MONEY MARKET REVIEW

Dilemma of Indian Banking
Liquidity, Capital and Return
EPW Research Foundation

In these times of inflation and the receding prospect of growth, and in the presence of fiscal laxity and higher government borrowing requirements, Indian banks are finding it difficult to expand their credit portfolio. Moreover, as returns on their investments tend to be lower than those on their advances, in this present overall context the real challenge is in finding the right balance as between liquidity, capital and return.

1 Introduction t a time when inflationary pressures have not subsided and the prospects of growth of the Indian economy during the current period is not that bright, the Indian banking system is facing the dilemma of balancing between liquidity, capital and return. The slower deposit growth partly explained by high inflation and substitution of bank deposits by households with inflation hedging products like gold and real estate has caused a dent in availability of liquid resources to the banking system. Afflicted with growing non-performing loans and higher provisioning requirements inter alia due to pension liabilities, banks have been put under the radar of Basel III requirements at a faster and tighter pace than the agreed international requirements for compliance. If banks are liquidity or capital constrained due to the above factors, they will automatically be credit constrained, which could adversely influence their credit decisions. They may not be able to expand their balance sheets as per the needs of the economy for higher credit growth. There are therefore apprehensions that at least the public sector banks will find it difficult to expand their credit portfolio to any significant extent in the near future. Furthermore, banks will perforce need to meet the growing appetite of government borrowing. Banks, despite the lower level of Statutory Liquidity Ratio (SLR) of 25% and later 24%, had been investing a much larger part of their deposits in government securities for reasons of higher liquidity and as a safe investment avenue on the face of higher capital standards. While this tendency had been reversed during the period of high growth and fiscal consolidation during 2004 to 2008, of late, because of fiscal laxity and

A

higher government borrowing, banks have turned to investments, crowding out credit flow to the commercial sector. Overall, return on funds may be affected because of this shift in portfolio choice since the return on investments tends to be lower than that on advances. Against the above backdrop, this note presents some perspectives on the Indian banking scenario in the immediate period ahead, focusing upon the three key aspects of liquidity, capital and return. 1.1 Liquidity For some time now, the banking system has been in a liquidity bind due to sluggishness in deposit growth. Credit growth, which can spur secondary deposit growth, also remained tardy during 2011-12 (Graph A, p 120). Liquidity in the banking system will depend essentially upon the deposit growth, which, in turn, depends upon the household preference for saving in financial assets like bank deposits. The trend in savings in the recent past has not been encouraging. The domestic savings rate declined in 2010-11 to 32.3% from 33.8% in 2009-10. The decrease in the savings rate was due to slower growth in savings of both the household and the private corporate sectors. The household sector’s savings rate declined to 22.8% in 2010-11, after touching a record high of 25.4% in 2009-10. Within household savings, the financial savings rate declined sharply from 12.9% to 10.0% during the same period. The decline in the net financial savings rate was further explained by the slower growth in households’ savings inter alia in bank deposits. The declining trend in savings in financial assets in general and bank deposits in particular evidently indicate that the household sector has shifted to inflation hedging assets like real estate and diversion to purchase of gold. This may also be partly due to increase in household debt to meet the needs of consumption on the face of a higher cost of living. With lower interest rates, deposit mobilisation might become difficult and hence, deposit rates are not expected to come down significantly. With the easing
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The EPWRF team is led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, V P Prasanth, Shruti J Pandey, Pallavi Oak, Bipin K Deokar and Sharan P Shetty.
Economic & Political Weekly EPW

may 26, 2012

vol xlviI no 21

MONEY MARKET REVIEW Graph A: Y-o-Y Aggregate Deposits. despite lowering of policy rates by the RBI.625 6.5 2. which range Graph B: Average Net Injection/Absorption (Rs Crore) 2. 2019 Minimum Common Equity Tier 1 (CET1) Capital conservation buffer (CCB) Minimum CET1+ CCB Minimum Tier 1 capital Minimum Total Capital Minimum Total Capital +CCB Phase-in of all deductions from CET1 (in %) 4. Thus.00.000 crore a year Rs 3. The Basel III capital ratios will be fully implemented as on 31 March 2018. banks would be expected to reduce their lending rates.0 lakh crore as capital The largest requirement is by State Bank of India and its associate banks. banks are expected to face tight liquidity conditions in the coming months.000 1.5 8 8 # .3-2 trillion 5 5 6. situation may improve.25 5.5 100 4.000 50.5 2. Table 1: Differences between RBI and BIS Norms for Basel III BIS 2013 Guidelines# Mar-14 BIS 2014 Guidelines# Mar-15 BIS 2015 Guidelines# Mar-16 BIS 2016 Guidelines# Mar-17 BIS 2017 Guidelines# BIS Mar-18 Jan 19.625 60 4.5 6 8 8 40 5.5 1.Bank for International Settlements. 1.75 6 8 9.5 8 7 9 11.00. While for private sector and foreign banks. The Reserve Bank of India (RBI) had been by and large pumping in liquidity to meet the deficit in the system caused by both structural and frictional factors.75 7 9 10.125 7 9 9. The raising of capital from the market will generally depend upon capital market conditions and how the bankingrelated equity market indices perform vis-à-vis the general equity indices. raising capital is not reported to be a serious issue.Guidelines on Implementation of Basel III Capital Regulations in India issued on 2 May 2012 by RBI. Different agencies have estimated additional capital requirements. followed by the mid-sized and small government banks with weaker internal capital generation The fund-raising atmosphere is depressed.5 7 6 8 10. 16 of 19 PSBs Table 2: Estimates by Agencies of Capital Requirements and Impact on Return Agency Estimated Additional Capital Requirements Remarks Fitch Rating The Macquarie Group and Crisil ICRA Source: Compiled by EPWRF. banks are not placed in any disadvantageous position compared to other sectors in raising funds from the market. A comparison of bank-related indices shows that they prominently mimic the general equity indices.000 -1.5 1. p 121).6 lakh crore of additional equity on top of retained earnings Rs 1.5 lakh crore or Rs. and second.000 1. The credit growth is further likely to be crowded out by the huge government borrowing programme that would in turn also adversely impact liquidity conditions.625 60 5.000 -1. for public sector banks (PSBs). one challenge for the banking system is how to balance between rather sticky deposit rates and a reduction in lending rates.5 3.000 from Rs 1. 2012 vol xlviI no 21 EPW Economic & Political Weekly .5 8 8 20 5. the date of compliance has been advanced to 2018 from 2019.000 0 -50. Bank Credit and Investments Growth (%) 45 41 37 33 29 25 21 17 13 9 5 1 -3 Bank Credit Aggregate Deposits Investments (SLR) of the policy rate.5 9 9 40 4 4 5.5 4. Since the beginning of 2004-05.2 Capital Banks in India will be required to augment their capital base for their normal business expansion.625 5.5 lakh crore to Rs 5. 30. but return on equity (RoE) levels is likely to fall Out of which common equity requirements will be Rs 1.0 lakh crore (Table 2).5 6 9 9 20 3.25 6.875 7.5 4.5 100 may 26. the level of compliance is at least 1 percentage point higher (Table 1).25 80 5.50. In any case.125 6 8 8.375 7 9 10. Overall.25 80 4. In the coming years. The RBI guidelines are tighter compared to international norms in two respects: first.9 to 5. Source: Compiled by EPWRF. BIS .5 0. but such liquidity injections are likely to be brought under reasonable limits within the comfort zone of the central bank at plus or minus 1% of net demand and time liabilities of the banking system (Graph B). 120 04/2001 07/2001 10/2001 01/2002 04/2002 07/2002 10/2002 01/2003 04/2003 07/2003 10/2003 01/2004 04/2004 07/2004 10/2004 01/2005 04/2005 07/2005 10/2005 01/2006 04/2006 07/2006 10/2006 01/2007 04/2007 07/2007 10/2007 01/2008 04/2008 07/2008 10/2008 01/2009 04/2009 07/2009 10/2009 01/2010 04/2010 07/2010 10/2010 01/2011 04/2011 07/2011 10/2011 01/2012 04/2012 04/2001 08/2001 12/2001 04/2002 08/2002 12/2002 04/2003 08/2003 12/2003 04/2004 08/2004 12/2004 04/2005 08/2005 12/2005 04/2006 08/2006 12/2006 04/2007 08/2007 12/2007 04/2008 08/2008 12/2008 04/2009 08/2009 12/2009 04/2010 08/2010 12/2010 04/2011 08/2011 12/2011 04/2012 Graph B: Average Net Injection/Absorption (Rs Crore) Up to $50 bn or Rs 2.50.00.5 1. they should also be able to mobilise and build up additional capital for meeting the Minimum Capital Ratios Guidelines# Jan-13 new regulations under Basel III framed by the RBI on 2 May 2012 which are to be implemented in phases effective from 1 January 2013. though the bankspecific indices might vary (Table 3 and Graph C. it may prove to be difficult.875 100 4.5 0.5 4.

863.18 20.080. injection of government capital to select banks this year will be just about adequate for maintaining an 8% tier I capital ratio.397. the tendency of banks switching to investments will have the consequence of reducing the overall return in the coming months.2 $ Closing value as on 14 May 2012.429 3.ccilindia.5 39.1500 5.5 33. the government must ensure sufficient fiscal space to augment its equity participation or give into higher order of privatisation.588.5 9.454. the government holding in PSBs needs to be diluted to NSE Overall.3600 4. Since the government’s ability to meet matching requirements will be limited.49 17. then the PSBs’ share in total banking system assets will further shrink relative to the gain of private and foreign banks.3 80.6400 108.9700 5.8100 20.3 3.06 12.0 36.5000 4.9 -24.968.9 1.01 11.3100 17.65 8.838.624.992 18.0000 5.7500 9. if new bank licences are issued to industrial houses.1 35.4 16.454.50 7. .493 9.86 6.5500 9. A higher level of NPAs is ultimately a charge on the capital of Economic & Political Weekly EPW around one-third from the present level of 51%.008.534.5 1.32 8.3 46.56 15. the Graph D: Return Structure (%) 22 20 18 16 14 12 10 8 6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Table 3: Yearly Closing Values of Sensex.0500 6. Source: www.34 13.not available. At present the government’s policy is to maintain 51% equity stake in PSBs.34-11.907.464.79 Return on Investments Return on Advances Table 5: Money Market Activity (Volume and Rates) Instruments April 2012 Daily Average Monthly Volume Weighted (Rs Crore) Average Rate (%) Range of Weighted Average Daily Rate (%) March 2012 Daily Average Monthly Range of Volume Weighted Average Weighted Average (Rs Crore) Rate (%) Daily Rate (%) Call Money Notice Money Term Money@ CBLO Market Repo 19.77 7.8400 72.7300 9.8000 13.02 15.93 9.54 6.5000 11.2 83.97 6.557 11.52 8. Since deposit rates are likely to remain sticky for some time.1 4.4000 6.38 4.92-13.4 61. BSE-Bankex and CNX – Bank Year Close-SENSX % Growth BSE Close-Bankex (BSE) % Growth Closing Values of CNX Nifty % Growth CNX-Bank % Growth 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$ 3.5000 2.05 9.96 5.4500 5.030.760 8.01 6.8 75.in.8 percentage points.82 5.13 4.721.58 8.6 16.63 5.3 Return The return on bank funds depends upon the combined influence of return on advances and return on investments.76 9. including capital and liquidity requirements under Basel III coming into effect shortly.5500 3.9300 13.51 8. till inflation rates rule high. return on equity will fall by 1.085.8 -51.40-13.226.24 5.201.7800 3.6 -32.39 9.74 4.2 -49.97 3.8000 71.rbi.93 5.00-10.49 5.153.3000 4.333 391 38.7100 7.7 36.59 14.25 7.6 32.05-12.257. and it is going to be much more difficult for PSBs.19 8.5000 2.73 4. Source: Websites of BSE and NSE.96-8.1 -52.836.1 29.791.2000 6.0900 15. In fact.75 7.08-9. In the Union Budget for 2012-13.029. There have been more additions to non-performing assets (NPAs) for PSBs in recent years than for private sector ones. and www.51 8.4 -31.71 8.3 39.5-1.73 20.2800 5.9600 6.7500 2.6 6.497.92 11.13 12.04 7.1 -52. the government is also examining the possibility of creating a financial holding company which will raise resources to meet the capital requirements of PSBs. With tightening of provisioning requirements.786. and this would mean much more capital needs for PSBs. 1.98 @ Range of rates during the month.134.0400 3.0 17.7 47. in the current environment.5000 1.77 13.1 1.647.48 4. Overall.377.75 7.215. In the absence of that. Some market estimates show that the return on equity of banks may come under pressure also because of higher funding costs due to additional capital to be raised in the coming years.56 3.5 30.20 8.23 8.32 7.77-9.com may 26.418.9 10.6000 2. For PSBs there is an additional difficulty because of the need for the matching contribution to come from the government. the burden of building up additional capital looms large on the banking system.9100 20.6500 111.295 4.65 7. have been reported to be underperforming the Bankex for several years.6900 9.92 10.6500 9.94 3.77 8. Kotak Institutional Equities has estimated that for every 100-120 percentage points rise in core equity.9 13. That means banks will need additional capital for funding credit growth. and there are pressures to bring down the lending rates. banks would be encouraged to build up risk-free assets in the form of a government securities portfolio. 2012 vol xlviI no 21 121 .19 7. For PSBs.33 3.000 crore for capitalisation of the PSBs.8 17.138.4 -24.03-8.29 9.54 7.5 64.001.799.3900 10.081.2 17.37 1. the net interest margin is likely to come under pressure.093. regional rural banks (RRBs) and other financial institutions.7 2. Table 4: Cost of Funds and Spread of SCBs Cost of Cost of Cost of Deposits Borrowings Funds Return on Return on Advances Investments 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: RBI.33 7.959.509.89 18.879.6 4.13 19.9 33.966. 13.4500 7.97 14.1 42.7600 2.9200 16.14 8. Cnx Nifty. In addition.661.549 300 38.9900 9.286. as per the second Tarapore Committee’s recommendations.4 81.MONEY MARKET REVIEW Graph C: Major Indices Along With Their Respective Banking Indices (% Growth) 120 110 100 90 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 Close-SENSX Close-SENSX Close-Bankex (BSE) Close-Bankex (BSE) Closing Values of CNX Closing Values of CNX Nifty Nifty CNX-Bank CNX-Bank 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$ banks.org. the finance minister has proposed to provide a sum of around Rs 15. The return on advances being generally higher than that on investments (Table 4 and Graph D).379.602.50-10.4 11.8 54.8 5.342.7300 11.5400 10.

08% on 27 April.83% 2041 27-Apr-12 8.000 crore.sebi.4) 35.7 (3.000 65.33 age rates fell by a sub.MONEY MARKET REVIEW return on funds is likely to come under pressure for the banking system.3 (6.80 102.20 98.14 in period of one month.000 3. 2.0) 46.3) 25.1) ing and lending obliga.708 91.000 2. In April.65% Feb-2012 49.1) repo more volatile and the Jan-2012 9.82 8.85 100. But.3 -(2.000 crore during March.41 -586 16.14 13-Apr-12 8.9 (6.9) 38.9) ments fell by 32 bps and Mar-2012 11.6) 26.28% 2027 8.123 72.7) rates of both the instru.60 104.04 2.6) 41.28% 2027 8.74 8. The a repetition of similar policy actions in daily trading activity in the overnight the near future.in.30 98.164 17.000 7. respectively.09 387 17.2 -(8. After reeling under an acute liquidity shortage in the previous month.5) 41.96 1.4) tions (CBLO) and market Dec-2011 11.06 8.44 8.00 9.6 -(13.700 50. rates moved downwards from the begin.14 2.69 1. prospects weakened investor confidence.000 4.0 (2.Month Rate (Last Friday Depreciation (-) (Equity+Debt) (Month-end (Month-end ket also displayed sharp of the Month) of Rs/$ (in %) (in $ million) Closing) Closing)# 48.64 1.55.000 4.9 (1. Table 7: Foreign Exchange Market: Select Indicators Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Index The notice money mar.455 73. months kept the rates of collateralised instruments Table 8: Average Daily Turnover in the Foreign Exchange Market* ($ billion) Month Merchant Interbank Spot Forward Total like collateralised borrowOct-2011 12.15% 2024 8.162 92.000 4.58 1.56 8.0 -(10.2) 53.2) 41.82 2.194 72.000 12.000 crore in bank credit.0 -(10.12.81 8.33. 39 bps.20 5. various issues.09 96.45 93.gov.97% 2030 8. Source: RBI’s Weekly Statistical Supplement.000 3. dur.547 1.772 20.64 8.Nov-2011 12. This was accompanied by an increase in currency circulation and the government’s market borrowing programme.49 1.63 8.Feb-2012 11.6 -(16.500 crore in April.83% 2041 R R R R R R R R R R R R R R R R 4.in.4) 26. Source: www.2) 22.Volumes in the CBLO market improved ning of the month and weighted average marginally by 1% even as the repo market one-day rates fell below the 9% levels.37 96.4) 26. However.6) 22. respectively.68 7. The overall inflows of liquidity improved to about Rs 65.2 -(0.600 12.28.471 1.com.16 Nil 8.1 (1.8 -(14. the system obtained significant inflows through a fall of Rs 95.72 2.17 -6.753 72.47 8.000 crore against meagre inflows of about Rs 12.Nov-2011 53.79% 2021 8.17 319.9 -(11.70 8.51 102.000 7.087 17.8 -(12.gov.000 crore.16 -4. the system experienced some moderation in the first month of the financial year 2012-13.21 634 17.719 1. in turn.33% 2036 20-Apr-12 8.65 98. RBI credit to government also increased by Rs 75.599 1.84 9.* Figures in brackets are percentage change over the previous month.76 8.37 and the weighted aver.690 35.000 7. may 26.3 (1. over over the month (Table 5. witnessed a sharp 63% jump in its turnCall rates softened significantly and nearly over over the period. Table 9: Details of Central Government Market Borrowings (Amount in Rs crore) Date of Auction Nomenclature of Loan Notified Amount Bid-Cover Ratio Devolvement on Primary Dealers YTM at Cut-off Price (in %) Cutt-off Price (Rs) 03-Apr-12 8.27 tary easing in the coming #: Nominal Major Currencies Dollar Index.00 95. the downward movement reported sizeable increases in their respecwas restrained due to expectations about tive trading volumes during April.9 -(14. a surprising 50 basis points (bps) repo rate cut on top of the earlier CRR cuts.000 1.26 -2.Dec-2011 Jan-2012 49. spreading an overall bearish outlook.24% 2018 8.52 declines in its daily rates Oct-2011 52.89 -927 17.195 15. Foreign investors continued to withdraw funds from the Indian market.8 (7.97 101.000 2.8 (13.org.8) 25. 2 Money.19% 2020 9.97% 2030 8.19% 2020 9.4) 48.05 4. Overall.6 (3.81 8.404 72.82 0. As per the latest available data from The weighted average call money rates fell by a considerable 40 bps compared to the RBI. However.24% 2018 8.1) 52.bseindia.33% 2036 Total for April 2012 Total for March 2012 R: Reissue.92 102. money market rates for trading activity in the money market. ing the same period.7 -(9. www.70 97. enthused market outlook to some extent. causing an outflow worth Rs 40.7 (8.000 2.436 Source: RBI’s Weekly Statistical Supplement.6 -(12. www.5) 26. However.319 72.12 2. Overnight money market segment had galloped by 34% in April. aggregating to 125 bps.1 (12.68 -2.07 1.7) 40. www. With 122 A sharp fall in rates led to heightened a cut in repo rate by 50 bps in its policy review to 8%.59 2.federalreserve.4 (7. the S&P ’s downgrading domestic outlook from stable to negative proved to be a dampener.705 70.000 3.6 -(0.20 nil 875.37 3.80 8. 2012 vol xlviI no 21 EPW Economic & Political Weekly .8) 25.000 8. Mar-2012 51. deposit growth fell by Rs 63.74 Uncertainty over mone. Uncertain global developments coupled with disappointing domestic growth Table 6: RBI’s Market Operations (Amount in Rs crore) Month/Year OMO LAF Net (Average Daily (Net Purchase(+)/Sale(-)) Injection (+)/Absorption(-)) Oct-2011 Nov-2011 Dec-2011 Jan-2012 Feb-2012 Mar-2012 Apr-2012 6 9.rbi.79% 2021 8. adversely affecting financial markets across the spectrum.16 95.000 crore and Rs 58.6 (3.00 2.17 3.3) 26. Forex and Debt Markets The beginning of the financial year 2011-12 proved to be dull for financial markets.000 2. All various instruments across maturities the short-term money market instruments fell. being a major reason for the deficit in the system.96 8.60 stantial 93 bps to 8.2) 24.31 99.50 8. there was touched 8% levels towards the end of the a 20% increase in money market turnmonth and settled at 8.1 Money Market Money market activity remained cautious in April with market participants anticipating policy rate cuts either in the repo rate or the CRR or both in the Annual Policy Statement for 2012-13.96 nil nil nil nil nil nil nil nil nil nil nil nil nil 1195.06 2.16 101.48 1.687 34.3) Includes trading in FCY/INR and FCY/FCY.82 99.1) 26.2 (1.000 3.26 7.446 33.4) 52.15% 2024 8.Apr-2012 52. Source: RBI press releases. p 121). the issuance of certificates of the previous month.1) 53.8 -(0.88 2.

349 9. The domestic currency was undermined by the weakness in the local stock market and huge FII outflows.558 4 1. 2012 vol xlviI no 21 123 .525 8.10 8.312 23. According to the trading platform.827 8.78 8.53 8.24 8.04 9.38 8.38 8.91 8.58 8.957 8.391 5.82 8.47 8.67 8.85 8.14 points in April (Table 7. The Indian rupee remained weak against almost all the global currencies. Bankers also accessed MSF of LAF and borrowed Rs 2. CDs turnover halved during April compared to March.738 1.273 9.58 8.003 162 2.50 8.660 8.546 56 342 321 422 3.64 8.67 8.61 8.47% to 14. However.44 27. a higher than Three Months Ago (January 2012) AMT YTM Six Months Ago (October 2011) AMT YTM Table 10: Secondary Market Outright Trades in Government Papers – NDS and NDS-OM Deals (Amount in Rs crore) Total for the Month AMT YTM Previous Month (March 2012) 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) 2012 (2) 2013 (1) 2014 (3) 2015 (5) 2016 (2) 2017 (4) 2018 (3) 2019 (3) 2020 (2) 2021 (2) 2022 (4) 2024 (1) 2027 (3) 2028 (1) 2030 (1) 2032 (3) 2034 (1) 2036 (1) 2040 (1) 2041 (1) 3 State Govt Securities Grand total (1 to 3) 8.664 656 1.439 1 4. weighted by the amounts of each transaction.949 1.59 8.56 8.37 8.67 8. Similarly.447 37 14.608 22. Fixed Income Money Market and Derivatives Association (FIMMDA).731 11. including Asian currencies.83 8.55 40.820 crore (Table 6.21 8. 2026. banks borrowed less form the repo window Descriptions Last Week (27) AMT YTM intentionally as the rate cut was strongly factored in by the markets.70 9.13.42 8.118 2.73 8.788 136 850 471 990 1.34 8.47 8. Economic & Political Weekly EPW may 26.286 8.44 8.76 8.67 8. OM = Order Matching Segment (1) Yields are weighted yields.64 8.585 1.86.65 8.75% for the respective periods.486 885 17 2.438 21.56 8.43 8.65 8.30% to 11.91. Despite an ease in liquidity.33 16. The discount rates for CDs ranged from 9.51 8. After successfully managing the worst ever cash crunch in March.028 79 6 30 690 1.12 8.812 8. CPs issued by corporates increased by Rs 12.120 22.46 8. the RBI’s injection of funds through the repo window of LAF fell to relatively moderate levels in April.62 lakh crore for the period ending 29 February 2012.18 8.99 689 2.501 1. 2.69 8. after the repo rate cut.158 252 1.206 5. base data from RBI and CCIL.75 8.54. CP rates ruled in the range of 8.54 8.239 76.09 8.353 1.610 7.48 7.16 8.165 22 2 1.65 8.743 3.064 16. during April.66 8.04 8.124 3.000 crore.50 8.60.48 8.94 (-) Means no trading YTM = Yield to maturity in per cent per annum.26 8.280 39 7. Weaker-than-expected US economic data and growing concerns about the eurozone debt crisis prompted April 2012 First Week (6) AMT YTM the market participants to avoid riskier assets and the dollar gained significance towards the second part of the month. Moreover.82 8.35 8.2 Forex Market The performance of the dollar against other currencies remained volatile as global financial markets remained in a risk-averse mode in the beginning of April following renewed fears of an exacerbation of the eurozone’s sovereign debt crisis.60 8.81 9.14 195 240 8.57 8.304 26.60 8.28 8.74 8. taking the outstanding amount to Rs 1.95 8.236 4.804 2.536 34.962 11.22 0 350 2.10 8.473 10.78 37.10 8.39 8.99. (2) Trading in 2023.MONEY MARKET REVIEW deposit (CDs) by scheduled commercial banks increased by Rs 16.8357 8.833 5.05. fell by 48 bps [Nominal Major Currencies Dollar Index (March 1973=100)] in a period of one month.64 8.398 106 37.146 730 186 1.566 1.70 8.000 crore in a month and the outstanding amount stood at Rs 4.395 30 13.94 8.59 8.02. bankers borrowed around Rs 92. The US currency. NDS = Negotiated Dealing System.19 1.49 8.30 8. Ahead of the central bank’s rate decision on 17 April.530 crore during the fortnight ending 23 March 2012.589 8.84 1. the RBI purchased securities worth Rs 12.19.79 8.293 2.775 9.700 crore in April. p 122). In OMO window also.659 4.619 2.694 4.375 13.102 8.26.86 8.51.95 8.33 8.527 8.206 7.88 8.51 8.45 8. Weaker-thanexpected industrial production data worsened the growth outlook for the economy in the beginning of the month coupled with S&P ’s downgrading of the India outlook further depressing market confidence.61 8.86.444 5.57 8.89 8.699 10 2. while the JP Morgan Asian dollar index (a spot index of emerging Asia’s most actively traded currency pairs valued against the US dollar) improved by 16 bps over March to 117.88 102 0 2.81 8. while CPs recorded a 5% rise in their average daily traded volume.37 8.63 8.205 8.220 4 8.39 8.48 8.65 8.429 431 1 704 2 2 387 6 723 1.91 9.14 3.73 8.64 8.626 29.000 crore from the repo window on a daily average basis in April.698 345 41 621 444 1.74 315 50 1 13 61 116 1.48 8.258 4.885 4.43 8.94 8.85 8.608 2.86 8.61 3.72 9.49 8.534 7 4.140 1.061 8.305 4.92.675 2.988 7.64 8.379 1. 2035 and 2039 are negligible.55 8.780 3. Source: Compiled by EPWRF.06 8. once again the borrowings by banks crossed Rs 1 lakh crore at a cheaper rate and continued to borrow till the end of the month.70 8.25 8.088 970 1.69 8.48 8.34 8.248 8.690 8.69 2. as tracked by the US dollar index.519 1.70 8.61 8.922 884 67.90%.42 8.57 8.17 7.42 8.78 9.253 99. p 122).963 7.36 8.58 8.926 3.282 580 745 28.48 8. well above the RBI’s comfort level.30 8.55 8.39 8.57 8.

833 498 4.486 109 757 2.54 8. p 122). the Yield Last Week First Week Entire Month Month Months Ago Ago turnover of futures and Spread in bps 1 Year-5 Year 44 43 32 34 39 33 options decreased by 15% 5 Year-10 Year 16 11 16 1 6 3 each during the month.76 8.92.61 8.249 1.1 Year-10 Year 60 54 48 35 45 36 INR contracts continued Source: As in Table 10. turnover of G -secs and SDLs investors influenced the turnover in moved up but turnover of treasury bills April.653 6.65 8.10 8.57 8.480 1. 2012 vol xlviI no 21 EPW Economic & Political Weekly . Thereafter.785 3.144 1. weighted by the amounts of each transaction.619 2.746 95 6 37.61 8.9% against dollar and closed at Rs 52.46 8.028 39 690 1.20 8.68.51 8.70 8. in the merchant segment while the spot United Stock Exchange (USE) registered and forward markets also recorded 1. However. The domestic exchanges report.17 8.83 2041 Total (All Securities) 315 10 45 105 11 75 2.33 8. However.50 8.041 22.59 2016 7.534 97.284 73 1.86 8. Among the exchanges trading in curthree-month and six-month premia hardened by 18 bps and 51 bps.957 9.703 2.01.48 8. during the same review period.55 8. their dominance in the futures segment the one-month premia eased by 11 bps in and garnered 94% of market share as in April compared to March.65 8.65 8.65 8.40 2012 7. the currency deriva.80 8.74 8.483 652 21.26 8.17 2015 7.55 3.286 8.714 191 6.041 103 2.19 8. in a period of one month the Indian rupee depreciated by 2. respec. After showing some revival in trading Beginning 2012-13.99 689 28.28 2027 8.37 8.yields of central government securities vers over a period of one month.32 8.688 314 168 1.55 8. Rs 805 crore in April.118 1.26 2027 8. while and SDLs inched up.2% increases over the period.39 8. issuances of central activity in March.020 340 470 1.610 2. March.135 3.061 8.87 8.83 2018 8.47 8.75 0 350 2.56 8.129 1.465 1.94 8. but sustained its prompted increased turnover during dominance with a 57% market share.304 13.78 8.rency derivatives products.63 8.19 2020 7. the rupee fell back on 11 April and shed another 34 paise versus the dollar.248 8.39 8. (1) Yields are weighted yields.15 2024 8.64 8. The movement over the month.22 8. Overall.63 8. the Multi-Commodity Exchange segments of the forex market improved (MCX-SX) reported a 27% reduction in its by 1.988 1.08 2022 8.165 10 162 2.29 8.60 8.91 8.91 8. rising crude oil prices and a passive domestic outlook for the rupee kept the forward premia across three Descriptions Last Week (27) AMT YTM tenures firm throughout April.28 2032 8.704 8.82 8.885 1.67 8. After recouping some of its value once again.796 4.527 8.224 30 8.124 3.34 8.80 2021 8.995 12.50 8.75 8.39 8.293 630 1.80 8. The rupee-dollar exchange rate began the month on a positive note and added 59 paise on the very first day.26. its value decelerated significantly by 129 paise till 24 April.and corporate bonds dropped.54 8.57 8.33 8. the performance of the rupee remained mixed till 18 April.439 251 401 1.57 8. Segment-wise.72 8.3% in March compared to February.53 8.62 8.530 1.74 (-) means no trading YTM = Yield to maturity in percentage per annum.47 8.76 8. while they declined the aggregate daily average Table 12: Yield Spreads (Weighted Average) – Central Government turnover decelerated by Securities (basis points) April 2012 Previous Three Six Months 15%.30 8.28 per dollar on 9 April.91 8.25 8.49 8.39 8. on 10 Year-15 Year 14 -2 5 13 24 15 daily average terms.67 8.304 13. the National Stock Exchange (NSE) reported an 18% tively.46 8.government securities heightened while tives market once again reflected a issuances of SDLs and t-bills declined dismal trading volume.214 359 29.MONEY MARKET REVIEW expected policy rate cut reduced the attractiveness of rupee-denominated assets while some fall in oil prices helped the rupee to see some gains.13.33 2. The daily trading in different Similarly. USD .22 8. Hurt by rising crude oil prices hovering above $125 per barrel.71 8.74 8.51 8.60 8.79 8.51. However.69 8. Source: As in Table 10.79 2021 8.417 37 14.13 2022 9.694 4.58 8.57 8. The uncertainty in the forex market fall in trading activity.54.61 195 8. trading and contributed 43% towards The highest rise in turnover was reported the total currency derivatives turnover.04 8. The widening current account and fiscal deficits. But intervention by the RBI kept the rupee value under control from 25 April and the currency managed to gain 27 paise against dollar in the last four trading days of April despite massive portfolio outflows from the Indian market.99 2017 8.087 1.067 2.53 8.22 8.64 8.176 27 975 12.97 2030 8.49 8. Corporate bond issuof the rupee against other currencies ances dried up in April.4% a huge fall and reported a volume of just and 1.81 8.70 8.70 8.47 8.44 440 1.39 8. 124 may 26.61 8.73 8.3 Central Government Securities ginally in March (Table 8. Overall.44 8.78 1.35 8.205 9. With the tardy growth of the Indian economy the local currency was poised to cross the crucial Rs 53 per US dollar mark.76 8. ed a 24% fall in their aggregate turno.454 1. while the earlier months.265 1.30 8.270 5.30 2040 8.357 8.60. the rupee depreciated substantially by 71 paise in the next two trading sessions and rose to Rs 51.07 2017 7. April 2012 First Week (6) AMT YTM Previous Month (March 2012) AMT YTM Three Months Ago (January 2012) AMT YTM Six Months Ago (October 2011) AMT YTM Table 11: Predominantly Traded Government Securities (Amount in Rs crore) Total for the Month AMT YTM GOI Dated Securities 7.68 on 27 April (Table 7). In the secondand lesser participation by foreign ary market.85.25 8.55 8.158 250 2 1.48 8.129 155 496 1.44 8.578 3.429 45 379 704 6 723 67. inter-bank dealings fell mar2.

000 8.000 3. 2012 vol xlviI no 21 .43 8.000 4.34 government securities im18-Apr-12 5.672 9.17%. with an improved bid-cover ratio a lower bid-cover ratio of 2.84% over the period. In the secondary eight securities were auctioned during market. thanks to security 8. followed by 182-day TBs worth Rs 9.000 crore five-year maturities broadened to 48 bps through four auctions in April.48%. Overall.80 8.86 (NDTL).926 crore. yields in the latter auction Table 14: Auctions of Treasury Bills (Amount in Rs crore) (Table 9.12 92. 11 bps to 8. The spread of yields for current financial year commenced in full 10-year maturities over one-year and swing absorbing Rs 65.000 crore to Rs 6.89 8.47 92.32 92.91 97.038 crore.00 97.08 8. over the month.48%. As against 45 issues in March only two issues were made in April. the cut-off and afterwards. Overall.87 18-Apr-12 9.38 8. the pressure of the huge The hardened yields of longer term borrowing programme.74 9.95 97.26 Overall. FIMMDA reported a turnover worth Rs 21.000 crore in the case of 364-day TBs at Rs 10.155 crore. which declined afterwards as the annual monetary policy 10-Apr-12 3 2.19 9.000 crore.96 raised the borrowing limit Total for April 2012 33.1 to 20 Source: www.81 banks under the marginal B: 182-Day Treasury Bills standing facility (MSF) 11-Apr-12 5. p 123.77 8.32 92. p 122).31 8.21 9.17 again in the fourth aucTotal for March 2012 32 21. yields the month to 9.22 92. GMR Infrastructure issued zero coupon bonds with nine years maturity for Rs 350 crore. The remaining three traded securithe repo rate cut by the RBI. which affected loans fell over the month but also the investor sentiments.00 1.99 96 from 1% to 2% of their net Total for April 2012 10. 17-Apr-12 1 75 6.55 95.36 8.000 2.000 3. The highest Banks/FIs 1 750 9. Turnover in the secondary market recorded a 31% fall in April to Rs 36.96 tion commanded higher Source: RBI press releases.000 2.715 2. on 3 April. Rs 10.80 97.57 8.36.000 3.60 3 trade was recorded for Corporates 1 350 0 9 9. first auction.000 crore and Rs 10.000 crore and Rs 10.000 2. respecinched up to 8.91 8.000 crore and Rs 2. aggregate turnover during the April.85 97.79% 2021 to the second position. TBs across maturities fetched lower yields over the month.25 92.50 97. A total of of 2.55 8.273 crore.000 2.37 8.70% over the month with tively. when 91-day. and in the case of 364day TBs.25 97. followed by NSE reporting a turnover worth Rs 12.5 Corporate Bonds Market There was no public issue in the corporate bonds market during April.95 9. it fell by 26 bps to 8.97 97. but Rs 7.55% over the Table 15: Details of Private Placement in Corporate Bonds month. In 04-Apr-12 6. In the secondary market.30 8.67 8.39 8. front loaded for maturities resulted in a widening of the current financial year.80 But a set of securities 24-Apr-12 5 4.92 8.02 9. private placements on the NSE also plummeted sharply by about 86% to Rs 1. Total for March 2012 8.219 crore.312 crore during the month.000 crore in the wake of a tepid response received by the first auction of central government securities one day before. for 91-day bills.nseindia.000 2.100 crore.30 8. Moreover.000 3.33 95. Date of Auction Bids Bid-Cover Cut-off Weighted Cut-off Weighted The RBI took the decision Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs) to cut the repo rate by 50 A: 91-Day Treasury Bills bps to 8% on 17 April.ties were 8.000 2. the yield firmed up to 9.15% 2024 security worth Total for April 2012 2 1.44 95. Yield rates across maturities softened. The turnover of central C: 364-Day Treasury Bills 04-Apr-12 5.000 4. resulted in a yield spreads. The top five securiInstitutional Category No of Volume Range of Range of Maturity ties contributed 93% to the Issues (Rs Crore) Coupon Rates in Years (y) and (in %) Months (m) total turnover. while the National Housing Bank issued bonds worth Rs 750 crore with 9. 2.850 3.100 9. the 10-year benchmark in the case of treasury bills.83% 2041 (Table 10.38%.640 2. 125 may 26. yield firmed up by Source: RBI’s press releases. The total traded volume of 91-day TBs was the highest at Rs 23.85 95. while it was higher by Rs 2.60% coupon and of three years maturity (Table 15). The issuance of 91-day TBs and 182-day TBs were reduced by Rs 7.60 3 to 9 Rs 1. Against only one issue of central govern.73 97.000 2.67 95. The auction resulted amount raised had dwindled by 64% to in devolvement worth Rs 1. yield eased by 46 bps to 8.60.286 crore.81 8. the remaining three auctions weighted average yields hardened over were fully subscribed.236 crore.17 issued in the second and Total for April 2012 9 7.261 1. Overall.000 crore to Rs 33.26.36 8. respectively.000 crore. p 124).000 3. respectively.06.21 9.43 month to Rs 2.com. Tables 11 crore.9 95.19 approached on 27 April.000 crore (Table 14).195 crore.24 8.51 proved by 71% over the Total for April 2012 10.74 9. Unlike the central government securities and state loans. month was Rs 7.4 Treasury Bills Four issuances of treasury bills (TBs) were made in April. The notified amount of 91-day TBs in the first auction was revised downward by Rs 3.48 8.14% from 8. At the time of the first auction.86 97.000 crore.69 8.25 8. for 182-day TBs it dropped by 33 bps to 8.51 9. 8.25-12. 2.74 (Table 13).40 8. respectively. The bid-cover ratio of 91-day TBs improved to 3.000 crore.19% 2020.41 92.81 97.33 97.02 8.21% and 9.85 order to provide a greater 11-Apr-12 9.23 9.97% 2030 and ment securities in March for Rs 12.98 liquidity cushion the RBI 25-Apr-12 9. showing an Date of Auction Number of Participating States Total Bid-Cover Amount Ratio Accepted YTM at Cut-Off Price (%) Weighted Average Yield (%) Economic & Political Weekly EPW Table 13: Details of State Government Borrowings (Amount in Rs crore) yields increase by about Rs 547 crore over March. Not only the number of states issuing hike on the notified amount set for the auction to Rs 18.MONEY MARKET REVIEW hardened.17 8. 182-day and 364-day TBs mopped funds worth Rs 33.34 8.69 8.91 25-Apr-12 5.42 8.92 of scheduled commercial Total for March 2012 40.4 92. the borrowing programme for the and 12.640 crore. In the and 16 bps.95 95.96 demand and time liabilities Total for March 2012 12.293 crore pushing Total for March 2012 45 7. total turnover fell by 7% to Rs 37.

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