MONEY MARKET REVIEW

Crunching the Liquidity Crunch

EPW Research Foundation

debt management function of the central government alone from the RBI may result in further complexities to both debt and monetary management functions.

1.1 Structural Factors

There has been an extreme tightening of liquidity in the money market since June, the result of both structural (a rapid growth in credit and a slower growth in deposits) and frictional (higher than anticipated receipts from the broadband auctions and large tax receipts) factors. The frictional factors could have been handled with better cash management practices by both central and state governments that are in harmony with debt management operations. In the absence of such an approach, merely separating the debt management function of the central government from the Reserve Bank of India may result in further complexities to both debt and monetary management functions. An alternative solution would be the creation of a Debt Management Corporation as a subsidiary of the RBI with shareholding by both central and state governments to handle debt management.

1 Introduction
t has been a period of a severe liquidity crunch since about June 2010 and this is expected to turn worse in the coming weeks before any respite is seen perhaps towards the end of the scal year. RBI Governor D Subbarao has commented that a combination of two factors has given rise to the tight liquidity situation. The rst is the structural factor, viz, the credit pick-up being faster than the deposit growth. As on 26 November 2010, the increase in credit offtake was 22.6%, year on year, but the deposit growth remained at 14%. The second is the frictional factor arising from higher than expected revenues realised by the central government through 3G and broadband wireless auctions, disinvestment and indirect tax collections. Without a corresponding increase in expenditure, the resultant increase in governments cash balances blocked a reverse ow of liquidity into the system. While these are proximate causes, the deep-rooted problem appears to be the lack of adequate attention being paid to having an integrated approach to governments cash and debt management, and adequately attuning liquidity management to both, consistent with the monetary policy stance. It is understandable that governments cash ows are to some extent exogenous, but rened cash management practices in coordination with debt management can minimise frictions caused by such movements. At present, the system functions very passively with too much of complexity causing avoidable frictional problems and also straining liquidity and interest rate management by the RBI. Against the above backdrop, we try to discern the factors underlying the current liquidity crunch and attempt to show how renements in cash and debt management functions of both the central and state governments can help in tiding over frictional problems caused particularly by uctuations in government cash ows. In the absence of such an approach, mere separation of
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During the current nancial year from April to November, there was persistent depletion in sources of liquidity, while increasingly larger pressures emerged from the demand side. First, the growth in aggregate deposits was only of the order of Rs 3.63 lakh crore against the growth in bank credit and SLR and non-SLR investments of Rs 4.45 lakh crore. Graph A (p 28) shows the progressive increase in aggregate deposits and bank credit over the base of March end 2009 till 19 November 2010. It is seen that while during most of the nancial year 2009-10, there was not much of a gap, there has been a yawning gap from the beginning of scal 2010-11. Second, as a consequence, the growth in M3 remained subdued at around 17% against more than 19% during the comparable period last year. With reserve money growth during the same period turned out to be larger at 23%, contributed in particular by the growth in currency component, the incremental money multiplier shrunk to 2.7 during 2010-11, up to November, compared to the value of 3.7 during the
Table 1: Finances of Government of India (April-October) (Rs crore)
SL No Budget Heads April - October 2010-11 2009-10 Actual Actual

Total Receipts of which: Revenue Receipts (a+b)

617435 536861 (15.0) (31.5) 447625 284479 (57.3) -(1.7)

(a) Tax Revenue (Net to centre) 271693 213896 (27.0) -(8.0) (b) Non-Tax Revenue 2 Total Expenditure (a) Revenue Expenditure (b) Capital Expenditure 3 4 Revenue Deficit Fiscal Deficit 175932 (149.3) 70583 (23.8)

617435 536861 (15.0) (31.5) 542455 491273 (10.4) (30.5) 74980 (64.5) 45588 (42.6)

94830 206794 -(54.1) (137.6) 162336 245075 -(33.8) (109.3)

Team led by K Kanagasabapathy and supported by V P Prasanth, Rema K Nair, Anita B Shetty, Shruti J Pandey, Vishakha G Tilak, Deepa Vaidya and Sharan P Shetty.
Economic & Political Weekly EPW

Actuals are unaudited provisional. Figures in brackets are percentage growth over the corresponding period of the previous year. Source: (http://www.cga.nic.in/data0212.htm) and Central Government Budget Documents, various issues.

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corresponding period in 2009-10. Third, foreign currency assets with RBI as a source of primary money had been halted because of the central banks non-intervention policy, despite huge inows of foreign capital. Fourth, the primary issues in stock market of equity and debt were of the order of Rs 47,000 crore of which about Rs 28,000 crore were in the last two months. Finally, the capital market turnover increased by more than Rs 1 lakh crore placing huge demand for short-term funds.

1.2 Frictional Factors

The frictional factor is the trend in government nances leading to accumulation of huge cash balances. The data on central government nances available up to October shows that the tax revenue remained buoyant showing a growth of 27% compared to (-)8% last year. The non-tax revenue growth was rather phenomenal on account of the windfall proceeds from broadband auctions. The total revenue receipts increased by 57% compared to (-)1.7% during the last year. Despite these, the total receipts including capital receipts did not show any drastic increase. On the expenditure side, while capital expenditure increased signicantly by 64.5%, compared to an increase of only 42.6% last year, the revenue expenditure seemed to have been compressed and showed only an increase of 10.4% compared to 30.3% up to October last year (Table 1, p 27). The government is reported to have obtained parliamentary approval for additional expenditure involving an additional cash outgo of about Rs 74,000 crore for the year 2010-11. As a result, while it may be expected that government will start spending the money in the coming months in the last quarter of the year, the huge build-up of cash balances over the last several weeks no doubt contributed to the severe cash crunch in the system testing the capacity of the central bank to tide over the situation. One of the reasons in fact for the sluggish growth of aggregate deposits is the blocking of government funds from owing back into the system.

1.3 Complexities in the Build-up of Cash Surplus

The recent experience shows that the governments cash management needs

sophistication and renement. Both receipts side and expenditure side of budgetary management should be looked at for striking a balance between the two. At present, it is very much cost inefcient. While some regulations and systems have been developed to handle cash decits, the system of handling cash surpluses of both state and central governments at present is not only very complex but it is also very passive, offering no incentive for governments to introduce efcient cash management practices. Second, the system does not allow in any way a return ow of such surpluses to the market, except by way of increasing expenditures. As a result, there is a tendency to treat such surpluses exogenous to the system and allow the frictions to be unwound totally in an unplanned manner. The system is characterised by the following features: Whenever there is a surplus balance in the central government account, up to a certain limit, it is invested in Government of India securities held by the RBI. Thus, a substantial balance is invested in governments own securities thereby any interest accrued is appropriated by the government itself, saving to that extent the net interest outgo on such securities held. Since this transaction is between the government and the RBI, there is no ow of money back into the market. Furthermore, since the quantum of such investments is not reported or published, one can surmise that the actual reported cash surpluses of the government is mostly understated. If it is assumed that at least half of the surplus is invested in this

Graph A: Progressive Increase in Aggregate Deposits, Bank Credit Plus Investment

1125000 1025000 925000 825000 725000 625000 525000 425000 325000 225000 125000 25000 -75000 -175000

Increase in Bank Credit + Aggregate Investments (A)

Increase in Aggregate Bank Deposits (B)

Difference (B-A)

8/10

11/10

12/10

10/10

9/10

4/10

5/10

6/10

7/10

8/10

9/10

1/10

2/10 3/10

4/10

5/10

6/10

7/10

10/10

Table 2: Weeks When Central Government Cash Balances Were in Huge Surplus and Corresponding Net Market Borrowings (Rs crore)
Weeks Ending Cash Balances Progressive (As Reported Net Market in WSS) Borrowings$ Increase in 14 Days Other Treasury Net Market Treasury Bills Bills Borrowings Outstanding @ Outstanding

2010-11 26-Nov-10 19-Nov-10 12-Nov-10 5-Nov-10 29-Oct-10 22-Oct-10 15-Oct-10 8-Oct-10 1-Oct-10 24-Sep-10 17-Sep-10 23-Jul-10 16-Jul-10 09-Jul-10 02-Jul-10 25-Jun-10 18-Jun-10 2009-10 22-Jan-10 15-Jan-10 08-Jan-10 01-Jan-10 25-Dec-09 18-Dec-09 30-Oct-09 23-Oct-09 16-Oct-09 09-Oct-09 02-Oct-09 25-Sep-09 18-Sep-09 11-Sep-09 04-Sep-09 28-Aug-09 21-Aug-09 14-Aug-09 07-Aug-09 31-Jul-09

43,525 36,550 33,459 12,768 36,559 25,662 24,410 20,580 10,202 15,577 19,758 15,166 6,579 18,316 10,575 26,531 5,687 17,539 10,221 19,150 37,193 53,538 48,394 19,491 12,842 11,443 37,558 38,340 30,875 30,166 101 31,114 31,462 9,490 38,595 100 10,413

2,75,813 2,64,813 2,53,813 2,42,818 2,42,818 2,33,966 2,22,966 2,11,966 2,00,966 1,89,966 1,89,966 1,32,884 1,19,884 1,07,884 98,134 95,277 93,391 3,89,911 3,79,911 3,69,911 3,74,911 3,74,911 3,65,911 3,19,911 3,09,911 2,99,911 2,89,911 2,89,911 2,77,911 2,66,911 2,55,911 2,43,911 2,31,911 2,19,911 2,07,911 2,07,911 1,95,911

11,000 11,000 10,995 0 8,852 11,000 11,000 11,000 11,000 0 57,082 13,000 12,000 9,750 2,857 1,886 10,000 10,000 -5,000 0 9,000 46,000 10,000 10,000 10,000 0 12,000 11,000 11,000 12,000 12,000 12,000 12,000 0 12,000 -

73,659 67,405 65,329 70,446 73,252 66,157 62,152 68,668 80,744 75,453 70,817 89,110 86,103 84,970 96,805 80,562 77,143 1,02,544 98,110 1,03,304 1,11,461 1,03,007 97,410 92,240 81,368 81,107 91,585 92,535 78,078 72,009 76,771 77,332 76,485 75,486 79,705 89,466 79,159

1,17,769 1,20,269 1,23,769 1,23,744 1,28,278 1,26,523 1,24,223 1,23,223 1,21,180 1,19,680 1,19,714 1,21,414 1,25,914 1,30,673 1,34,873 1,34,179 1,36,679 1,34,765 1,34,765 1,34,765 1,34,765 1,34,765 1,34,265 1,34,981 1,35,981 1,37,013 1,38,888 1,39,888 1,38,888 1,38,855 1,38,855 1,38,855 1,40,355 1,41,381 1,39,881 1,41,339 1,41,339

@ - There is a lag of two days. Predominant part represents investments by State Governments. $ - Inclusive of MSS desequestration during 2009-10. WSS - Weekly Statistical Supplement (RBI).

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extraordinary strain and stretching the liquidity win8 Call Rates dow beyond tolerance limits. 7 The governments cash sur6 plus, though temporary in nature, causes the interest 5 CBLO Rates rates to overshoot, besides cre4 ating a maturity imbalance in Repo RatesOutside the RBI 3 banks balance sheets. 2 The liquidity tightness led 1 to a consistent increase in money market rates in recent 0 10/30 11/1 11/3 11/5 11/7 11/9 11/11 11/13 11/15 11/17 11/19 11/21 11/23 11/25 weeks. The call money and other short-term rates breached the corridor manner, then the actual cash surplus could be at least double that of the reported gure. set by liquidity adjustment facility (LAF). Whenever state governments accumu- There is clamour and competition for raislate surplus balances, such surpluses are ing short-term funds from the market and invested in 14-day treasury bills (TBs) of the many banks have announced sharp increascentral government. State governments es in their deposit rates. The commercial are also allowed to participate in issues of papers (CPs) volume in the market has auction TBs on non-competitive basis. While expanded by about Rs 67,000 crore till this practice helps the central government November, though certicate of deposits to meet their need for funds in a decit (CDs) volumes remained at. The rates situation, when the central government is offered on CPs also appear to have steeply already in a surplus situation, it accentu- increased. There is a possibility that the ates the problem. In the recent period, at lending rates will also see parallel presany point of time, a huge amount of 14 day sures dampening growth prospects for the TBs remained outstanding predominantly industry and economy in general. In short, representing state governments investments. the liquidity tightness and rise in interest The primary issuance of government secu- rates could be much more than what was rities largely follows a calendar announced intended by the monetary measures. half yearly, except for some occasional changes. As a result, the progressive net 1.4 The Way Forward
Graph B: Trends in Weighted Averages of Call Rates, Repo Rates and CBLO Rates November 2010

borrowing results in a further build-up of surplus, intensifying the frictional factor. There were several contiguous weeks during 2009-10 and 2010-11 when the central government built up huge reported cash surpluses (Table 2, p 28). It may be seen that these periods also witnessed relentless government borrowing in dated securities as represented in net market borrowing. Also it is evident that during these periods there were also huge outstanding amounts of 14-day TBs. Therefore, it is clear that the problem of cash surplus caused by the friction of mismatch between receipts and expenditure gets accentuated by uncoordinated debt management and allowing state governments to passively invest in 14-day TBs. One immediate fallout of the present system is the complexity it creates to the RBI in managing both liquidity and interest rates. The liquidity decit is met through the Liquidity Adjustment Window causing
Economic & Political Weekly EPW

The short conclusion is that the frictional factors contributing to the present liquidity crunch are mostly avoidable if better cash management practices are introduced by both central and state governments attuned in harmony with their debt management practices. The minimum that can be done immediately is to nd ways of releasing locked up funds as cash balances with the central government to the market as is done by many central banks. The Rakesh Mohan Committee on Financial Sector Assessment has recommended the release
Table 3: Money Market Activity (Volume and Rates)
Instruments Daily Average Volume (Rs Crore) November-10 Monthly Weighted Average Rate (%)

of such funds on a non-collateralised basis to banks at market-related rates. This option could be exercised by the RBI at its discretion and consistent with its stance of policy. Country experiences would show that there are several ways of handling the surplus cash balances, other than locking up of these funds and preventing them from owing back into the system. A RBI staff study of 15 December 2009, Determinants of Surplus Cash Balances of States in India: A Panel Data Analysis by Kumudini Hajra, Rajeev Jain and Dhirendra Gajbhiye, attempted to explore the serious problems posed by cash surpluses and has documented well-tested practices followed by many countries. The preceding analysis also shows the intricate link between the cash and debt management of two levels of government. The proposed separation of debt management function of the central government alone does not seem to show enough appreciation of the frictional problems that it could generate in the absence of overall coordination. Even the limited coordination exercised by the RBI would be lost in the bargain. As the state governments would prefer the RBI to handle their debt issuances, an alternative solution to the separation of debt management would be the creation of a Debt Management Corporation as a subsidiary of the RBI with shareholding by both central and state governments to handle debt management of the central and state governments. There could be an
Table 4: RBIs Market Operations (in Rs crore)
Month/Year OMO LAF (Average Daily (Net Purchase(+)/Sale(-)) Injection (+)/Absorption(-))

April-10 May-10 June-10 July-10 August-10 September-10 October-10 November-10

10 0 -2 -16 -11 8 -1 8,354

-54,009 -34,749 43,123 48,740 1,207 14,364 62,309 98,001

Source: RBIs Weekly Statistical Supplement.

Range of Weighted Average Daily Rate (%)

Daily Average Volume (Rs Crore)

October-10 Monthly Weighted Range of Weighted Average Rate (%) Average Daily Rate (%)

Call Money Notice Money Term Money @ CBLO Market Repo

8,663 1,875 103 31,600 9,635

6.97 6.81 6.12 6.44

6.16-7.38 3.75-6.95 6.00-8.85 4.00-6.87 4.68-6.47

8,377 1,598 117 43,768 14,177

6.41 6.81 5.89 5.99

5.36-7.67 4.37-8.09 5.75-8.50 4.04-7.96 5.38-6.58

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

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(Rs 32,000 crore). Growth in RBI announced additional support under aggregate deposits also slowed the LAF up to 2% of net demand and time down (Rs 26,000 crore). The liabilities (NDTL) to banks and also extended Apr-10 44.44 2.03 2,783 17,559 81.99 RBI would ideally expect the the second LAF window, valid up to early May-10 46.54 -4.51 -1,505 16,945 86.58 liquidity decit in the system to January 2011. Jun-10 46.54 0.00 2,424 17,701 86.28 In the government securities market, be not more than 1% of net Jul-10 46.46 0.17 5,285 17,868 81.65 demand and time liabilities of the RBI purchased securities through Aug-10 46.86 -0.85 3,163 17,971 83.25 banks which works out to about open market operations, but it was not Sep-10 45.54 2.90 7,100 20,069 78.72 Rs 50,000 crore. But, from June adequate to arrest the yield rates from Oct-10 44.54 2.25 5,468 20,032 77.27 onwards, the RBIs operation of further rming up in both primary and Nov-10 45.74 -2.62 4,785 19,521 81.19 the LAF window has been in an secondary markets. Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.gov.in), www.futures.tradingcharts.com In the forex market, the rupee reversed injecting mode, the liquidity its past appreciating trend with the dollar injection increasing daily to touch more arms length relationship of this corporation with all the three stakeholders. The than Rs 1 lakh crore for several days in posting one of its best gains against corporation can be entrusted with also the November. Liquidity tightness is expected almost all its global counterparts particucash management function of both the to further accentuate in December, when larly against the euro and the yen. Thanks governments in a seamless and harmoni- companies are expected to pay around Rs to the strong dollar and weak stock marous manner reducing the frictional ele- 55,000-60,000 crore as advance corporate ket sentiments, the rupee depreciated sigment and eliminating forces working at taxes. A cut in the cash reserve ratio (CRR) nicantly during the month. In the corpocross purposes, very often seriously dis- to tide over the situation was mooted by rate bonds market, the buoyed interest in some, but Subir Gokarn, Deputy Governor primary equity market somewhat dampturbing the market conditions. Given the tightening phase of the policy RBI, has stated that it will send contradicto- ened the activity in the bonds segment. cycle, it is understandable that the RBI is ry signals to the market against RBIs curhesitant to loosen the CRR. The SLR relaxa- rent policy stance. As GDP growth is 2.1 Money Market tion is not effective when there is a sys- around its potential and WPI ination also The pressure on liquidity in the system contemic shortage of liquidity. While there has not yet reached its comfort level, the tinued during November despite the RBI are instruments for short-term absorption tight phase of monetary policy is likely to initiating several policy measures. The of liquidity, there are not enough instru- continue till the end of the scal. Fearing short-term rates rmed up marginally, and ments for short-term injection of liquidity a deeper crunch in the money market in ruled above the LAF corridor set by RBI durand the entire operation, except for the December, the RBI announced a tempo- ing November and the weighted average open market operations (OMO), is skewed rary reduction in liquidity reserve require- call rate stood at 6.97%. During the begintowards overnight funds. In the absence ment for banks (SLR) to help them tide ning of the month, the rates witnessed of a term money market, the central bank over the funds shortage. On 29 November, somewhat of an easing trend but crossed should therefore consider extending a term Table 6: Turnover in the Foreign Exchange Market* (in $ billion) repo/liquidity facility in the form of a general Month Merchant Interbank Spot Forward Total renance to banks as it was operational- Apr-10 233.6 -(9.8) 689.0 -(6.9) 489.7 -(4.5) 433.0 -(11.0) 922.6 -(7.6) 320.9 (37.3) 839.9 (21.9) 595.8 (21.7) 565.0 (30.5) 1,160.8 (25.8) ised during mid-2008 to ease liquidity on May-10 281.2 -(12.4) 803.4 -(4.3) 547.1 -(8.2) 537.6 -(4.9) 1,084.7 -(6.6) impact of crisis. This can lift some pressure Jun-10 253.4 -(9.9) 747.5 -(7.0) 492.4 -(10.0) 508.5 -(5.4) 1,000.9 -(7.7) off the lid. Such a facility should be subject Jul-10 Aug-10 284.2 (12.2) 796.3 (6.5) 517.7 (5.1) 562.9 (10.7) 1,080.5 (8.0) to limits and at a slightly higher rate than Sep-10 306.1 (7.7) 819.5 (2.9) 559.2 (8.0) 566.4 (0.6) 1,125.6 (4.2) the repo rate. It should be temporary. Oct-10 398.9 (30.3) 1047.6 (27.8) 708.3 (26.7) 738.1 (30.3) 1,446.4 (28.5) Market development should focus upon *: Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are percentage change over the previous month. Source: RBIs Weekly Statistical Supplement, various issues. developing short-term bench marks for money market. Banks should be incentiv- Table 7: 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 Price ised to operate on a term basis instead of Primary Dealers (in %) purely on overnight basis. 04-Nov-10 7.17% 2015 R 4,000 1.68 nil 7.81% (Rs 97.56)
Table 5: Foreign Exchange Market: Select Indicators
Month Rs/$ Reference Rate (Last Friday of the Month) Appreciation (+)/ FII Flows Depreciation (-) ($ Million) of Rs/$ (in %) BSE Sensex (Month-end Closing) US Dollar Index

2 Money, Forex and Debt Markets

The persisting stiff liquidity conditions in the system turned further acute during November having an impact on all segments of the money market with rates continuing their upward trend. There were huge outow of funds from the banking system through bank credit to the extent of Rs 80,000 crore followed by government securities auctions
12-Nov-10

19-Nov-10

8.13% 2022 8.26% 2027 7.99% 2017 7.80% 2020 8.30% 2040 7.17% 2015 8.08% 2022 8.26% 2027

R R R R R R R R

Total for November Total for October

R: Re-issue. Source: RBI press releases.

5,000 2,000 4,000 4,000 3,000 4,000 4,000 3,000 33,000 44,000

2.27 2.28 2.11 2.12 1.84 2.59 2.06 2.41 2.15 2.02

nil nil nil nil nil nil nil nil

8.01% (Rs 100.89) 8.37% (Rs 99.00) 7.99% (Rs 99.98) 8.10% (Rs 98.03) 8.49% (Rs 97.91) 7.85% (Rs 97.43) 8.09% (Rs 99.92) 8.42% (Rs 98.56)

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the 7% mark during the second week of the month as the Power Grid Corporations IPO resulted in a sudden cash crunch. However, the rates eased a bit later and ruled below the 7% level for the remaining part of the month ahead of the reporting fortnight, as banks met their daily cash needs promptly and the demand for funds waned. The other short-term money market rates including notice money and term money rates displayed a volatile trend and ruled in a wider range; however, the weighted average rates ruled above the previous months level. Similarly, the monthly weighted average rate of collateralised borrowing and lending obligations (CBLO) and market repo ruled above the previous months levels and breached the 6.0% -mark in November. The market tightness was also reected in a lower turnover in money market instruments. While the turnover marginally
Descriptions Last Week (26th) AMT YTM

improved in the case of overnight call to CDs, the volumes of CPs continued to money and notice money, in the remain- rise during October and added an enoring instruments CBLO, market repo and mous Rs 17,500 crore in a single fortnight term money it plunged sharply over the and the outstanding amount touched a previous month. Aggregate daily average high of Rs 1,50,000 crore on 31 October volumes of call money, notice money, term 2010. The corporates faced higher borrowmoney, CBLO and market repo dipped to ing costs and the rates of the CPs touched Rs 51,876 crore in November from Rs 68,037 elevated levels and ranged between 7% crore in the previous month. This reected and 18% during the second fortnight of the uncertainty about the present liquidity October. It is reported that the rates have scenario and varied market sentiments further rmed up in November. about the expected policy responses Compared to the previous month, RBI (Table 3 and Graph B, p 29). injected huge amounts in its LAF window to The volume of outstanding CDs fell by full the needs of banks. After a span of Rs 11,000 crore during a Table 9: Yield Spreads (Weighted Average) Central Government Securities period of one fortnight and November 2010 (basis points (bps)) the total outstanding amount Yield November 2010 Previous Three Six Months Last Week First Week Entire Month Month Months Ago Ago stood at Rs 3,32,126 crore Spread in bps 1 Year-5 Year 88 53 92 116 137 222 on 5 November. The rates of 5 Year-10 Year 22 14 22 21 20 20 this instrument continued 10 Year-15 Year 74 to rise reecting the higher 1 Year-10 Year 110 67 114 137 157 242 demand for CDs. Contrary Source: As in Table 8.
November 2010 First Week (5th) AMT YTM Previous Month (October 2010) AMT YTM Three Months Ago (August 2010) AMT YTM Six Months Ago (May 2010) AMT YTM

Table 8: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)
Total for the Month AMT YTM

1 Treasury Bills A 91-Day Bills B 182-Day Bills C 364-Day Bills 2 GOI Dated Securities Year of (No of Maturity Securities) 2010 2011 5 2012 2 2013 3 2014 6 2015 5 2016 3 2017 4 2018 3 2019 2 2020 3 2021 1 2022 4 2023 1 2024 2025 2026 1 2027 2 2028 1 2032 2 2034 1 2035 1 2036 2039 2040 1 3 State Govt Securities Grand total (1 to 3)

4,007.29 2,266.72 1,100.32 640.25 25,984.8

6.54 7.15 6.97 8.02

2,645.31 1,666.00 100.00 879.31 51,842.22

6.67 6.81 7.00 7.94

11,946.76 6,845.70 2,720.38 2,380.68 1,39,918.7

18,512.63 6.62 12,014.55 7.08 1,533.24 7.02 4,964.84 7.99 2,40,054.67

6.42 6.6 6.73 7.96

18,372.72 13,500.25 1,954.83 2,917.64 2,29,375.66

33,103.04 5.9 21,595.37 6.03 4,925.19 6.25 6,582.48 7.84 3,61,583.98

4.33 4.55 4.77 7.45

135.02 1,048.05 255.11 501.24 5,310.49 290.04 11,852.46 31.00 6,683.48 0.30 23,904.00 0.50

6.88 7.20 7.18 7.44 7.76 7.84 7.89 8.02 7.98 8.09 8.03 8.43

25.00 30.00 40.84 5.00 2,011.06 7,822.52 1.64 0.40 5,148.78 0.93 8,553.78

7.32 7.20 7.36 7.71 7.85 7.93 8.25 8.28 7.99 8.07 8.06

215.70 1,578.42 801.15 521.29 13,249.76 415.34 35,362.25 53.08 26.60 23,235.90 5.55 55,481.01 0.75

6.88 7.21 7.30 7.45 7.80 7.84 7.93 8.10 7.97 8.02 8.09 8.04 8.38

2,335.27 6107.90 1,946.86 1,815.42 18,618.92 1,131.63 31,222.78 104.04 213.65 76,663.81 96.05 88,841.83 5.05

6.60 7.12 7.26 7.55 7.76 7.90 7.94 8.05 8.03 7.97 8.03 8.07 8.35

0.09 1,339.55 22.00

8.55 8.37 8.39

1,793.57 5.48 0.17

8.40 8.52 8.43

0.09 6,107.55 5.74 39.00 2.27 0.02

8.55 8.39 8.52 8.42 8.28 8.73

0.52 7,451.47 2.10 216.76 34.41 80.50

8.41 8.34 8.30 8.35 8.27 8.32 8.42 8.35

468.89 585.56 30,577.65

8.42 8.33

545.63 329.55 54,817.08

8.46 8.40

2,817.21 2,448.71 1,54,314.17

8.47 8.33

3,165.66 2,368.83 2,60,936.13

3,369.67 6,480.61 4,539.88 2,415.13 28,191.58 3,723.28 10,415.43 49.66 130.74 99,039.92 15.00 61,290.80 0.05 5,370.36 2,708.29 113.60 4.30 63.50 1,453.85 2,338.57 2,50,086.95

8,379.46 6.31 4,985.10 7.01 12,776.45 7.23 7,375.52 7.43 7,360.04 7.68 15,641.53 7.85 48,547.68 7.89 767.12 7.99 47.56 8.01 411.70 7.88 1,16,896.20 8.09 41.00 7.99 1,19,969.17 1,677.19 8.20 12.00 20.00 848.59 8.34 8,466.08 46.40 8.33 7,060.07 8.24 179.22 6.45 8.32 65.95 8.23 3.50 8.39 8.21 5,731.80 4,00,418.82

5.98 5.09 5.87 6.52 6.97 7.31 7.46 7.53 7.64 7.77 7.51 7.90 7.75 8.22 8.17 8.25 8.14 8.09 8.09 8.20 8.15 8.16 8.21 8.32 8.08

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

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11 months, the RBIs open market operations resulted in net purchases of more than Rs 8,000 crore. These operations helped to ease the liquidity situation and kept money market rates by and large range-bound, even while the market hardened a bit and depicted higher volatility (Table 4, p 29). The interest rate futures segment of the NSE continued its lacklustre behaviour during November.

2.2 Forex Market

November proved to be one of the best for the US dollar. After the nancial turmoil, the performance of the dollar was relatively poor in recent times. It was feared that with the US regime initiating on 3 November further quantitative easing measures of the order of $600 billion, this would cause a further weakening of the dollar. But, after an initial drop, the dollar started strengthening. Besides expectation of faster US recovery, the dollar also beneted from the other global factors like the sovereign debt crisis in Europe on the back of fears of Ireland requiring a bailout package like Greece and the dollar regained its image as the safe haven of choice in times of nancial crisis. The dollar recorded a sharp rise against almost all the global counterparts during November and the US dollar index
Descriptions Last Week (26th) AMT YTM

which measures the dollars Graph C: Spot Quotations and Annualised Forward Premia for the US Dollar in the Domestic Inter-Bank Market performance against the basket 9.0 60 Monthly Averages (Apr 2007 to of major currencies also gained 8.0 (Daily) Working Days October 2010) Spot November 2010 50 by 3.9% in a single month. 7.0 The broader strength of the 6.0 40 dollar overseas pushed the 5.0 1-month rupee down despite the strong 4.0 30 portfolio inows into the 3.0 20 domestic economy. The rupee 2.0 lost its strengthening spree 1.0 6-month 10 and depreciated by 2.6% dur- 0.0 0 ing November over October. -1.0 On the back of sturdy primary issuances, the market movements and touched its low of FIIs continued to invest heavily in Indian Rs 45.74 per greenback on 26 November. equity markets during November also, but Overall, the rupee moved in a narrow band it did not help the Indian currency sustain during November and posted a deprecition its strength. However, it was rather sur- of 2.9% aginst the dollar (Table 5, p 30). prising that RBI data on intervention in The forward premia across all the three the forex market showed a mixed picture. maturity segments recorded a somewhat The RBIs December Bulletin revealed that softening trend during November consethe apex bank had in fact been purchasing quent to sharp depreciation of the rupee foreign currency, though to a small extent against the dollar. The one-month premia from September 2010 onwards, which ruled higher compared to the other two might have arrested rupees appreciation. maturities on expectation that the depreciThe rupee started the month with mar- ation of the rupee might continue in the ginal appreciation buoyed by enormous near future due to intervention by the RBI capital inows into the contry on the back but this may not be sustained over the of large primary issues in the capital market; medium term. The one-month, 3-month the currency touched its months high of and 6-month premia ended on 26 NovemRs 44.25 per dollar on 11 November. There- ber at 6.82% (7.81% on 29 October) 5.95% after, the rupee displayed an incessant (6.92%) and 5.33% (6.47%) respectively depreciating trend tracking the weak stock (Graph C).
November 2010 First Week (5th) AMT YTM Previous Month (October 2010) AMT YTM Three Months Ago (August 2010) AMT YTM Six Months Ago (May 2010) AMT YTM

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

Total for the Month AMT YTM

GOI Dated Securities 6.57 , 2011 9.39 , 2011 7.40 , 2012 7.27 , 2013 7.32 , 2014 7.17 , 2015 7.38 , 2015 7.02 , 2016 7.46 , 2017 7.99 , 2017 6.90 , 2019 6.35 , 2020 7.80 , 2020 8.08 2022 8.13 , 2022 8.20 , 2022 8.24 , 2027 8.26 , 2027 8.28 , 2032 8.32 , 2032 8.30 , 2040 Total (All Securities)

10.00 15.00 40.00 2,011.00

7.33 7.22 7.35 7.85

336.50 7,486.00

7.93 7.93

130.00 648.05 245.00 26.21 5,020.00 265.25 290.00 862.46 10,940.00

6.86 7.26 7.17 7.46 7.76 7.76 7.84 7.92 7.89

5,148.78 3,313.66 5,225.50 13.55 11.00 1,782.57

7.99 8.08 8.05 8.10 8.39 8.40

6,683.48 8,229.15 15,622.85 52.00 1.75 1,337.80 22.00 468.89 51,842.22

7.98 8.04 8.02 8.06 8.39 8.37 8.39 8.42 7.94

545.63 25,984.80

8.46 8.02

5.00 160.68 1,128.05 787.90 36.21 12,948.95 265.25 415.00 1,900.88 33,411.35 26.20 60.76 23,174.75 16,944.00 38,393.55 142.30 34.95 6,072.60 15.00 24.00 2,817.22 1,39,918.70

6.62 35.11 6.90 1,480.01 7.25 4,266.00 7.30 1,940.50 7.48 1,110.00 7.81 17,324.59 7.76 826.62 7.84 1,076.00 7.92 2,869.90 7.92 28,315.36 7.96 104.30 8.06 206.18 8.02 76,151.93 8.06 19,529.75 8.04 68,923.61 8.09 388.25 8.39 176.06 8.39 7,275.32 8.46 53.54 8.39 136.22 8.47 3,165.67 7.99 2,40,054.67

6.36 6.64 7.14 7.26 7.55 7.76 7.81 7.89 7.94 7.94 8.04 8.01 7.97 8.07 8.07 8.11 8.29 8.35 8.36 8.37 8.42 7.96

875.00 634.42 4,371.50 4,259.82 840.00 25,476.01 2,645.30 3,698.08 10,359.13 55.00 130.14 352.33 98,687.42 59,726.77 1,564.03 840.89 4,529.47 112.30 2,558.99 1,453.85 2,29,375.66

6.27 895.00 6.40 2,871.55 7.00 9,562.51 7.23 6,649.50 7.47 3,885.84 7.68 7.70 12,659.37 7.85 48,400.66 7.90 80.71 7.81 259.84 8.02 384.50 8.00 6,150.66 7.88 1,10,475.55 20.00 7.99 8.14 1,19,949.17 8.34 985.16 8.34 7,427.81 8.37 6,419.82 8.33 562.25 8.39 7.84 3,61,583.98

4.82 5.10 5.84 6.52 6.98 7.31 7.46 7.48 7.63 7.76 7.91 7.50 7.69 7.75 8.13 8.08 8.20 8.19 7.45

(-) 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 8.

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coming months. From these three auctions, the government raised Rs 33,000 crore, 09-Nov-10 5 3,650 3.81 8.42 8.41 which was three fourths of 11-Nov-10 2 600 5.30 8.42 8.41 the amount raised in the 23-Nov-10 4 3,125 3.89 8.39 8.38 previous month. All aucTotal for November 11 7,375 3.96 8.41 8.40 tions were fully subscribed Total for October 16 11,202 2.60 8.49 8.46 Source: RBI press releases. and investors response was relatively better as Table 12: Details of Commercial Bond Issues during November 2010 evident from the slightly Institutional Category No of Issues Volume in Range of Range of Maturity Rs Crore Coupon Rates in Years (y) and higher bid-cover ratio of 2.15 (in %) Months (m) times during the month, FIs/Banks 4 3,860 6.05-8.98 3y-15y compared to 2.02 times in NBFCs 1 150 8.75 3y Central Undertakings 3 3,000 0-8.80 10y October (Table 7, p 30). Total for November 2010 8 7,010 6.05-8.98 3y-15y The secondary market Total for October 2010 9 8,362 7.50-10.47 2y-15y activity in dated government Source: HSBC InvestDirect (India) Limited. securities also remained subdued partly because of liquidity conThe overall turnover in the forex market recorded enormous growth during straints and partly because of uncertainty October inuenced by buoyed activity in over policy rate hikes. Turnover in secondary domestic import-export trade. The turn- market declined by 42% in November to over in the merchant and inter-bank seg- Rs 1,39,919 crore compared to Rs 2,40,055 ment showed a massive rise of 30% and crore in October. Overall, yields across 28%, respectively, while spot and forward maturities securities increased, though only transactions rose by 30% and 29%, marginally. Most traded securities were 8.12% 2022, 7.99% 2017, 7.80% 2020, respectively (Table 6, p 30). In the currency derivatives segment of 8.08% 2022 and 7.17% 2015. These securities the MCX-SX, NSE and United Stock contributed to about 90% of total trade Exchange (USE), the turnover saw an over- during the month. Trade in the 10-year all decelerating trend despite the intro- benchmark security of 7.80% 2020 fell duction of options in NSE and USE on 29 considerably over the month as the market October. It is worth noting that despite was expecting a new benchmark issue for being barred from options trading in its 10 year maturity. Overall, yields of government securities platform, the MCX-SX managed to sustain its top position in market share in the rmed up during the month, yields of currency trades during November. MCX-SX shorter maturities increasing faster than contributed 49% market share in total that of longer term securities. The yield derivatives turnover followed by NSE curve, as a result, further steepened. Yield with 39% and USE by 12%. The aggregate spread between securities maturing in one and the average daily trading in the cur- and ve years, one and ten years and ve rency futures segment of three exchanges and 10 years narrowed more in November declined by 27% in November over Octo- than in October (Tables 8, 9, p 31 and ber, battered by the poor performance of Table 10, p 32). rupee against major currencies. Among The amount raised through state develthe traded currencies in the futures seg- opment loans (SDLs) also plunged by 34% ment, the rupee-dollar futures continued to Rs 7,375 crore during the month. A to dominate and activity in other products considerably better response was seen for remained dull. In the options segment, the three auctions. The bid cover ratio NSE dominated as the new entrant USEs improved signicantly to nearly 4.0 times activity is yet to pick up. compared to 2.6 times in the previous month (Table 11). 2.3 Government Securities Market During the month, three auctions of central 2.4 Treasury Bills (TBS)
Date of Auction Number of Participating States Total Amount Accepted Bid Cover YTM at Ratio Cut-off Price (in %) Weighted Average Yield (%)

Table 11: Details of State Government Borrowings (Amount in Rs crore)

of 91-day TBs were conducted, for Rs 4,000 each, for an aggregate amount at Rs 16,000 crore. 182-day and 364-day TBs were auctioned twice during the month for Rs 4,000 crore each. Yields at cut off prices hardened during the month as against October. In the secondary market also yield rates across maturities rmed up with traded volume shrinking. The turnover of 91-day TBs at Rs 6,846 crore fell by more than 40%, over October. Turnover in 182 and 364-day TBs also were down by 10% and 22%, respectively, over the previous month.

2.5 Corporate Bonds Market

Given the heightened activity in the primary equity market, the primary issuance in corporate bonds market remained somewhat subdued compared to the previous month. During November, eight issues including four FIs/Banks, three central undertakings and one NBFC tapped the corporate bonds market through issuances of bonds and NCDs, mobilising a total amount of Rs 7,010 crore. FIs/Banks collected Rs 3,860 crore through four issues and the coupon rates offered by these institutions reected a falling trend for the maturity period ranging between three and ve years. Central undertakings issued three bonds with coupon rates of around 8.80% including one zero coupon bond maturing in 10 years. The IDFCs 5-year and 15-year bonds offered coupon rates ranging between 6.05% and 8.95%. However, corporates had chosen the equity market as their favourable platform to meet their requirements. Mobilisation of funds by NBFCs came down substantially during the month compared to the previous month while the coupon rates offered generally remained at. All these issues carried AAA ratings by rating agencies (Table 12). The secondary market transactions in commercial bonds continued to remain subdued as a result of limited participation by FIIs. The momentum seen in the equity market segment in the past several months had its adverse effect on the corporate bonds market and trading has also seen a continuous deceleration in recent times. As per the data published by SEBI, the aggregate as well as the average daily turnover in the corporate bonds reported by BSE, NSE and FIMMDA decreased by 20% over one month.

government securities were held on 4 November, 12 November and on 19 November. Fewer auctions are expected in the
Economic & Political Weekly EPW

The amount raised across all maturities of TBs remained at at Rs 24,000 crore compared to the previous month. Four auctions
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