MONEY MARKET REVIEW

Issues in Financial Sector I: Transparency in Monetary Policy

EPW Research Foundation

The time has now come to look rather dispassionately at some of the major issues raised in the report of the Committee on Financial Sector Assessment that was released in the midst of the global financial crisis. This exercise is being undertaken in three parts. The first of the three parts deals with the issue of transparency in monetary policy. The second and third parts will be published in the corresponding issues of April and May.

t is now almost a year since the sixvolume report of the Committee on Financial Sector Assessment (CFSA), chaired by the then Deputy Governor of the Reserve Bank of India (RBI), Rakesh Mohan, was released in the midst of the global financial crisis. Now that the economies across the world are regaining normalcy and the Indian economy is showing the promise of returning to its high growth trajectory, it would now be possible to look rather dispassionately at some of the major issues raised in the report. We would endeavour to do this in three parts. This part covers issues pertaining to transparency in monetary policy. It is agreed that in the globalised world of integrated financial markets, trans parency helps in establishing credibility, reducing uncertainty and, consequently, in strengthening the effectiveness of policies by the central bank, besides contributing to efficient functioning of markets and assessment of risks. As a matter of fact, it was the absence of relevant and timely information and data to market agents that contributed to the sudden loss of market confidence and collapse of the inter-bank markets in mid-2007. Transparency as an essential ingredient of the financial system has therefore regained emphasis; unlike on many other issues like regulation, there has been a total rethinking after the crisis.

(ii) redefining and clarifying the responsibilities of the RBI in regulation and supervision of various institutions in case of overlapping areas with other regulatory authorities; (iii) spelling out the criteria for removal of heads and members of the governing bodies of the central bank in the RBI Act; (iv) specifying the objectives of exchange rate management; (v) taking on record the directions that the central government may give to the RBI from time to time; (vi) setting up of the Debt Management Office (DMO) as a statute-based entity; (vii) changing the price index for measuring inflation from the present use of Wholesale Price Index (WPI) to an economy-wide Consumer Price Index (CPI) for policy purposes; (viii) strengthening the committee approach in monetary policymaking; and (ix) enhancing clarity on monetary policy statements by using simpler language. The CFSA exceptionally countered all these proposals, barring the one on using simpler language in monetary policy. Since it stood virtually in favour of maintaining the status quo, it would be useful to list out the comments and the reasons it made out.

1.1 Need for Review of Legislations

The need for a review of legislations was examined in the context of three dimensions, viz, the clarity of objectives and operating instruments, the regulatory reach of the RBI, and, its operational independence. As regards clarity of objectives, taking note of the preamble to the RBI Act, to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability and generally to operate the currency and credit system of the country to its advantage, the CFSA observed that in the years since the framing of the Act, the various objectives of monetary policy have been derived from these provisions in the Preamble through the interpretations of the monetary policymakers. The major objectives of monetary policy in India have been to maintain price stability and ensure an adequate flow of credit to the productive sectors of the economy. With economic liberalisation,

1 Taking Stock of the CFSAs Views

The Advisory Panel constituted by the CFSA identified certain gaps in compliance with regard to transparency in monetary policy and made certain recommendations. In a nutshell, its recommendations pertained to: (i) providing an explicit legislative mandate for the objectives of monetary policy after a Working Group comprehensively reviews the current legislation;

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

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the objective of financial stability has gained importance, apart from several other related objectives, such as maintaining credit quality. The interpretations have been changing over time to accommodate the changing circumstances. However, the RBI has always been transparently articulating its objectives and any change in inter se emphasis from time to time through its policy statements. The CFSA argued that currently, the objectives as evolved in practice over time in no way contravened the legislation. On the other hand, the present framework provided enough room and manoeuvrability for the RBI to operate monetary policy suited to evolving needs and circumstances. The multiple objectives with changing relative emphasis inter se, combined with the current multiple indicator approach, have stood the test of time and served the country well. The CFSA felt that significant changes to the statutory basis for defining monetary policy objectives may not be required and the current statutory provisions are flexible and clear enough for the RBI to define policy objectives and implement monetary operations to fulfil its objectives. Any rigid framework, explicitly incorporated in legislation or mandated otherwise, in the CFSAs view, would reduce this flexibility. However, one member of the CFSA felt that instead of multiple objectives, the RBI should primarily have the objective of price stability, financial stability and growth. As regards operating instruments available for monetary control, the existing legislation has vast and wide-ranging provisions, including the power of the lender of the last resort. This was amply illustrated at the time of providing accommodation and demand stimulus through various unconventional instruments in managing the recent crisis. In the context of the regulatory reach of the RBI, the Advisory Panel constituted by

the CFSA has observed that Graph A: Spot Quotations and Annualised Forward Premia for the US Dollar in the Domestic Inter-Bank Market the responsibilities of the 60 6 Monthly Averages (Daily) Working Days Spot Bank in regulating and (Apr 2007 to January 2010) Feb 2010 5 50 supervising entities like 4 rural financial institutions, 40 6-month 3 urban co-operative banks, 30 chit funds and nidhis are not 2 20 clearly specified in legisla1 1-month tion. The roles and res 10 0 ponsibili ties of the RBI as a 0 -1 regulator and supervisor may require clarification in the statute, as they and banker and debt manager to governare subject to considerable overlap with ments, its areas of regulatory and super those of the government and other regula- visory jurisdictions have expanded over tors. The RBI regulates regional rural banks, time, through other legislations, as well and rural co-operative banks, but they are as a series of amendments to the RBI Act. supervised by the National Bank for Agri- As regards market regulation, while tradiculture and Rural Development (NABARD). tionally the RBI has been regulating money, Again, though the powers of the RBI in foreign exchange and the government regulating the financial markets have securities markets, legal clarity has been been clearly defined in the amendment to established through an amendment to the the RBI Act in 2006, there is some overlap RBI Act. Along with this expansion, the between the central bank and the Securi- presence of the government and the setties and Exchange Board of India (SEBI), ting up of other regulators such as SEBI, which arises from the fact that while con- Insurance Regulatory and Development tracts related to government securities, Authority (IRDA) and Pension Fund Regumoney market securities, gold-related latory and Development Authority (PFRDA) securities and ready forward transactions have resulted in a situation where the regcome under the regulatory purview of the ulators have come to acquire generally RBI, the execution of such contracts on divided but some overlapping responsibilstock exchanges are regulated by the SEBI. ities across institutions and markets. The Advisory Panel therefore recomThe CFSA concluded that despite the mended that the multiple responsibilities overlapping responsibilities, sufficient legof the central bank would need to be well- islative authority is available with the RBI defined and the regulatory and supervisory to discharge its regulatory/supervisory jurisdictions of the RBI over varied cate functions. The latter has also been regugories of institutions and markets need to lating money, foreign exchange and govbe given greater clarity and re-definition ernment securities markets through its through amendments in the RBI Act and regulatory and supervisory powers prothe Banking Regulation Act. This should vided in several legislations. be done with a view to meeting current The CFSA also observed that it may not and future requirements. be possible to remove the overlap in finanThe CFSA observed, however, that cial regulation and supervision vis--vis though the RBI was set up in 1935 under an the government, as the roles of the latter, Act of 1934, with basic functions of note in this respect, are based on the Indian issue, bankers bank, reserve management Constitution. For example, co-operation is a subject on the State List in the Indian Table 1: Money Market Activity (Volume and Rates) Constitution and the state governments, Instruments February 2010 January 2010 being the representatives of the people, Daily Average Monthly Range of Weighted Daily Average Monthly Weighted Range of Weighted Volume (Rs Crore) Weighted Average Daily Volume Average Rate (%) Average Daily Rate derive their powers over the co-operative Average Rate (%) Rate (%) (Rs Crore) (%) bodies from this List for enhancing finanCall Money 5,741 3.22 2.56-3.28 5,961 3.28 2.71-3.52 Notice Money 1,117 3.25 2.41-3.30 1,651 3.26 2.38-3.50 cial inclusion, which would be difficult to Term Money @ 41 - 67 - 3.25-6.50 override in any way. CBLO 63,185 2.91 2.32-3.28 50,578 2.92 1.66-3.41 Taking these into account, the CFSA felt Market Repo 18,961 2.95 1.50-3.15 15,068 2.99 2.16-3.76 that there was no further requirement for @ Range of rates during the month. a thorough review of the RBI Act or other Source: www.rbi.org.in. and www.ccilindia.com.
Premia in percentage
Economic & Political Weekly EPW march 20, 2010 vol XLV No 12

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legislations to re define and clarify the responsibilities of the RBI in the regulation and supervision of various institutions. The CFSA recommended, however, that if necessary, further amendments could be considered to the BR Act to bring it in alignment with modern banking and financial practices. Yet another angle from which a review of the RBI legislation is sought is with regard to de jure operational independence of the central bank. The CFSA observed that, as per convention, the RBI enjoys independence vis--vis the executive arm of the State. In practice, through conventions, agreements and memoranda of understanding in specific areas, the RBI has gained, over time, a greater degree of operational independence in performing its monetary policy function. Also, there
Table 2: RBIs Market Operations (Amount in Rs crore)
Month/Year OMO (Net Purchase(+)/ LAF (Average Daily Sale(-)) Injection (+)/Absorption(-))

April-09 May-09 June-09 July-09 August-09 September-09 October-09 November-09 December-09 January-10 February-10

20,292 16,959 6,451 5,243 12,073 14,275 1,082 182 630 -8 -4

-95,915 -129,997 -123,153 -126,740 -124,488 -124,812 -104,047 -104,506 -77,153 -76,949 -80,674

has been proposed by aca- Graph B: Yield Curves for Dated Securities Weighted Averages for February 2010 8.50 demics, as also practitionCurrent month ers, for some time since 7.50 Previous month the reform process started 6.50 in the early 1990s. It 3-months ago appears that the govern5.50 ment of India considered these issues and the alter4.50 natives before announcing 3.50 the constitution of the 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 22 24 25 26 29 Financial Sector Legislative Reforms Commission in the last budget. It objectives and operations between debt is noteworthy that the announcement of management and monetary management this Commission is in the context of and, therefore, for the effective discharge strengthening transparency and public of both, functional separation could evenaccountability. This is indeed a major tually be desirable, the chairman personmove to consider all issues such as clarity of ally felt that the time is not yet ripe for the objectives, overlaps and gaps in regulation, complete separation of debt management operational independence, etc. For this from the RBI. The essential point to note is purpose, the Legislative Reforms Commis- that there is no fundamental difference of sion should have a broad representation opinion regarding the merit of separation from academics, market participants and of the debt management function, but the policymakers to get a balanced view in time is not as yet ripe to carry this through. framing/reframing various legislations. It should wait for fiscal consolidation and further development of markets. 1.2 Separating Debt and Monetary Management 1.3 Other Issues The issue of conflict between the debt On taking on record the directions of the management and monetary management central government to the RBI, the CFSA functions of the RBI has received consider- said that the issue of explicit direction by able attention since the mid-1990s. The the government would arise only when general recommendation for separation there is a difference of opinion between of debt management from the monetary the central bank and the government, authority is essentially premised on the and such a direction would have to be in perception of a conflict of interest between writing. It would be impractical to record monetary policy and debt management regular consultative processes and it is because of the conflicting pressures on the also not desirable to attempt to do so. direction of interest rates. On the issue of strengthening the role The government of India has gone of the Technical Advisory Committee on ahead and constituted a Middle Office, as Monetary Policy (TACMP), the CFSA observed a prelude to the setting up of a full-fledged that since there is neither voting nor a single Debt Management Office. The Chairman, decision-point like setting a targeted rate, CFSA while fully concur- Table 3: Foreign Exchange Market Select Indicators Reference Rate Appreciation(+)/ FII Flows Net Purchases BSE Sensex US Dollar ring with the current pro- (Last Friday Depreciation (-) (US $ Million) by RBI (Closing) Index of the Month) of Rs/$ (in %) (US $ Million) posal for the setting up of 50.20 1.45 1,790 (-) 1071 11,403 84.70 a Middle Office, which is Apr-09 May-09 47.30 5.80 3,577 (+) 131 14,625 79.43 akin to the role of the Jun-09 47.90 -1.20 1,059 (+) 745 14,494 80.43 DMO in the US Treasury, Jul-09 48.20 -0.60 2,727 (+) 800 15,670 78.45 purely in his personal Aug-09 48.90 -1.50 945 (+) 619 15,667 78.22 capacity recorded practi- Sep-09 48.05 1.75 4,263 (+) 539 17,127 76.86 cally a note of dissent in Oct-09 46.96 2.30 3,428 (+) 464 15,896 76.47 46.78 1.03 1,330 (+) 500 16,926 74.93 the report against separa- Nov-09 Dec-09 46.73 -0.53 1,873 (+) 525 17,465 78.22 tion in the immediate Jan-10 46.37 0.78 1,849 (+) 525 16,358 79.65 context. While acknowlFeb-10 46.37 0.30 445 Not available 16,430 80.44 edging that there could Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.gov.in), www.futures. be potential conflicts in tradingcharts.com
march 20, 2010 vol XLV No 12 EPW Economic & Political Weekly
Yield (% per annum)

Source: RBIs Weekly Stastical Supplement.

has hardly been any occasion for the abrupt removal of the governor/deputy governors or supersession of the Board, as such actions are fraught with serious reputation risks. The CFSA apprehended that by specifying procedures and reasons for the removal of the governor/deputy governor, as also for the supersession of the RBI Board, there is a potential for loss of the central banks well-established de facto independence. There are no doubt considerable merits on the stance taken by the CFSA. However, given the complexities in regulatory structure with considerable overlaps and lack of sufficient clarity in certain provisions relating to policy objectives, the option of reviewing legislations looks promising, though it would prove to be time-consuming. A review of the RBI Act and also the BR Act, along with several legislations affecting the financial sector structure and performance,

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the scope and need for strengthening the role of the TACMP by wider dissemination of the discussions are limited. On the choice of a representative inflation measure, the CFSA observed that given the economic and demographic diversity that exists in India, a combination of different measures of inflation gives useful information on diverse aspects, which is found to be meaningful in formulating an appropriate policy. Relying on a single index might result in loss of information regarding some crucial sectors and might be less useful in tackling the diversity of issues. The CFSA was also of the view that the policy on exchange rate management is transparently stated and is consistent with current monetary policy objectives.

The corporate bond market remained less active in February and the mobilisations through bonds recorded a marginal decline. The forex market saw the dollar strengthening against other major global currencies particularly the euro and the pound.

2.1 Money Market

Call money rates remained range-bound. The weighted average call rates ruled in a range of 2.71%-3.52% as in January. The overnight rates ruled in Table 5: Details of Central Government Market Borrowings (Amount in Rs crore) the range of 2.68%-3.21% Date of Auction Nomenclature Notified Bid Cover Devolvement on YTM in % and of Loan Amount Ratio Primary Dealers Cut-off Price (in Rs) in the first week of Febru05-Feb-10 7.02% 2016 R 3,000 1.74 Nil 7.51 (97.52) ary as it was just the 6.35% 2020 R 3,000 1.96 Nil 7.68 (90.90) beginning of the new 8.24% 2027 R 2,000 2.56 Nil 8.32 (99.25) reporting fortnight. The Total for February 8,000 2.03 Nil short-term rates hard- Total for January 27,000 2.40 Nil ened a bit during the sec- R: Re-issue. Source: RBI press releases. 1.4 Conclusion ond week, ahead of the Overall, one gets an impression that trans- reporting Friday and showed distinct sta- Rs 3,789 crore between 15 January and parency issues of monetary policy may need bility during the third week even though 15 February 2010. a review even if it leads to maintenance of there was a hike in CRR with effect from The LAF auctions showed that the daily the status quo. As regards the framework, the fortnight beginning 13 February 2010. average amount absorbed through reverse the monetary targeting approach replaced The rates ranged between 2.56% and repo in February increased to Rs 81,000 the earlier credit planning in mid-1980s. 3.28% during the last week of the month. crore from around Rs 77,000 crore in the This approach gave way to the multiple The monthly weighted average rate of previous month. The RBIs open market indicators approach since April 1998, collateralised borrowing and lending obli- operations (OMO) showed net sale of a which had its sway for more than a decade. gations (CBLO) also showed a similar meagre Rs 4 crore (Table 2, p 24). The time is perhaps ripe now to take a trend, and the rates remained flat at 2.91% relook in the context of evolving views in the in February compared to 2.92% in January. 2.2 Forex Market aftermath of the global financial turmoil. Similarly, the daily average-notice money During the month of February, the dollar The pros and cons of alternative solutions rate and market repo rate also remained appreciated against most of the other as discussed in the CFSA report provide a range-bound, but overall, firmed up dur- major currencies even as it depreciated fertile ground for such examination. ing the month. against the rupee and the Japanese yen. The daily average volume of call money The appreciating value of commodities 2 Money, Forex, and Debt Markets transactions declined marginally by 4% to such as gold and other metals restricted Despite the hike in the cash reserve ratio Rs 5,741 crore in February from Rs 5,961 the strengthening of the US dollar index (CRR) by 75 basis points, the liquidity con- crore in January. The daily average-notice and, during February, it was up by about dition in the system was easy, reflected money volume also came down to Rs 1,117 100 basis points over the previous month. in the higher participation in reverse crore in February from Rs 1,651 crore in During the initial part of the month, the repo auctions of the liquidity adjustment January. The major collateralised instru- huge foreign institutional investment (FII) facility (LAF). ments, viz, CBLO and market repo volumes outflow from the markets kept the rupee under pressure and also restricted the Table 4: Turnover in the Foreign Exchange Market* (Amount in $ billion) equity markets from improving their perMonth Merchant Interbank Spot Forward Total Apr-09 178.2 -(16.8) 577.4 -(14.5) 317.2 -(22.8) 438.5 -(8.4) 755.6 -(15.1) formance. FII flows, however, recovered May-09 214.2 (20.2) 675.3 (16.9) 411.0 (29.6) 478.5 (9.1) 889.5 (17.7) during the second half of the month and Jun-09 232.1 (8.3) 705.9 (4.5) 453.0 (10.2) 485.0 (1.4) 938.0 (5.4) inflows into equity market increased to Jul-09 209.2 -(9.9) 699.1 -(1.0) 439.4 -(3.0) 468.9 -(3.3) 908.3 -(3.2) $2.7 billion in February from an outflow of Aug-09 193.5 -(7.5) 543.8 -(22.2) 368.0 -(16.3) 369.4 -(21.2) 737.4 -(18.8) $0.9 billion in January. Sep-09 211.8 (9.5) 580.6 (6.8) 421.1 (14.4) 371.4 (0.5) 792.4 (7.5) The rupee started appreciating against Oct-09 243.3 (14.9) 594.7 (2.4) 440.6 (4.6) 397.4 (7.0) 838.0 (5.8) the dollar from the beginning of the month Nov-09 213.1 -(12.4) 573.4 -(3.6) 426.9 -(3.1) 359.6 -(9.5) 786.4 -(6.2) and continued the trend till 3 February and Dec-09 218.2 (2.4) 603.5 (5.3) 421.4 -(1.3) 400.3 (11.3) 821.7 (4.5) rose to Rs 46.04 per dollar with news of Jan-10 213.2 -(2.3) 653.4 (8.3) 466.2 (10.6) 400.4 (0.0) 866.6 (5.5) * Includes trading in FCY/ INR and FCY/FCY. Indias strong economic recovery gathering Figures in brackets are % change over the previous month. momentum. The purchasing managers Source: Weekly Statistical Supplement, various issues.
Economic & Political Weekly EPW march 20, 2010 vol XLV No 12

showed, in contrast, an increasing trend; the volumes increased by 25% and 26%, respectively during 10 January to 10 February 2010 (Table 1, p 23). There was a significant improvement in the volume of the outstanding certificates of deposit (CD), which expanded by Rs 16,258 crore to Rs 2.65 lakh crore between 18 December 2009 and 15 January 2010. Similarly, the volume of outstanding commercial paper (CP) also increased by about

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index compiled by HSBC Holdings and Market Economics showed that Indias manufacturing output rose the most in 17 months and stood at 57.6 in January. From 4 February, the rupee started to depreciate following the unexpected job losses in the US, and fell to Rs 46.81 per dollar by 8 February. Dollar buying by importers and the weakness of the domestic equity indices also exerted pressure on the rupee. The gradual withdrawal of foreign capital from the domestic markets also fuelled the rupee to depreciate further. On 9 February, the rupee bounced back and stood at Rs 46.68 per dollar and continued to appreciate until 17 February and rose to Rs 46.02 against the dollar. The rupees gaining streak was arrested for two days following the strengthening of the greenback against other global currencies. However, on 22 February, the rupee appreciated marginally, tracking the domestic
Descriptions

equity markets. The dollar weakened during the last week of the month but recovered after the German confidence data. The strengthening of the dollar against the euro and other major currencies in the overseas markets and also demand from oil companies restricted the rupee to appreciate further and the currency ended the month at Rs 46.23 per dollar on 26 February (Table 3, p 24). The 3-month and 6-month forward premia showed a mixed trend during the beginning of the month as there was interest payment after the announcement of the inflation numbers during the initial part of the month. However, exporters sold forward dollars, which led to receiving interest and softening of the rates across 3-month and 6-month maturities. While the 1-month premium on 26 February stood firmer at 2.99% (2.59% in January-end), the 3-month at 3.03% (3.19%) and 6-month premium
February First Week (5th) AMT YTM

ending at 2.77% (2.98%), showed some hardening, respectively (Graph C, p 27). During the month of January, the turnover in the foreign exchange market recorded a growth of 5.5% over December, following the appreciation of rupee against other currencies from the past two months. The turnover in the merchant segment showed a dip of 2.3% while interbank transactions recorded a growth of 8.3% over the previous month. The spot market turnover witnessed a marked improvement of 10.6%, while that of forward market transactions remained almost unchanged during the same period (Table 4, p 25). The currency futures market witnessed a marginal improvement during February and the average daily turnover increased by 5% over January. The average daily turnover in the MCX-SX and NSE stood at Rs 16,981 crore and Rs 12,993 crore respectively, aggregating Rs 29,974 crore. The total
Three Months Ago (November 2009) AMT YTM Six Months Ago (August 2009) AMT YTM

Table 6: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)
Last Week (26th) AMT YTM Total for the Month AMT YTM Previous Month (January 2010) AMT YTM

1 Treasury Bills B 182-Day Bills C 364-Day Bills

7,287.12 3.80 3.75 4.81 55.00 947.74

9,719.49 6,765.16 1,102.53 1,851.80 3.69 4.11 3.55

25,903.40 18,910.53 2,292.33 4,700.54 4.16 3.98

45,918.40 3.58 3.76 3.81 3,628.38 5,408.69

12,661.77 7,628.75 2,431.08 2,601.94 3.23 3.57 3.87

11,477.00 7,473.00 2,075.00 1,929.00 3.25 3.43 3.73 6.97

A 91-Day Bills 6,284.38

3.78 36,881.33

2 GOI Dated Securities 40,475.74 7.65 35,878.26 7.46 1,47,852.12 7.52 2,26,991.91 7.20 2,08,088.37 7.27 1,27,736.00 Year of (No of Maturity Securities) 2010 3 167.90 4.04 595.45 4.19 1,987.55 4.22 9,822.73 4.01 2,655.15 3.91 4,778.00 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2032 2034 2035 2036 2039 7 4 8 4 5 4 6 4 7 6 2 1 4 2 2 1 1 1 1 647.60 360.75 705.05 546.60 50.69 10.69 1,132.41 40.30 46.50 9.13 801.09 0.15 1.07 503.72 14.53 4.00 1.00 - - 5.12 6.18 6.89 7.31 7.53 7.63 7.85 7.90 7.95 7.82 8.13 8.21 8.29 8.49 8.24 8.55 8.36 8.32 8.32 8.43 - - 7.95 596.50 968.70 865.35 1,356.52 449.00 7,579.74 190.00 - 3,570.35 18,346.50 0.27 60.00 17.01 22.64 - 82.98 985.57 1.75 181.66 1.00 7.00 - 0.27 2,137.56 4.84 6.21 6.82 7.18 7.46 7.48 7.63 - 7.79 7.64 7.83 8.07 8.23 8.24 - 8.16 8.29 7.90 8.29 8.25 8.08 - 8.29 8.18 5,528.84 5,415.45 2,281.97 3,044.38 2,992.48 31,433.44 297.14 28.52 7,150.37 81,772.04 57.97 364.42 225.69 827.24 0.15 87.25 3,776.40 3.10 492.07 50.00 14.90 20.50 0.27 6,785.97 4.96 6.21 6.89 7.24 7.54 7.68 7.88 7.86 7.77 8.12 8.12 8.16 8.48 8.24 8.17 8.35 8.12 8.32 8.42 8.17 8.35 8.29 8.11 11,900.34 16,921.08 1,234.87 8,793.68 2,889.79 303.51 70.01 39,462.14 87,576.09 300.03 428.54 362.96 739.11 15.75 2,662.31 4,983.21 3.96 2,612.89 224.59 122.62 196.25 13.25 8,912.40 5.21 6.22 6.84 7.20 7.43 7.41 7.51 7.71 7.71 7.55 7.77 8.06 8.26 7.91 8.34 8.33 8.25 8.16 8.30 8.26 8.22 8.27 8.06 8.16 6,369.88 5,595.40 1,066.65 4,505.00 10,470.17 28,028.62 2,338.84 110.05 70,383.66 70,465.23 333.29 107.13 1,083.23 287.77 0.90 15.30 2,141.84 2.66 284.53 1,807.01 7.08 9.00 20.00 4,187.36 5.46 6.32 6.78 7.04 7.28 7.25 7.56 7.64 7.25 7.58 7.77 7.91 8.28 8.12 8.23 8.33 8.18 8.13 8.30 8.23 8.16 8.28 8.29 7.95 6,481.00 1,985.00 2,184.00 32,155.00 10,710.00 16,674.00 819.00 160.00 25,817.00 11,596.00 6,908.00 291.00 574.00 45.00 1.00 307.00 4,545.00 3.00 395.00 283.00 954.00 70.00 - 4,175.00 7 1,832.60

4.29 5.53 6.19 6.74 6.86 7.02 7.16 7.25 7.26 7.20 7.47 7.63 7.68 8.02 7.86 7.96 7.94 7.98 7.92 8.00 7.99 7.99 8.01 7.85

4 9,296.18

7.58 35,352.20

3 24,303.78

3 State Govt Securities 1,892.97

Grand total (1 to 3) 49,655.83

47,735.31 1,80,541.49 2,81,822.71

2,24,937.50 1,43,387.54

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

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2.3 Government Securities Market

The tightening stance of monetary policy, strong signals of pickup in economic acti vity, and the huge borrowing programme for 2010-11 influenced expectations about interest rates in the coming months. Yield rates have firmed up both in the primary and secondary market segments. In February, only one auction for central government securities was held on 5 February 2010 for an aggregate notified amount of Rs 8,000 crore as compared to three auctions in January 2010 for notified amounts of Rs 29,000 crore. By 5 March 2010, more than 92% of the gross budgeted borrowing stands completed. The only auction in February comprised re-issue of 7.02% 2016, 6.35% 2020 and 8.24% 2027 securities for notified amounts of Rs 3,000 crore, Rs 3,000 crore and Rs 2,000 crore, respectively aggregating to Rs 8,000 crore. The bid-cover ratio, indicative of investors interest, had plummeted to 2.03 in February from 2.40 in January. In a rising interest rate scenario, investors have become cautious. The stepup in credit demand also contributed to a lower appetite for government securities. Despite the fact that two securities out of
Descriptions

Table 7: Predominantly Traded Government Securities (Amount in Rs crore)

Last Week (26th) AMT YTM February First Week (5th) AMT YTM Total for the Month AMT YTM Previous Month (January 2010) AMT YTM Three Months Ago (November 2009) AMT YTM Six Months Ago (August 2009) AMT YTM

GOI Dated Securities 7.55 , 2010 6.57 , 9.39 , 7.40 , 7.27 , 6.07 , 7.32 , 6.49 , 7.02 , 6.90 , 6.35 , 8.24 , 8.28 , 2011 2011 2012 2013 2014 2014 2015 2016 2019 2020 2027 2032

167.60 460.00 97.30 996.60 360.75 20.00 500.00 535.85 9,231.00 1,080.08 24,303.68 503.22 12.03 40,475.74

4.03 5.04 5.32 6.11 6.89 7.30 7.30 7.53 7.63 7.95 7.82 8.36 8.33 7.65

435.43 116.50 40.00 723.50 750.00 6.40 1,265.03 374.00 7,439.74 3,560.35 18,266.50 985.57 172.66 35,878.25

4.11 4.74 5.10 6.18 6.83 7.19 7.18 7.45 7.48 7.79 7.65 8.29 8.29

1,122.03 3,455.50 1,222.44 2,860.15 2,141.75 102.31 2,298.93 2,791.93 31,056.76 6,915.68 81,420.69 3,775.20 355.57

4.07 4.88 5.21 6.14 6.89 7.25 7.21 7.54 7.58 7.86 7.79 8.35 8.32

Yield (per cent per annum)

number of contracts in the exchange-traded currency futures segment showed a dip of 6% while the notional value remained flat at around Rs 5,69,000 crore compared to the previous month. The open interest position at the end of February decreased by 3% over January-end.

the three auctioned have Graph C: Trend in Call Money Rates and Yields of Dated Securities 16 been the most traded 14 securities, the auction Call money 12 failed to appeal to inves10 tors. The primary yields 10 year yield 8 in auctions of comparable 6 maturities have firmed 5 year yield 4 up in February compared 1 year yield 2 to January. 4/2008 6/2008 8/2008 10/2008 12/2008 2/2009 4/2009 6/2009 8/2009 10/2009 12/2009 2/2010 Unlike in January, when there was a step-up in trading activity, Overall, the lukewarm sentiment preFebruary witnessed a substantial fall in vailing in the secondary market for govsecondary market trade volumes. In the ernment securities had resulted in the secondary market, the total traded amount shifting of the yield curve upward over had gone down by almost 35% to Rs 1,47,852 the previous month and the previous crore in February from Rs 2,26,992 crore three months yield curves (Table 6, p 26, in January. The lower trading interest Tables 7, 8 and Graph C). impacted the secondary market yields of Yet another feature anticipating an government securities. The monthly expected increase in short-term interest weighted average yield in February ruled rates has been the widening of spread at 7.52% against 7.20% in the previous between one- and five-year maturities month. The fall in prices over the month which have broadened to 258 bps from depressed the demand for Table 8: Yield Spreads (Weighted Average): Central Government Securities government securities February 2010 (bps) Yield Current Month Previous Three Six Months (Table 5, p 25 ). Spread in BPS Last Week First Week Entire Month Month Months Ago Ago The 6.35% 2020 and 1 Year- 5 Year 241 262 258 222 182 149 7.02% 2016 were the 5 Year-10 Year 29 18 23 12 30 45 42 47 79 65 49 most traded securities, 10 Year-15 Year 1 Year-10 Year 270 280 281 234 212 194 accounting for 76.1% of Source: As in Table 5. the total traded volume of central government Table 9: Details of State Government Borrowings (Amount in Rs crore) of Auction Number of Notified Bid Cover YTM at Cut-off Weighted securities in February. Date Participating Amount Ratio Price (in %) Average States Yield (%) The total traded amount 02-Feb-10 7 5,824 2.28 8.36 8.33 of the 10-year benchmark 15-Feb-10 3 3,477 3.26 8.57 8.54 security, 6.35% 2020 was 23-Feb-10 7 3,933 3.68 8.51 8.49 Rs 8,142 crore with aver- Total for February 17 13,234 2.96 8.46 8.43 age monthly yield-to- Total for January 13 8,189 3.47 8.30 8.26 Source: RBI press releases. maturity (YTM) of 7.79%.

4,321.33 3,315.00 4,786.39 11,432.45 691.65 287.80 8,066.37 2,456.08 35,330.25 39,362.46 86,189.84 4,931.38 2,523.16

3.99 4.87 5.45 6.26 6.79 7.29 7.19 7.39 7.41 7.71 7.60 8.25 8.30

1,485.15 1,940.00 2,585.00 5,305.00 1,031.35 415.00 3,540.00 10,045.17 27,837.58 70,313.66 70,465.23 1,986.44 149.25

4.34 5.01 5.63 6.31 6.78 7.13 7.01 7.28 7.25 7.25 7.58 8.18 8.32

1,716.26 400.00 4,761.12 445.11 2,059.20 30,961.96 - 10,613.80 13,782.36 25,683.74 11,595.57 4,545.06 233.53

4.53 5.55 5.55 6.11 6.73 6.86 7.02 7.16 7.20 7.47 7.98 7.95 6.97

Total (All Securities)

7.46 1,47,852.12

7.52 2,26,991.91

7.20 2,08,088.37

7.27 1,27,735.59

(-) Means no trading. YTM = Yield to maturity in percentage per annum. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: As in Table 5. Economic & Political Weekly EPW march 20, 2010 vol XLV No 12

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MONEY MARKET REVIEW

222 bps in the previous month. The spread between one- and ten-year maturities had also widened to 281 bps in February against 234 bps in January. The primary market was more active in the state government loans (SDLs) segment. A total of as many as 17 state governments auctioned SDLs during February with a 62% increase in the amount accepted in the auctions over the last month. As auctions of the central government securities practically halted during the month, state governments were in advantage and conducted three auctions during February. The aggregate notified amount totalled Rs 13,234 crore in February against Rs 8,189 crore in the month of January. The YTM at cut-off price at 8.46% in February was higher as compared to 8.30% in January. The weighted average yield also firmed up in the month under review to 8.43% from previous months 8.26%. The bid-cover ratio had come down to 2.96 in February as compared to 3.47 of January, which showed that in the case of SDLs also, investor interest was less. The cut-off yield showed a pickup from 8.36%

on 2 February to 8.51% in 23 February auctions (Table 9, p 27).

2.4 Treasury Bills

Primary issues of Treasury Bills (TBs) showed a mixed picture. The total volume of 91-day TB issues were reduced by Rs 6,000 crore to Rs 22,000 crore in the month of February while the issues remained flat for 182-day TBs at Rs 3,000 crore. For 364-day TBs, the issues went up by threefold to Rs 6,000 crore in February. Including all maturities, the total volume was marginally less at Rs 31,000 crore in February as against Rs 33,000 crore of the previous month. Both the cut-off yields and weighted average yields firmed up in the case of 91-day TBs to 4.11% and 4.08% from 3.86% and 2.80% respectively in the previous month. The bid-cover ratio, however, improved marginally to 2.08 in February from last months 1.97, reflective of relatively higher investor interest in shorter maturities. For 182-day TBs, amount of primary issuance remained static. Nevertheless, the bid-cover ratio had fallen to 2.51 in February from 3.59 in the Table 10: Auctions of Treasury Bills (Amount in Rs crore) previous month, indicatDate of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted Accepted Ratio Yield (%) Average Price (Rs) Average ing lower investor inter Yield (%) Price (Rs) est. The cut-off yield and A: 91-Day Treasury Bills weighted average yield 03-Feb-10 7,000 1.90 4.09 4.05 98.99 99.00 surged to 4.52% and 10-Feb-10 5,000 2.27 4.09 4.05 98.99 99.00 4.46% in February from 17-Feb-10 5,000 1.95 4.13 4.09 98.98 98.99 24-Feb-10 5,000 2.26 4.13 4.13 98.98 98.98 4.13% each in the previTotal for February 22,000 2.08 4.11 4.08 98.99 98.99 ous month. Total for January 28,000 1.97 3.86 3.80 99.05 99.06 With a threefold increase B: 182-Day Treasury Bills in the 364-day TB issues to 03-Feb-10 1,500 1.85 4.49 4.39 97.81 97.86 Rs 6,000 crore in Febru 17-Feb-10 1,500 3.16 4.55 4.53 98.78 97.79 ary, the yields both cutTotal for February 3,000 2.51 4.52 4.46 98.30 97.83 off and weighted average Total for January 3,000 3.59 4.13 4.13 97.98 98.01 firmed up. The cut-off C: 364-Day Treasury Bills yield increased to 4.95% 10-Feb-10 3,000 2.81 4.88 4.84 95.36 95.40 from 4.67% and the 24-Feb-10 3,000 2.18 5.01 4.97 95.24 95.28 weighted average yield Total for February 6,000 2.49 4.95 4.90 95.30 95.34 Total for January 2,000 4.61 4.67 4.64 95.55 95.58 from 4.64% to 4.90% Source: RBI's press releases. between January and February 2010 (Table 10). Table 11: Details of Commercial Bond Issues during February Institutional Category No of Issues Volume in Range of Range of Performance in the sec Rs Crore Coupon Rates Maturity in Years and Months ondary market of TBs was FIs/Banks 3 1,435 6.45-9.20 3-10 also subdued as in the NBFCs 4 1,550 8.40-9.00 1.6-10 case of dated central govCentral Undertakings 3 6,260 6.00-8.80 5-20 ernment securities and Corporates 3 2,200 8.00-10.00 2-7 SDLs. The total traded volTotal for February 2010 13 11,445 6.00-10.00 1.6-20 ume had drastically come Total for January 2010 25 11,681 6.05-10.35 1.5-15 down by almost 44% to Source: Various media sources.

Rs 25,903 crore in February from its previous months traded volume. The 91-day TBs had been the main contributor to the decline in the monthly traded volume, which dropped by 50% to Rs 18,910 crore in February from its previous month level of Rs 36,881 crore (Tables 6 and 7).

2.5 Corporate Bond Market

Though there has been a firming up of coupon rates, the corporate bond market activity during the month of February showed central undertakings and corporates coming into the market, indicating the need for larger investible funds. The aggregate amount mobilised in February stood at Rs 11,445 crore from 13 issues, compared to Rs 11,681 crore raised from 25 issues in January. The availability of total green shoe option increased from Rs 1,150 crore in January to Rs 2,390 crore in February. In contrast to January, there was a slowdown in the mobilisation from the financial sector comprising banks/financial institutions (FIs) and non-banking financial corporations (NBFCs) contributing 13% and 14% of the total mobilisation. The banks/FIs made three issues, raising an amount of Rs 1,435 crore and the NBFCs, four issues for an amount of Rs 1,550 crore. The banks/FIs issued perpetual and lower tier II bonds, while NBFCs favoured non-convertible debentures (NCDs). For the lower maturity, the coupon rate was in the range of 6.45-8.50%, while for the higher maturities the issues carried coupons in the range of 8.92-9.20%. Most of the issues carried either AAA ratings or AA+ ratings except UCO Bank which carried a coupon rate of AA- and AA bt Crisil and Care. L&T Finance offered green shoe option of Rs 250 crore for its NCDs. The central undertakings accounted for 55% of the total amount mobilised with three bond issues for an aggregate value of Rs 6,260 crore. The coupon rate ranged from 6% to 8.80% for maturities of 5 to 20 years. The highest issue came from the Indian Railway Finance Corporation, which raised Rs 5,000 crore at coupon rates ranging from 6% to 6.70% for 5-7 year maturity bonds. The private corporate sector tapped the market with two NCDs and one bond for a total amount of Rs 2,200 crore at coupon rates of 8% to 10% for 2 to 7-year maturities (Table 11).

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march 20, 2010 vol XLV No 12 EPW Economic & Political Weekly