    In the forex market, overall positive developments in both domestic and global fronts helped the rupee to recover from its worst depreciation against major global currencies. The local currency

    13-Jan-12 9.15% 2024 R 6,000 2.5 Nil 8.36 106.16

    8.97% 2030 R 4,000 2.1 Nil 8.54 103.98

    8.19% 2020 N 4,000 2.59 Nil 8.19

    20-Jan-12 7.83% 2018 R 4,000 2.31 Nil 8.17 98.35

    8.79% 2021 R 7,000 1.89 Nil 8.14 104.28

    8.83% 2041 R 3,000 2.56 Nil 8.5 103.59

    27-Jan-12 8.19% 2020 R 4,000 1.53 Nil 8.37 98.96

    recovered by as much as 7% against the 9.15% 2024 R 6,000 2.17 Nil 8.45 105.36

    United States (US) dollar in a single month, 8.97% 2030 R 3,000 2.13 Nil 8.66 102.84 Total for January 2012 55,000 2.27 Nil 8.37

    buoyed by whopping $5 billion of inflows

    Total for December 2011 50,000 2.34 400 8.71

    to Indian equity and debt markets. A vast

    R: Reissue, N: New issue. recovery in the domestic share market with Source: RBI press releases.

    108 february 25, 2012 vol xlviI no 8

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    MONEY MARKET REVIEW

    As per the latest available data from the RBI, the certificates of deposit (CDs) issued by scheduled commercial banks saw a huge rise of Rs 30,000 crore in a single fortnight, and after a span of four months, the outstanding amount crossed Rs 4 lakh crore during the fortnight ending 30 December 2011. The discount rates for these papers continued their uptrend and ranged between 9.16% and 10.50% during the same period.

    Similar to CDs, the outstanding amount of commercial papers (CPs) issued by I ndian companies also increased marginally by Rs 1,450 crore during a period of one month and stood at Rs 1.8 lakh crore in the fortnight ending 15 December 2011. The rates continued to harden and ruled in a wide range of 9.10% to 14.50% during the same period.

    According to the trading platform – Fixed Income Money Market and Derivatives Association (FIMMDA) – both CDs and CPs recorded 17% fall each in their daily trading activity during January 2012 over December 2011.

    In the first reporting fortnight of January 2012, liquidity remained tight but in the second fortnight the cash condition worsened further and the RBI injected Rs 1.5 lakh crore into the system on a daily average basis. Overall, the average daily borrowings in the RBI’s LAF window remained above Rs 1.3 lakh crore in January. In addition, borrowers utilised Rs 2,500 crore from the marginal standing facility (MSF) of RBI. Besides, the central bank purchased securities worth Rs 35,000 crore through OMO window as in the previous month. Still, pressure on the liquidity front continued throughout the month (Table 5, p 107).

    2.2 Forex Market

    Signs of recovery in the US economy with better-than-expected US jobs data for December helped the dollar advance against all major currencies during the beginning of the month. However, the buoyancy was short-lived and the currency depreciated significantly after the Fed’s promise to keep the interest rates exceptionally low until late 2014. The assurance spurred market participants to compete for higheryielding riskier assets. In addition, early signs of a healing global economy and falling European borrowing costs boosted demand for emerging market assets.

    Owing to increased demand for emerging market assets class, most of the Asian currencies also limited their losses and strengthened against the dollar during January. This broad recovery was also reflected in the 2 percentage points increase in the Asian dollar index (a spot index of emerging Asia’s most actively traded currency pairs valued against the us dollar) over the month which ended at 117.15 as on 31 January 2012 (Table 6, p 108).

    Taking cues from rising Asian currencies, the Indian rupee also recovered substantially during January. The rupee-dollar exchange rate began the New Year 2012 at Rs 53.30 on 2 January showing a 4 paise loss against dollar in a single day. Thereafter, the rupee bounced back and appreciated continuously for seven days in a row and added a notable 155 paise against dollar to trade below the Rs 52 mark on 11 January bolstered by huge portfolio inflows.

    Table 9: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore)

    Descriptions January 2012 Previous Month Three Months Ago Six Months Ago
    Last Week (28) First Week (7) Total for the Month (December 2011) (October 2011) (July 2011)
    AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
    1 Treasury Bills 1,940 7,549 27,473 35,227 16,102 43,075
    A 91-Day Bills 1,118 8.64 3,365 8.42 10,206 8.50 13,588 8.54 8,780 8.38 33,678 8.04
    B 182-Day Bills 487 8.52 1,704 8.37 5,962 8.49 9,918 8.51 3,258 8.48 3,730 8.16
    C 364-Day Bills 335 8.45 2,480 8.16 11,305 8.12 11,721 8.41 4,064 8.51 5,667 8.24
    2 GOI Dated Securities 82,743 8.32 1,42,235 8.44 4,54,527 8.33 4,42,147 8.58 1,68,357 8.74 2,36,766 8.36
    Year of (No of
    Maturity Securities)
    2012 (4) 128 8.66 530 8.44 1,146 8.48 3,805 8.62 2,546 8.61 923 8.08
    2013 (4) 5 8.04 20 8.05 730 7.89 80 8.37 56 8.37 210 8.16
    2014 (7) 25 8.20 186 8.10 265 8.23 342 8.42 122 8.21
    2015 (4) 250 8.08 625 8.13 1,566 8.10 984 8.44 321 8.59 826 8.33
    2016 (4) 178 8.23 449 8.26 1,743 8.24 976 8.42 422 8.65 2,968 8.32
    2017 (4) 247 8.18 1,742 8.36 3,626 8.28 2,304 8.51 3,375 8.70 2,649 8.34
    2018 (6) 4,882 8.26 9,592 8.35 29,280 8.26 41,070 8.47 13,088 8.72 12,173 8.34
    2019 (2) 20 8.34 15 8.40 39 8.37 130 8.46 101 8.45
    2020 (4) 2,322 8.28 385 9.47 7,519 8.42 7,805 9.59 970 9.06 1,136 8.81
    2021 (4) 40,271 8.26 48,680 8.36 1,91,675 8.25 1,99,127 8.50 1,13,304 8.73 1,54,392 8.32
    2022 (5) 206 8.30 531 8.37 2,949 8.34 9,490 8.55 26,885 8.73 53,783 8.41
    2024 (1) 30,201 8.37 73,093 8.49 1,92,833 8.39 1,52,133 8.63
    2027 (3) 298 8.50 2,701 8.67 5,220 8.58 3,938 8.86 4,827 8.88 3,777 8.63
    2030 (1) 2,282 8.58 1,569 8.59 8,124 8.54 11,096 8.75
    2032 (3) 40 8.51 909 8.62 3,558 8.55 113 8.65 102 8.91 1,411 8.58
    2034 (1) 1 8.53 1 8.70 4 8.56 2 8.49 1 8.56
    2039 (1) 1 8.49 4 8.70 12 8.60 2 8.38
    2040 (1) 357 8.56 500 8.65 1,619 8.57 4,514 8.94 2,118 8.94 1,947 8.61
    2041 (1) 1,053 8.52 864 8.70 2,694 8.57 4,315 8.74
    3 State Govt Securities 513 8.66 1,087 8.79 4,659 8.69 8,475 8.87 2,353 8.94 3,960 8.59
    Grand total (1 to 3) 85,196 1,50,871 4,86,660 4,85,849 1,86,812 2,83,801
    (-) 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) Trading in 2023, 2026, 2028 and 2036 are negligible.
    Source: Compiled by EPWRF; base data from RBI, CCIL.
    Economic Political Weekly february 25, 2012 vol xlviI no 8 109
    EPW

    MONEY MARKET REVIEW

    Still, a volatile share market and weak euro restricted the rupee’s gains on some intermittent trading sessions. However, the recovery in euro, weak dollar overseas and prominent share market movements further buoyed market sentiments. Foreign institutional investors sustained their buying of Indian bonds and extended their interest in Indian stocks tracking healthy corporate results for the third quarter. Benefiting from the overall supportive environment, the rupee extended its appreciation and fell below the psychological Rs 50-mark 7% up against the dollar. Over the previous month, the local currency gained by 358 paise and ended at Rs 49.68 against dollar on 31 January 2012.

    The constant fall in the rupee against the dollar in the past two months prompted the premia to harden substantially across tenures. However, during January 2012, with the rupee recouping its losses, the forward premia across three maturities softened from the beginning of the month. But, premia inched up again in the middle of the month responding to the euro area’s rating problems. However, a vast recovery in the rupee supported the premia across tenures to ease further towards the end of January. During a period of one month, the near-month premia eased by 71 bps to 8.82% as on 31 January; 3-month and 6-month premia also softened notably by 1.7 percentage points and 1.1 percentage points, and closed at 8.45% and 7.31%, respectively, during the same period.

    Following hazy external developments in December, the forex market reported a 12% fall in its daily turnover over November. Spot trading witnessed the highest decline of 14% in its daily trading followed by inter-bank transactions reporting a 13% fall. Forward and merchant trading also reported a 10% and 8% fall in turnover, respectively, during December compared to November (Table 7, p 108).

    The currency derivatives trading in domestic exchanges during the month remained almost flat compared to the previous month. Segment-wise, the futures turnover reported a slight fall compared to the previous month while options trading increased by 6% during January. In the futures segment, USD-INR contracts garnered 96% of the market share as reported in earlier months. The remaining products turnover continued to be negligible.

    Among the exchanges trading in currency derivatives products, National Stock Exchange (NSE) witnessed an 8% rise in its total trading and continued its dominance with a 59% market share while, the Multi-Commo dity Exchange (MCX-SX) contributed 40% towards the total currency derivatives turnover. However, United Stock Exchange (USE) managed to garner just 1% of overall turnover during January.

    2.3 Central Government Securities

    Four auctions of central government securities were held in January, raising Rs 55,000 crore against Rs 50,000 crore in the previous month. The overall cutoff yield stood at 8.37% indicating a fall of about 30 bps over the month. Two securities included in the first auction, 7.83% 2018, 8.79% 2021 were reissued in the third auction with lower yields at 8.17% and 8.14%, from 8.34% and 8.33% in the first auction. The first three weeks of the month saw lower yields but yields hardened in the last week. This is attributed to the absence of the OMO auction in the fourth week. Thus, all securities in the second auction when repeated in the fourth auction fetched higher yields for each security. The bid-cover ratio also fell marginally to 2.27 times from 2.34 times in December (Table 8, p 108).

    Turnover in the secondary market has increased, though marginally, to Rs 4,54,527 crore over the period with lower overall yield of 8.33%. Yields were lower during most part of the month. Market sentiments improved with lower inflation for December at 7.47% combined with the RBI’s stance to give a pause to policy tightening. Investors were so optimistic that on 2 January, a rally in bond prices had breached, for the first time, the price band fixed by the RBI. Yields on the 10-year benchmark security 8.79% 2021 closed at 8.38% with the price at Rs 102.65 on 2 January compared with a close of 8.56% with price at Rs 101.49 on 30 December. Yields further softened in the third week also in the wake of interest shown by banks and corporates in

    Table 10: Predominantly Traded Government Securities (Amount in Rs crore)

    Descriptions January 2012 Previous Month Three Months Ago Six Months Ago

    Last Week (28) First Week (7) Total for the Month (December 2011) (October 2011) (July 2011) AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

    GOI Dated Securities

  • 6.85 2012 1 8.47 435 8.44 691 8.44 2,235 8.67 76 8.57
  • 7.17 2015 50 8.10 600 8.13 1,265 8.10 824 8.44 251 8.46 786 8.34
  • 7.59 2016 77 8.20 447 8.26 1,135 8.22 964 8.42 401 8.65 2,700 8.31

  • 7.99 2017 145 8.18 1,676 8.36 3,214 8.29 1,011 8.50 1,067 8.80 646 8.32
  • 8.07 2017 101 8.18 66 8.31 359 8.22 1,103 8.54 2,304 8.65 1,460 8.34
  • 7.83 2018 4,882 8.26 9,592 8.35 29,270 8.26 41,023 8.47 13,087 8.72 11,976 8.35

  • 7.80 2021 619 8.27 1,330 8.38 6,129 8.30 19,154 8.49 1,13,304 8.73 1,54,349 8.32
  • 8.79 2021 39,590 8.26 47,325 8.36 1,85,454 8.25 1,39,600 8.55
  • 8.08 2022 79 8.30 171 8.38 1,465 8.33 5,370 8.53 13,995 8.71 20,292 8.42

  • 8.13 2022 127 8.30 360 8.37 1,249 8.33 4,105 8.58 12,885 8.76 33,428 8.41
  • 9.15 2024 30,201 8.37 73,093 8.49 1,92,833 8.39 1,52,133 8.63
  • 8.26 2027 83 8.48 2 8.54 498 8.48 722 8.87 1,785 8.91 2,375 8.61

    8.28 2027 215 8.51 2,698 8.67 4,704 8.58 3,197 8.86 3,041 8.87 1,382 8.64

    8.97 2030 2,282 8.58 1,569 8.59 8,124 8.54 11,096 8.75

    8.28 2032 40 8.51 902 8.62 3,530 8.55 113 8.65 103 8.91 1,361 8.59

    8.30 2040 357 8.56 500 8.65 1,619 8.57 4,514 8.94 2,118 8.94 1,947 8.61

    8.83 2041 1,053 8.52 864 8.70 2,694 8.57

    Total (All Securities) 82,743 8.32 1,42,235 8.44 4,54,527 8.33 4,42,147 8.58 1,68,357 8.74 2,36,766 8.36

    (-) 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.

    february 25, 2012 vol xlviI no 8

    EPW
    Economic Political Weekly

    MONEY MARKET REVIEW

    Table 11: Yield Spreads (Weighted Average) – Central Government Yield spread for securi increased with successive auctions for
    Securities (basis points) Yield Previous Three Six Months ties between one and ten bills of all maturities. 91-day TBs were auc-
    January 2012 Spread in bps Last Week First Week Entire Month Month Months Ago Ago years and one and five tioned worth Rs 24,000 crore, whereas
    1 Year - 5 Year 14 31 39 14 33 18 years widened to 45 bps 182-day and 364-day TBs were issued
    5 Year - 10 Year 12 1 6 4 3 7 and 39 bps, respectively. worth Rs 8,000 crore each. The bid-cover
    10 Year - 15 Year 21 30 24 31 15 22 1 Year - 10 Year 26 32 45 18 36 25 The top five securities, ratio dropped for 91-day and 364-day
    Source: As in Table 9. 9.15% 2024, 8.79% 2021, TBs to 2.25 times and 2.65 times from
    Table 12: Details of State Government Borrowings (Amount in Rs crore) 7.83% 2018, 8.97% 2030 3.76 times and 2.84 times in the earlier
    Date of Auction Number of Total Bid-Cover YTM at Weightedand 7.80% 2021, have con month, respectively (Table 13).
    Participating Amount Ratio Cut-Off Average States Accepted Price (%) Yield (%) tributed to almost 93% of In the secondary market, turnover of TBs
    10-Jan-12 10 9,167 2.11 8.72 8.66 the total turnover in Janu dropped by 22% to Rs 27,473 crore over
    24-Jan-12 12 10,961 1.59 8.64 8.63 Total for January 2012 22 20,128 1.83 8.67 8.64 Total for December 2011 19 13,459 2.04 8.88 8.85 ary (Table 11). The RBI had purchased January. In the month, the first fortnight saw a turnover of Rs 17,661 crore, higher
    Source: RBI press releases. government securities than the second fortnight at Rs 9,812
    Table 13: Auctions of Treasury Bills (Amount in Rs crore) through three OMO auc crore. Turnover plummeted and yield
    Date of Auction Bids Bid-Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Averagetions, on 6 January, 13 Jan rates softened across maturities but a
    Yield (%) Price (Rs) uary and 20 January, noticeable fall was in the case of 364-day
    A: 91-Day Treasury Bills 04-Jan-12 6,000 2.4 8.52 8.48 97.92 97.93worth Rs 8,471.451 crore, bills to 8.12% from 8.41% in December.
    11-Jan-12 6,000 2.81 8.56 8.52 97.91 97.92Rs 11,760.464 crore and 18-Jan-12 6,000 2.01 8.65 8.6 97.89 97.9Rs 10,435 crore, respectively. 2.5 Corporate Bonds Market
    25-Jan-12 6,000 1.8 8.73 8.69 97.87 97.88 Total for Jan 2012 24,000 2.25 8.61 8.57 97.9 97.91 During the month, the Three public issues of corporate bonds
    Total for Dec 2011 16,000 3.76 8.49 8.45 97.93 97.94 amount raised through hit the market in the month, mopping up
    B: 182-Day Treasury BillsState Development Loans Rs 18,433 crore in aggregate with cou
    04-Jan-12 4,000 2.8 8.42 8.33 95.97 96.01 18-Jan-12 4,000 2.8 8.55 8.51 95.91 95.93 (SDLs) in two auctions on pon range of 8.20% to 8.70% and matu-
    Total for Jan 2012 8,000 2.8 8.49 8.42 95.94 95.97 10 and 24 January jumped rity ranging from 10 to 15 years. PFC,
    Total for Dec 2011 8,000 2.76 8.39 8.33 95.99 96.01 to Rs 20,128 crore over NHAI and IDFC raised Rs 4,033 crore and
    C: 364-Day Treasury Bills 11-Jan-12 2.45 8.2 8.1 92.44 92.53Rs 13,454 crore in the pre- Rs 10,000 crore and Rs 4,400 crore,
    4,000 25-Jan-12 4,000 2.86 8.47 8.44 92.21 92.24 vious month. Out of 22 respectively. Various financial institu-
    Total for Jan 2012 8,000 2.65 8.34 8.27 92.33 92.39 states, six states issued SDLs tions, non-banking financial companies
    Total for Dec 2011 8,000 2.84 8.31 8.22 92.35 92.42 twice, namely, West Bengal, (NBFCs) and central government under-
    Source: RBI’s press releases. Karnataka, Maharashtra, takings raised Rs 9,999 crore in aggre-
    Table 14: Details of Public Issues and Private Placement in Corporate Bonds – January 2012 Meghalaya, Punjab and gate through private placements on NSE.
    Institutional Category No of Volume in Range of Range of Maturity Tamil Nadu. Cut-off and Coupon range for private placement
    Issues Rs Crore Coupon Rates in Years (y) and weighted average yields, issues varied between 9% and 9.83%
    (in %) Months (m) Public issues softened to 8.67% and with maturity ranging from one to 11
    Central undertakings 2 14,033 8.20-8.30 10 to 158.64%, respectively, over years. Four issues from privately placed
    NBFCs 1 4,400 8.70 10 Total for January 2012 3 18,433 8.20-8.70 10 to 15 the period. Yields were bonds were zero coupon bonds; two of
    Private placements on NSE relatively lower in the sec- HDFC, one each of IDFC and Aditya Birla
    FIs/Banks 6 3,930 9.00-9.50 3 to 7ond auction than in the first Finance Ltd (Table 14).
    Central undertakings 1 1,292 9.55 3 NBFCs 16 9.23-9.83 1 to 11 auction. Bid cover, however, Turnover in the secondary market of
    4,777 Total for January 2012 23 9,999 9.00-9.83 1 to 11 in the month, declined to corporate bonds plunged by 18% to
    Total for December 2011 76 22,237 9.25-12.50 1 to 20 1.83 times from 2.04 times Rs 51,494 crore from Rs 63,067 crore in
    Source: www.nseindia.com, News papers. in December (Table 12). the previous month. Turnover, however,
    government securities as they factored in In the secondary market, traded vol increased on NSE to Rs 19,152 crore
    the RBI’s move in the forthcoming third ume decreased by 45% to Rs 4,659 crore from Rs 17,365 crore in December. The
    quarterly credit policy review. Yields from Rs 8,475 crore. Yields also eased spread of corporate bonds across matu
    were lowest in the week on 20 January, correspondingly to 8.69% from 8.87% rity baskets over comparable govern
    when the RBI conducted an OMO auction, in December. The SDLs of Maharashtra, ment securities widened in the first fort
    purchasing securities worth Rs 10,435 Gujarat, Uttar Pradesh, West Bengal night owing to fallen yields of govern
    crore. In the fourth week, on 24 January, and Karnataka turned out to be the ment securities while it narrowed
    the CRR cut buoyed investors’ sentiments top traded. across almost all maturities in the sec
    and the turnover peaked at Rs 32,500 crore ond fortnight. In the second fortnight
    on that day. Yield nevertheless marched 2.4 Treasury Bills only the maturity bracket of seven years
    northward during the last week due to Four issuances of TBs were conducted in and above, saw a widened yield spread
    the absence of OMO auction (Table 9, January, raising Rs 40,000 crore in the due to a sharp fall in government secu
    p 109 and Table 10, p 110). aggregate. Cut-off yields progressively rities yields.
    Economic Political Weekly february 25, 2012 vol xlviI no 8 111
    EPW

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