MONEY MARKET REVIEW

Deregulation of the Savings Bank Deposit Rate

EPW Research Foundation

Deregulation of the interest rate on savings bank deposits will allow more room for non-price competition for improving the quality and diversification of customer service rather than result in a rate war. Given the nature of savings bank deposits vis--vis other deposits, some further regulatory guidelines would be required to complete the rationalisation of these accounts. It is the category of current account deposits in the current plus savings bank deposits segment that essentially determines the differences in the cost of funds between banks.

1 Introduction

Team led by K Kanagasabapathy and supported by Anita B Shetty, Vishakha G Tilak, V P Prasanth, Rema K Nair, Bipin K Deokar, Shruti J Pandey, R Krishnaswamy and Sharan P Shetty.

lmost culminating in full interest rate deregulation, the Reserve Bank of India (RBI) in its October 2011 policy announced that the banks are free to determine their savings bank deposit interest rate (SBR). The RBI has also fixed a threshold size of Rs one lakh up to which a uniform rate will apply and beyond that level, the banks are free to apply differential rates. Though apparently there was opposition to this move particularly from the public sector banks, the RBI needs to be commended for the way in which it prepared the ground for deregulation well ahead by releasing an excellent discussion paper and inviting public comments. For obvious reasons, the non-resident deposits will continue to be administered and freeing of those rates has to await full convertibility of the rupee. Yet another set of rates on small savings schemes of the government, though remaining regulated for practical reasons, has been bench marked against appropriate market-related rates in the system. In a recent speech, K C Chakrabarty, deputy governor of the RBI has mentioned that the RBI has set the tone for increased competition by deregulating the saving deposit rate. The measure would go a long way in encouraging thrift behaviour in the economy. This step is also expected to further strengthen the rate channel of transmission in monetary policy besides resulting in better integration of financial markets. To promote competition, the RBI has also charted out a course for entry of new private sector banks and also given a clear indication that foreign banks are encouraged to come by setting up a bank subsidiary. The RBI has also allowed domestic scheduled commercial banks to set up new branches in Tier 2 centres. All these augur well for improved competition in the financial industry and financial market development.
november 26, 2011

An attempt is made in this note to analyse certain related issues concerning the pattern of ownership of savings bank deposits (SBDs) and facilities associated with these deposits. It is proposed that given the nature of SBDs vis--vis other forms of deposit, some further regulatory guidelines would be required to complete the rationalisation of these accounts. Second, it is established that it is the component of current account deposits in the current plus savings bank deposits (CASA) segment that essentially determines the differences in the cost of funds between banks. It is argued that rather than result in a rate war the SBR deregulation will allow more room for nonprice competition for improving the quality and diversification of customer service.

1.1 Some Distinguishing Features of SBDs

The nature of SBDs in India differs with international practices in two respects. First, there is a diversified ownership and, second, cheque writing facility is allowed practically without limits. As a result, apart from individuals, including high net worth individuals, SBDs are owned by a variety of persons including government, financial and non-financial sectors. This may perhaps be attributed to historical factors. Table 1 (p 73) shows the ownership pattern of SBDs in terms of deposit amounts. Though the household sector held about 85%, farmers and wage earners together accounted only for about 25% of the ownership, while businesspersons and the nonhousehold sector accounted for the rest. While the government sector accounted for about 9%, a somewhat nebulous category, other individuals, within the household sector accounted for about 39%.

1.2 Price and Non-Price Factors in Competition

One of the arguments for not freeing interest rate on SBDs thus far was that it could increase the cost of funds for the banking system, particularly for public sector banks. There could be possibilities of competitive hikes of deposit rates particularly by the foreign banks and private sector banks and this could wean away the deposit base from the public sector banks.
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Since these accounts are operated more as current accounts, there is no reason why banks should be willing to pay significantly higher rates of interest on these accounts.
Current

Overall, the safety factor lies with the public sector. In spite of lower rates, public sector banks should be in a position to retain their deposit base.
Savings CASA Total Current/ CASA Savings/ CASA/Total CASA

Table 1: Ownership of CASA Deposits with Scheduled Commercial Banks 2010 (Rs crore) I 92,140 1,05,378 19,7,518 6,55,091 (15.9) (8.6) (10.9) (13.5) II Private corporate sector (non-financial) 1,91,309 6,965 1,98,274 7,13,696 (33.0) (0.6) (11.0) (14.8) III Financial sector 46,379 4,817 51,196 4,82,043 (8.0) (0.4) (2.8) (10.0) IV Household sector 2,37,317 10,48,573 12,85,890 28,04,875 (41.0) (85.2) (71.0) (58.0) of which Individuals (including Hindu 1,06,018 9,13,807 10,19,825 21,84,273 undivided families) (18.3) (74.2) (56.3) (45.2) Farmers 4,250 1,02,452 1,06,702 2,11,842 (0.7) (8.3) (5.9) (4.4) Businessmen, traders, professionals 47,190 1,19,750 1,66,940 3,41,997 and self-employed persons (8.2) (9.7) (9.2) (7.1) Wage and salary earners 6,615 2,08,327 2,14,942 4,29,811 (1.1) (16.9) (11.9) (8.9) Shroffs, moneylenders, stockbrokers, 4,753 5,044 9,797 29,162 dealers in bullion, etc (0.8) (0.4) (0.5) (0.6) Other individuals V Foreign sector Grand total
Figures in bracket are percentage to total. Source: RBI.

Government sector

46.6 96.5 90.6 18.5

53.4 3.5 9.4 81.5

30.2 27.8 10.6 45.8

10.4 4.0 28.3 3.1 48.5 8.3 15.2 32.0

89.6 96.0 71.7 96.9 51.5 91.7 84.8 68.0

46.7 50.4 48.8 50.0 33.6 44.5 42.7 37.4

43,209 4,78,234 5,21,443 11,71,461 (7.5) (38.8) (28.8) (24.2) 11,704 65,450 77,154 1,80,657 (2.0) (5.3) (4.3) (3.7) 5,78,849 12,31,183 18,10,032 48,36,362 (100.0) (100.0) (100.0) (100.0)

Table 2: Bank Group-wise Pattern of CASA Deposits of Scheduled Commercial Banks (March 2010)
Bank Group % to Total Current Savings Deposit Amount per Account in Rs Current Savings Current to CASA No of Amount Accounts in Lakh CASA to Total Deposits No of Amount Accounts in Lakh Cost of Funds

SBI and Associates Nationalised Banks Total Public Sector Private Sector Banks Regional Rural Banks Foreign Banks All SCBs
Source: RBI, Compiled by EPWRF.

21.2 42.0 63.3 23.5 1.3 11.9 100.0

26.2 49.5 75.7 15.2 6.2 3.0 100.0

1,53,343 23,342 1,33,349 21,601 1,39,454 22,174 2,62,841 36,647 57,865 8,886 19,87,639 1,14,010 1,74,955 21,992

5 6 6 9 1 9 5

27 28 27 41 9 65 31

81 80 80 75 86 81 80

43 36 38 39 58 45 39

5.32 5.37 5.35 4.83 2.83 5.10

The fear that deregulation of SBR would result in a rate war has been belied. So far, only four new relatively smaller sized private sector banks have revised their rates upward from the earlier administered rate of 4% to a range of 5.5% to 6%. All these banks had a very low savings bank deposits to total deposits ratio of 10% or less, excepting Ratnakar Bank with a ratio of 19.5%. In terms of value, the public sector banks accounted for about 76%, private sector about 10-15% and the foreign banks a meagre 1-3%. This can be attributed to the implementation of regulated branch licensing policy and traditional dominance of the public sector. Overall, the safety factor favours the public sector. In spite of lower rates, public sector banks should be in a position to retain their deposit base (Table 2). When the price is administratively mandated, it stifles competition. In a public sector-oriented banking system, administered rates on SBDs provided a protective umbrella to the public sector. Given the limitations, the private sector and foreign banks tended to focus upon non-price factors to sustain their deposit base and minimise the cost of funds. The reach of branches is an important factor in deciding competitive power. On this score, public sector banks still hold an advantageous position. Studies have shown that the deregulation of banking sector had not improved significantly the competitive efficiency of banking system precisely for this reason. However, despite a regulated branch licensing policy, it has been observed that the private sector banks have
Public Sector Banks CAGR 1999-2000 2009-10 CAGR

Table 3: Bank Group-wise Growth in Deposits (1999-2000 to 2009-10)

1999-2000 State Bank Group 2009-10 CAGR 1999-2000 Nationalised Banks 2009-10

No of Branches CASA Deposits (Rs lakh) Current (Rs lakh) Savings (Rs lakh) Total Deposits (in crore) Per Branch Amount of Deposits (Rs lakh) Per Branch Saving Deposits (Rs lakh) Per Branch Current Account Deposits (Rs lakh)

13,356 84,19,179 29,56,174 54,63,005 2,03,049 1,520 409 221 5,010 26,81,409 14,43,835 12,37,574 97,001 1,936 247 288

17,229 4,40,90,496 117,95,174 3,22,95,322 10,18,666 5,913 1,874 685

Private Sector Banks

(2.9)

(16.3) (18.4) (13.4) (8.0)

32,568 1,64,67,903 49,72,015 1,14,95,888 4,42,493 1,359 353 153 186 15,42,007 10,42,831 4,99,176 46,842 25,184 2,684 5,607

41,596 8,41,96,033 2,33,33,351 6,08,62,682 23,65,598 5,687 1,463 561

Foreign Banks

(2.8)

(17.2) (17.1) (15.5) (5.8)

45,924 2,48,87,082 79,28,189 1,69,58,893 6,45,542 1,406 369 173 51,120 2,10,28,170 1,05,45,802 1,99,73,368 8,21,420 1,607 391 206

58,825 12,82,86,529 3,51,28,525 9,31,58,004 33,84,263 5,753 1,584 597

All SCBs

(2.8)

(17.0) (17.6) (14.8) (3.4)

No of Branches CASA Deposits (Rs lakh) Current (Rs lakh) Savings (Rs lakh) Total Deposits (in crore) Per Branch Amount of Deposits (Rs lakh) Per Branch Saving Deposits (Rs lakh) Per Branch Current Account Deposits (Rs lakh)
Source: RBI, Compiled by EPWRF. Economic & Political Weekly EPW

10,027 3,17,44,055 1,30,55,320 1,86,88,735 8,06,569 8,044 1,864 1,302

(17.2) (25.2) (18.3)

308 1,02,48,915 66,18,838 36,30,077 2,28,186 74,086 11,786 21,490

(12.7) (17.9) (16.1)

69,160 17,85,72,304 5,55,23,683 12,30,48,621 45,61,029 6,595 1,779 803

(17.0) (18.3) (16.3)

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expanded their branches at a faster pace compared to the public sector and so was the case with foreign banks as well. The per branch mobilisation of deposits by private and foreign banks had recorded a faster growth over the last decade compared to public sector banks (Table 3, p 73). An analysis of the relationship between the cost of funds and the type of deposits held by the banks shows that the cost of funds was influenced equally by the extent of current accounts component in the CASA besides the extent of CASA in total deposits (Table 4 and Graph A). While with the

exception of a few banks most of Graph A: Relationship between CASA and Cost of Funds (March 2010) 8 the banks had a good CASA base, 7 the current accounts to CASA ratio varied in a wide range. The 6 ratio was more favourable in 5 the case of private sector banks 4 and foreign banks. Thus, despite 3 the fact that current accounts do not earn any interest, these banks 2 were able to attract huge current 1 11 14 17 20 23 26 29 32 35 38 41 44 47 50 53 56 account deposits perhaps because CASA to Total Deposits of non-price factors in the form of the quality and diversity of services freeing of SBR would result in further these banks provide to customers. The intensification of this competition. Such competition can become more intensive Table 4: Pattern of CASA Deposits and Cost of Funds: Select Banks (March 2010) with the entry of new private sector banks. Savings to Current to CASA Current to CASA to Cost of
Total Deposits Total Deposits (Rs crore) CASA Ratio Total Deposits Cost of Funds Funds

A Public Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank State Bank of India IDBI Bank Ltd Average B Private Banks ING Vysya Bank Ltd Tamilnad Mercantile Bank Ltd The Federal Bank Ltd The Jammu & Kashmir Bank Ltd The Karnataka Bank Ltd The Karur Vysya Bank Ltd The Ratnakar Bank Ltd The South Indian Bank Ltd Axis Bank Ltd HDFC Bank Ltd ICICI Bank Ltd IndusInd Bank Ltd Kotak Mahindra Bank Ltd Yes Bank Ltd Average C Foreign Banks Bank of America NA Citibank NA Standard Chartered Bank The Bank of Nova Scotia HSBC Average
Source: RBI, Compiled by EPWRF.

25.1 26.9 20.8 25.4 22.1 27.1 21.8 26.1 16.3 27.8 25.1 24.4 16.5 19.6 31.9 26.5 18.6 22.9 29.1 17.3 33.0 5.6 23.1 23.7 21.2 13.4 21.2 30.6 16.1 13.1 19.5 19.6 24.9 30.2 27.8 7.9 10.4 1.6 18.4 16.1 10.0 21.3 18.9 3.2 19.5 14.6

9.9 7.9 8.6 8.6 7.2 9.7 7.8 9.2 16.8 9.1 7.6 8.5 8.5 6.6 9.0 9.8 7.4 9.2 9.6 7.3 14.6 9.6 9.2 16.5 19.0 12.0 4.8 14.3 7.2 10.8 18.0 4.8 22.7 21.9 15.4 17.8 20.6 10.1 14.2 29.3 44.1 30.4 29.2 12.5 28.8 29.0

12,36,158 36,530 22,761 70,360 63,660 23,301 67,720 55,126 26,448 18,320 28,360 35,700 29,947 12,255 1,00,087 36,079 29,706 52,886 25,719 15,225 3,71,135 23,891 54,534 3,16,270 8,234 2,906 9,321 15,054 5,518 4,530 567 5,319 64,673 86,048 82,730 6,262 7,364 2,818 21,525 1,02,699 2,887 27,942 22,115 306 26,556 15,961

28.2 22.6 29.2 25.3 24.5 26.3 26.4 26.1 50.8 24.6 23.2 25.9 33.9 25.3 21.9 26.9 28.5 28.7 24.8 29.6 30.6 63.2 29.4 41.1 47.4 47.2 18.3 31.8 30.9 45.2 48.0 19.7 47.6 42.0 35.7 69.4 66.4 86.1 45.4 64.5 81.5 58.8 60.8 79.8 59.7 68.1

35.0 34.8 29.4 34.0 29.3 36.8 29.7 35.3 33.1 36.9 32.7 32.9 25.0 26.2 40.9 36.3 26.1 32.2 38.7 24.6 47.5 15.2 32.3 40.2 40.2 25.4 25.9 44.9 23.3 23.9 37.5 24.4 47.6 52.2 43.2 25.7 31.0 11.7 32.6 45.4 54.1 51.7 48.0 15.7 48.2 43.6

5.35 5.37 5.38 4.37 4.97 5.28 5.61 6.06 5.08 5.67 5.56 6.14 6.21 5.75 4.90 5.42 5.78 5.28 5.92 5.84 5.14 5.19 5.47 4.83 4.10 6.96 6.11 5.32 7.45 6.79 5.86 6.42 4.03 4.66 4.18 5.69 4.50 6.05 5.58 2.83 1.85 2.67 3.04 2.40 3.17 2.63

1.3 Suggestions
SBDs like in other countries could offer minimum facilities such as withdrawal and ATM/debit card with modest interest payment but it may not offer cheque writing facility, beyond a certain limit. RBI should allow price competition without attempting micromanagement of fixing or restricting bank charges for services rendered. That kills both price as well as non-price competition. The accounts with cheque writing facility like current accounts should not offer any interest payment on balances. Opening of SBDs may be allowed only by individuals and family, and all other categories of account holders like government organisations, trusts, non-banking organisations, etc, should be made to switch over to chequable deposit accounts. With these measures, RBI would be moving a further step ahead towards rationalisation of deposit accounts.

2 Money, Forex and Debt Markets

The continuing and high inflation forced a series of hikes in policy rate clearly showing its repercussions on the growth front. Still, the RBI continued its hawkish stance and raised the key policy repo rate once again on 25 October in its Second Quarterly Monetary Policy Review. However, the central bank signalled a possible pause in rate hikes largely hoping that inflation might start easing after December 2011. Money market rates sustained their upward movements in October with key interest rates touching their peaks. After
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Table 5: Money Market Activity (Volume and Rates)
Instruments October 2011 Daily Average Monthly Volume Weighted (Rs Crore) Average Rate (%) Range of Weighted Average Daily Rate (%) Daily Average Volume (Rs Crore) September 2011 Monthly Weighted Average Rate (%) Range of Weighted Average Daily Rate (%)

Call Money Notice Money Term Money @ CBLO Market Repo

9,848 3,356 235 43,076 13,674

8.24 8.27 8.01 8.07

7.61-8.39 6.99-8.54 6.85-10.01 5.98-8.45 7.41-8.42

10,320 3,027 353 43,408 13,714

8.11 8.10 7.95 8.03

7.48-8.28 7.25-8.29 7.00-10.65 6.56-8.24 5.25-8.27

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

Table 6: RBIs Market Operations (Rs crore)

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

yields also inched up on the back of rising government bond yields.

Jun-2011 Jul-2011 Aug-2011 Sep-2011 Oct-2011

981 -6 -6 5 6

72,204 37,683 36,948 52,194 50,708

2.1 Money Market

Source: RBIs Weekly Statistical Supplement.

experiencing some normality in the beginning of October, the liquidity in the system showed signs of tightness following festive season demand along with the huge market borrowing programme by the government, which absorbed more than Rs 50,000 crore from the system. A massive fall in deposits growth to the extent of around Rs 90,000 crore and outflows caused by a fall in currency circulation amounting to Rs 36,000 crore also resulted in a severe cash crunch. However, the drop in credit growth by Rs 66,000 crore and a fall in bankers deposits to the extent of Rs 52,000 crore supported the system in managing the funds crunch. The RBI continued to meet the liquidity deficit and banks borrowed around Rs 50,000 crore on a daily basis in the RBIs LAF window during the month. Impressive fund inflows and positive stock market movements coupled with euro area developments propelled the Indian rupee to recover from its lows during the month and the local currency marginally gained by 0.2% against the dollar. Following the governments move to raise its bond sale target by Rs 53,000 crore in the second half of the current fiscal, yields advanced further on supply concerns. Notably, sale of government bonds devolved on three occasions on primary dealers in October as investors sought higher yields. Indias benchmark 10-year bonds yield saw its worst since May 2009 on speculation that the governments debt sale target could further dampen overall demand. Corporate bond
Economic & Political Weekly EPW

Another round of policy rate hikes and the emergence of a liquidity crunch in the system again prompted short-term money market instruments to sustain their northward trend in the month of October. A possible pause in the rate hike was belied in the beginning of October itself with RBI officials clearly signalling the significance of controlling inflation. Thus, despite the slowdown in growth, the government officials also expressed preference for following strict monetary action. However, in the policy review there was a softening of tone when it indicated by way of forward guidance about some ease in inflation, as well as of interest rates in coming months. Following all these developments, the overnight and 14-day weighted average rates increased by 13 basis points (bps) and 17 bps, respectively over a period of one month. However, the likely pause in rate increase in the coming policy review influenced the movements of rates on term and the collateralised instruments which ruled in a relatively lower bound compared to call and notice money rates. In October, the CBLO and Table 7: Foreign Exchange Market: Select Indicators Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex Dollar Index market repo rates inched Month Rate (Last Friday Depreciation (-) (Equity +Debt) (Month-end (Month-end up slightly by 6 bps and 3 of the Month) of Rs/$ (in %) in $ Million Closing) Closing)# * 44.72 1.10 4,883 18,846 69.36 bps, respectively over Sep- Jun-2011 Jul-2011 44.16 1.27 2,399 18,197 68.53 tember. Overall, compared Aug-2011 46.05 -4.12 -7,903 16,677 68.85 to September, all the shortSep-2011 48.93 -5.87 -1,866 16,454 72.81 term money market instru- Oct-2011 48.82 0.21 634 17,705 70.52 ments ruled in a wider *: Data relates to last day of the month. #:Nominal Major Currencies Dollar Index. Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov. range despite witnessing Table 8: Average Daily Turnover in the Foreign Exchange Market* ($ billion) less volatility. Merchant Interbank Spot Forward Total Uncertainty in rates Month Jun-2011 12.7 -(5.8) 48.1 -(0.5) 27.4 -(5.2) 33.4 (1.5) 60.8 -(1.7) coupled with liquidity Jul-2011 14.0 (9.5) 45.1 -(6.3) 28.5 (4.0) 30.5 -(8.8) 59.0 -(3.0) crunch in the system Aug-2011 17.0 (21.6) 46.6 (3.3) 30.3 (6.2) 33.3 (9.0) 63.5 (7.7) resulted in varied trading Sep-2011 15.1 -(11.2) 44.8 -(3.8) 29.6 -(2.3) 30.3 -(9.0) 59.8 -(5.8) behaviour across the money *: Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are percentage change over the previous month. market instruments. Except Source: RBIs Weekly Statistical Supplement, various issues.
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the notice money segment, the remaining four money market instruments reported a lower trading volume. The overnight segment recorded a 5% fall in its daily turnover due to a sharp rise in rates during the month over the previous month. Similarly, CBLO and market repo also registered reduction in their trading volume though only marginally over the period. The heightened expectation of an easing in rates induced a sudden fall in the term money trading. However, borrowers preferred to borrow funds from the notice money segment which registered a 11% rise in its trading activity during the review period (Table 5). As per the latest available data by RBI, the short-term certificates of deposit (CDs) market had seen a fall of Rs 22,000 crore in its outstanding amount during September over August primarily due to lessening credit demand and rising interest rates. Still, in the fortnight ending 23 September, the issuance of CDs amounted to Rs 66,000 crore. The range of discount rates hardened notably and crossed the 10% mark in the upper-bound in both the fortnights of September. Contrary to CDs, the outstanding amount of commercial papers (CPs) improved by Rs 17,000 crore during a period of one month till 15 September. The rates continued to rule in an upper range of 8.47% and 14.00% in the fortnight ending 15 September. During the same period, the CPs reported Rs 31,000 crore issuances. According to the trading platform Fixed Income Money Market and Derivatives Association (FIMMDA) CDs and CPs recorded a notable fall in their daily trading activity

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during October. Over a period of one month, both the products reported 40% and 33% fall in their total turnover, respectively. The severe cash crunch experienced during September sustained itself in October also due to a fall in currency circulation and deposit growth, in addition to the huge market borrowing programme which put huge cash demands on banks. To manage the situation, the borrowers dependence on the RBIs LAF window increased remarkably during the period as overnight money
Date of Auction Nomenclature of Loan Notified Amount

market rates also crossed the prevailing repo rate. In the aftermath of advance tax payments by companies for the second quarter of 2011-12, the system experienced some moderation in the liquidity situation in the beginning of October with the repo tendered amount coming down to just Rs 11,000 crore on a daily average basis in the first week. However, banks borrowings spurted immediately from the second week onwards with the government starting its borrowing programme for the second
Bid-Cover Ratio Devolvement on Primary Dealers YTM at Cut-off Price (in %) Cut-off Price (in Rs)

Table 9: Details of Central Government Market Borrowings (Amount in Rs crore)

07-Oct-11

8.07% 2017 8.08% 2022 8.28% 2027 8.30% 2040 14-Oct-11 7.83% 2018 7.80% 2021 8.26% 2027 28-Oct-11 7.99% 2017 8.13% 2022 8.28% 2027 8.30% 2040 Total for October 2011 Total for September 2011
R: Reissue. Source: RBI press releases.

R R R R R R R R R R R

3,000 6,000 3,000 3,000 4,000 6,000 3,000 4,000 6,000 2,000 3,000 43,000 22,000

1.84 1.74 1.98 1.84 1.51 1.79 3.10 1.84 1.74 1.98 1.84 1.88 2.21

nil nil 193 706 1,614 2,424 nil 149 nil nil nil

8.64 8.70 8.87 8.92 8.79 8.78 8.95 8.92 8.95 8.98 8.98 8.85 8.44

97.61 95.68 95.00 93.59 95.31 93.75 94.21 95.90 94.35 94.12 93.03 94.79 97.44

half of the current fiscal. The situation remained the same for the remaining weeks of the month with the average daily borrowing lingering above Rs 61,000 crore. Despite a lower demand for credit, the last week of the month reported the banks borrowings crossing Rs 1 lakh crore on 25 October. Overall, during the month of October, the injection of funds by the RBI averaged around Rs 55,000 crore as in the previous month. During the same period, banks parked around Rs 4,000 crore in RBIs reverse repo window. However, RBIs marginal standing facility (MSF) as also its OMO window remained inactive (Table 6, p 75). The interest rate futures (IRFs) segment of NSE reported nil trading activity in October, However, to revive the segment by attracting huge participation from banks, SEBI is planning to allow the launch of derivatives based on 2-year and 3-year bonds on cash-settled basis.

2.2 Forex Market

In the domestic market, the rupee completed its first monthly gain after a span of two months as the central bank increased
Three Months Ago (July 2011) AMT YTM Six Months Ago (April 2011) AMT YTM

Table 10: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)
Descriptions Last Week (28) AMT YTM October 2011 First Week (7) AMT YTM Total for the Month AMT YTM Previous Month September 2011 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) 2011 2012 (4) 2013 (2) 2014 (5) 2015 (3) 2016 (3) 2017 (4) 2018 (4) 2019 2020 (1) 2021 (2) 2022 (3) 2023 2027 (3) 2028 2032 (1) 2034 2035 2040 (1) 3 State Govt. Securities Grand total (1 to 3)

2,613 1,531 771 311 28,274

8.62 8.62 8.56 8.80

6,167 3,834 900 1,432 33,202

8.29 8.29 8.47 8.57

16,102 8,780 3,258 4,064 1,68,357

8.38 8.48 8.51 8.74

27,761 21,065 2,787 3,909 2,45,522

8.31 8.35 8.34 8.35

43,075 33,678 3,730 5,667 2,36,766

8.04 8.16 8.24 8.36

17,843 12,653 2,526 2,665 1,00,608

7.09 7.19 7.37 8.09

1,010

8.68

55 95 823 1,778

8.53 8.73 8.87 8.78

29 56 221 210 111 1,056 2,477 630 17,976 8,994 1,004

8.34 8.36 8.35 8.56 8.51 8.53 8.53 9.06 8.53 8.61 8.75

2,546 56 342 321 422 3,375 13,088 970 1,13,304 26,885 4,827 102

8.61 8.37 8.42 8.59 8.65 8.70 8.72 9.06 8.73 8.73 8.88 8.91

18,689 5,008 453

8.78 8.86 8.92

363 129 31,016

8.95 9.01

440 678 40,046

8.89 8.82

2,118 2,353 1,86,812

8.94 8.94

1,003 822 266 1,067 997 5,405 12,051 25 1,590 1,74,377 42,386 1 4,218 1 231 4 2 1,076 2,042 2,75,325

8.32 8.27 8.26 8.32 8.33 8.33 8.34 8.34 8.97 8.32 8.41 8.65 8.57 8.51 8.58 8.51 8.92 8.63 8.62

317 923 210 122 826 2,968 2,649 12,173 101 1,136 1,54,392 53,783 2 3,777 25 1,411 1 1,947 3,960 2,83,801

9.08 8.08 8.16 8.21 8.33 8.32 8.34 8.34 8.45 8.81 8.32 8.41 8.29 8.63 8.77 8.58 8.56 8.61 8.59

1,353 3,453 371 796 2,285 2,845 4,114 3,941 16 1,759 24,634 51,697 2 1,927 4 8 2 105 1,297 1,785 1,20,236

7.58 7.73 7.79 7.98 8.02 8.17 8.01 8.00 7.91 7.98 8.03 8.16 8.20 8.41 8.31 8.37 8.46 8.37 8.46 8.30

(-) means no trading YTM = Yield to maturity in per cent per annum NDS = Negotiated Dealing System OM = Order Matching Segment (1) Yields are weighted yields, weighted by the amounts of each transaction. (2) Trading in 2024-26 and 2036-39 securities were negligible. Source: Compiled by EPWRF; base data from RBI, CCIL.

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interest rates again and Europe stepped up efforts to contain a debt crisis that drove funds from emerging market assets. The downward pressure on the Indian rupee was sustained in the beginning of the month with data showing a widening of the current account deficit and increasing concerns about the global and domestic economic outlook. The rupee lost 50 paise against the dollar and crossed the 49-mark on 3 October. The restrained demand for emerging market assets resulted in huge portfolio outflows in the first week of October and the stock market activities also remained bearish. Overlooking all the negative indicators and tracking the strengthening of the Asian currencies, the rupee reversed the trend from 4 October and recovered by 39 paise till 11 October. Thereafter, the local currency displayed see-saw movements till 17 October but again turned to a depreciating mode. Huge dollar demand by oil importers put enormous pressure on the rupee and the currency lost a substantial 117 paise versus the dollar till 21 October and crossed the psychological 50-mark. At this point, the RBI was also reported to have intervened in the market to arrest the rupees slide. However, a smart rebound in local stocks along with fresh dollar selling by exporters amid dollar weakness overseas coupled with the resumption of capital inflows supported the domestic currency in its bounce back in the last week of October. The rupee recovered by a smart 117 paise and closed at
Descriptions

Rs 48.87 per dollar on 31 October register- one-year of operation in domestic exchaning 0.1% appreciation over 30 September. ges but was able to achieve just a 13% The forward premia across three matu- market share towards total currency rities displayed a hardening trend during derivatives turnover. October on a likely depreciation of the rupee in the near term. The premia of three 2.3 Government Securities Market different maturities remained relatively The government securities market entered volatile and moved in a wide range. During a difficult phase with both central and state the month as a whole, the one-month premia governments increasing their primary issues inched up by 99 bps over the previous even as the selling pressure mounted in month to 6.63% as on 31 October. Similarly, the secondary market. Primary auctions the 3-month and 6-month premia increased saw more devolvement and yields in both by 58 bps and 105 bps, respectively to 5.73% primary and secondary markets moved and 4.75% during the review period. northward. Continued inflationary presDespite a spurt in exports and imports, sure combined with prospects of lower the total and average daily turnover in the economic activity weighed down on the foreign exchange market plummeted by fixed income markets. 5.8% each, during September over August. During October, three auctions of governThe highest fall was registered by merchant ment securities were held for Rs 43,000 transactions (-11.2%) followed by forward, crore in the aggregate. As expected, the inter-bank and spot market dealings overall yield inched up to 8.85% from (Table 8, p 75). 8.44% in September. A dip in investors Imposition of transaction charges for cur- response for auctions, measured by the bid rency derivatives trading by the exchanges cover ratio was also witnessed as it came from August continued to pinch trading down to 1.88 from 2.21 during the last activity in the currency derivatives market month. Since 29 September, when the RBI in October. The segment reported a 41% announced increased market borrowings, fall in its collective turnover traded in three almost worth Rs 53,000 crore for the secdifferent exchanges. The average daily turn- ond half of the current financial year, yields over also plunged by 38% to Table 12: Yield Spreads (Weighted Average) Central Government Securities Rs 30,000 crore during the (Basis points) October 2011 Previous Three Six Months month. Both options and Yield Spread in bps Last Week First Week Entire Month Month Months Ago Ago futures segments reported a 1 Year-5 Year 5 17 4 0 24 44 5 2 8 -1 0 -14 38% fall each in their average 5 Year -10 Year 10 Year-15 Year -7 daily trading. Options trad- 1 Year-10 Year 10 19 12 -1 24 30 ing in currencies completed Source: As in Table 10.
October 2011 First Week (7) AMT YTM Previous Month September 2011 AMT YTM Three Months Ago (July 2011) AMT YTM Six Months Ago (Aril 2011) AMT YTM

Table 11: Predominantly Traded Government Securities (Amount in Rs crore)

Last Week (28) AMT YTM Total for the Month AMT YTM

GOI Dated Securities 7.40 2012 7.27 2013 7.17 2015 7.59 2016 7.49 2017 7.99 2017 8.07 2017 7.83 2018 7.80 2021 8.08 2022 8.13 2022 8.20 2022 8.26 2027 8.28 2027 8.28 2032 8.30 2040 Total (All Securities)

1,010 55 95 667 152 1,778 18,689 1,000 4,008 117 336 363 28,274

8.68 8.53 8.73 8.90 8.75 8.78 8.78 8.81 8.87 8.90 8.92 8.95 8.80

29 55 160 91 1 185 870 2,476 17,976 5,835 3,159 20 984 440 33,202

8.33 8.36 8.42 8.48 8.52 8.51 8.54 8.53 8.53 8.63 8.57 8.75 8.75 8.89 8.57

2,439 56 251 401 1 1,067 2,304 13,087 1,13,304 13,995 12,885 1,785 3,041 103 2,118 1,68,357

8.61 8.36 8.46 8.65 8.52 8.80 8.65 8.72 8.73 8.71 8.76 8.60 8.91 8.87 8.91 8.94 8.74

364 750 991 970 76 2,477 2,802 12,041 1,74,374 9,931 32,390 60 562 3,656 218 1,076 2,45,522

8.28 8.23 8.28 8.31 8.30 8.36 8.32 8.34 8.32 8.40 8.41 8.57 8.57 8.57 8.58 8.63 8.35

676 210 786 2,700 275 646 1,460 11,976 1,54,349 20,292 33,428 45 2,375 1,382 1,361 1,947 2,36,766

8.05 8.16 8.34 8.31 8.32 8.32 8.34 8.35 8.32 8.42 8.41 8.40 8.61 8.64 8.59 8.61 8.36

2,665 370 2,278 2,812 190 1,479 3,930 24,634 28,681 22,978 37 1,914 4 1,297 1,00,608

7.77 7.79 8.02 8.17 8.02 8.03 8.00 8.03 8.18 8.13 8.11 8.41 8.36 8.46 8.09

(-) means no trading YTM = Yield to maturity in percentage per annum. Source: as in Table 10. Economic & Political Weekly EPW

1) Yields are weighted yields, weighted by the amounts of each transaction.

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pressures in the secondary market contributed to the overall secondary market 04-Oct-11 9 7,735 1.58 8.88 8.86 yield increasing significantly 13-Oct-11 1 300 6.1 8.98 8.95 from 7.74% to 8.35% in 18-Oct-11 11 7,735 2.03 9.07 9.06 October over the previous Total for October 2011 21 15,770 1.89 8.98 8.96 month. Secondary market Total for September 2011 11 9,050 1.72 8.64 8.63 Source: RBI press releases. trading also fell steeply by Table 14: Auctions of Treasury Bills (Amount in Rs crore) 31% during the month to Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted Rs 1,68,357 crore. The most Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs) traded security was the A: 91-Day Treasury Bills 10-year benchmark, 7.80% 05-Oct-11 4,000 3.69 8.44 8.44 97.94 97.94 2021, which alone contrib12-Oct-11 4,000 2.85 8.48 8.48 97.93 97.93 uted to 67% of total traded 19-Oct-11 4,000 2.88 8.65 8.60 97.89 97.90 volume, while the top-five 25-Oct-11 4,000 3.33 8.65 8.65 97.89 97.89 traded securities including Total for October 2011 16,000 3.19 8.55 8.54 97.91 97.92 Total for September 2011 28,000 2.70 8.41 8.40 97.95 97.95 8.08% 2022, 7.83% 2018, B: 182-Day Treasury Bills 8.13% 2022 and 8.28% 12-Oct-11 4,000 1.82 8.62 8.57 95.88 95.90 2027 accounted for 93% of 25-Oct-11 4,000 2.33 8.71 8.66 95.84 95.86 the total turnover. The conTotal for October 2011 8,000 2.08 8.66 8.62 95.86 95.88 tribution of the top 10 secuTotal for September 2011 6,000 2.69 8.43 8.41 95.97 95.98 rities was almost 99%. The C: 364-Day Treasury Bills 05-Oct-11 4,000 2.66 8.52 8.51 92.17 92.18 yield curve assumed an unu19-Oct-11 4,000 2.67 8.68 8.66 92.03 92.05 sual and quite an inverted Total for October 2011 8,000 2.67 8.60 8.58 92.10 92.12 shape even as yields firmed Total for September 2011 5,742 3.49 8.40 8.39 92.27 92.28 up more towards the highD: 48-Day Cash Management Bills er end of maturities as 17-Oct-11 10,000 2.19 8.69 8.61 98.87 98.88 Source: RBIs press releases. compared to shorter maturities. The yield spread was Table 15: Details of Private Placement in Corporate Bonds in NSE during October 2011 narrowed by 12 bps for Institutional Category No of Volume in Range of Range of Maturity 1-year and 10-year maturi Issues Rs Crore Coupon Rates in Years (y) NS (in %) Months (m) ties and 4 bps for 1-year and Corporates 7 214 9.95-10.25 3-5 years 5-year maturities (Table 10, NBFCs 10 3,408 7.51-10.10 2-17 years p 76 and Tables 11 and 12, Central Undertakings 3 2,015 8.97-9.35 5 years p 77). Total for October 2011 20 5,637 7.51-10.25 2 to 17 Total for September 2011 6 6,329 9.38-10.15 1 to 15 Through three auctions Source: www.nseindia.com state governments raised have been moving upwards. Primary market Rs 15,770 crore in the aggregate during yields during October auctions were far the month, 74% larger than in September. higher than one or two months before. A total of 16 states took part in these aucDespite elevated cut-off yields, every auc- tions out of which Andhra Pradesh, Kerala, tion in the month partially devolved on the Maharashtra, Rajasthan and Tamil Nadu primary dealers. This amounted to 12% of accessed the market twice. A strengthening the aggregate notified amount for the of cut-off yields was seen over the aucmonth. The cut-off yields as also devolve- tions. Overall, the average cut-off yield ment could have been much higher, but firmed up to 8.98% from 8.64% over the for the passive injection of liquidity by the month. The bid cover was almost equal to RBI through its LAF window. The average that of central government auctions. In borrowing from the repo window in the the second auction, Punjab was the only month was Rs 57,806 crore, a bit higher participant with a very high bid cover than RBIs comfort zone of Rs 50,000 of 6.10 (Table 13). crore, and touched its high of more than A sharp surge in yield was also seen in Rs 1 lakh crore on 25 October, the day of the secondary market trades of SDLs as it the policy announcement (Table 9, p 76). moved to 8.94% from 8.62% in SeptemElevated yields in primary auctions ber; but some improvement was seen in coupled with devolvement and the selling the turnover at Rs 2,353 crore.
Table 13: Details of State Government Borrowings (Amount in Rs crore)
Date of Auction Number of Total Participating Amount States Accepted Bid Cover Ratio YTM at Cut-Off Price (%) Weighted Average Yield (%)

2.4 Treasury Bills

Treasury bills (TBs) with regular maturities were issued for lower notified amounts as compared to the pervious month, but after 21 July, the RBI resumed issuance of cash management bills (CMBs) on 17 October, with maturity of 48-days, for Rs 10,000 crore. In the month, a better response was realised only by 91-day TBs, 3.19 times the aggregate notified amount. A firming up of cut-off yields was seen across maturities. For 91-day, 182-day and 364-day TBs cut-off yields were set at 8.55%, 8.66% and 8.60% in October against 8.41%, 8.43% and 8.40% in the previous month. Forty-eight day CMBs were issued at a cutoff yield of 8.69% (Table 14). Overall, the turnover of the TBs fell over the month by 42% to Rs 16,102 crore. Among different maturities, 91-day TBs recorded a 58% fall in traded volume. Yields in general moved up but it was the highest for 364-day TBs by 17 bps to 8.51% over the month.

2.5 Corporate Bond Market

Private placement issues at Rs 5,637 crore on NSE was lower by about 11% over the previous month, though the number of issues was more in October at 20 against only six in the previous month. IDFC mopped up Rs 1,510 crore through three issues, followed by two issues of the Rural Electrification Corporation which raised Rs 1,415 crore. The Airport Authority of India, NABARD, L&T Infrastructure Finance Company and Power Finance Corporation of India were others raising funds of above Rs 400 crore. The largest amount was raised by NBFCs during the month followed by central undertakings. A few issues did not disclose coupon rates. Corporates offered highest coupon rates ranging between 9.95% and 10.25% followed by central government undertakings and NBFCs. Maturity wise, the shortest bonds were issued by corporates followed by central government undertakings and NBFCs (Table 15). According to data published by SEBI, the total turnover in the secondary market of corporate bonds, reported by BSE, NSE and FIMMDA, dropped further by about 4% in October to Rs 43,263 crore in comparison to the previous month, mainly due to a fall in NSE trades.
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