MONEY MARKET REVIEW

Market Borrowings: Centre versus States

EPW Research Foundation

This review analyses the trends in certain crucial parameters pertaining to the market borrowings of the centre and the states. It argues that the latter have made efforts to contain their borrowing. But, continued excess borrowing by the central government is introducing a perverse incentive for the states, which would adversely affect overall fiscal management at the country-level.

1 Introduction

hile the fiscal responsibility legislation was passed by the central government in 2003, all the states passed corresponding legislations by 2010. The burden of financing the fiscal deficit is increasingly shouldered by domestic market borrowing of both the states and the centre. While prudent fiscal management is a joint responsibility of the states and the centre, because of the subordinated position of the states in raising market borrowings, it is the central government that should show in a demonstrable manner the way to fiscal consolidation. This note analyses trends in certain crucial parameters pertaining to market borrowings, particularly at the level of the states, and argues that the latter have made efforts to contain their borrowing. But, continued excesses by the central government would introduce a perverse incentive for the states, which would adversely affect overall fiscal management at the country-level.

1.1 Market Borrowings and Fiscal Deficit

Market borrowings constitute a significant component of financing the fiscal deficit at both levels of government and the
Year (1) Centre Gross (2) Net (3) Gross (4) State Net (5)

corresponding share has been increasing over the years. In respect of the states, during the 1990s, this component constituted only about 16% of the fiscal deficit, which increased to around 26% during 2000-05. After witnessing a decline to around 17% in 2005-06 and 2006-07, it rose to a range of 57.1% to 77.3% during 2007-08 to 2010-11 (Table 1 and Graph A, p 120). Correspondingly, loans from the centre remained less than 4% of the states fiscal deficit since 2000-01 some years even showing negative flows compared to an average of 40% to 49% during the 1990s. This is consequent to the recommendations of the finance commissions making the states more market-dependent. The contribution of market borrowings in financing of the central governments fiscal deficit also remained very significant at more than 85% in 2011-12. Overall, it would appear that containment of the fiscal deficit at both central and state levels would crucially depend upon economising on market borrowings. Secondly, larger market borrowings also crowd out other borrowers, particularly corporates, from the market, not only making bond financing costlier, but also discouraging the much needed development of the corporate bond market for financing growing infrastructure needs. Thirdly, effective monetary management and interest rate policy by the Reserve Bank of India (RBI) will also depend upon the market borrowing programmes being contained within limits. In this context it is worrisome that the fiscal performance of both the centre and
Combined % of State Borrowings Share of Market to Total Borrowing in Financing Gross Net Gross Net Fiscal Deficit (6)=(2+4) (7)=(3+5) (8) (9) Centre States

Table 1: Market Borrowings of Central and State Governments

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

1,15,183 1,33,801 1,51,126 1,47,636 1,06,501 1,60,018 1,79,373 1,88,205 3,18,550 4,92,497 4,37,000 5,10,000*

73,787 92,302 1,04,118 88,816 46,050

13,300 18,707 30,853 50,521 39,101

12,880 17,261 29,064 46,376 33,978

1,28,483 86,667 1,52,508 1,09,563 1,81,979 1,33,182 1,98,157 1,35,192 1,45,602 80,028 1,81,747 2,00,198 2,55,984 4,36,688 6,23,619 5,36,529 5,95,331 1,13,692 1,25,549 1,65,728 3,46,083 5,09,241 4,73,413 NA

10.4 12.3 17.0 25.5 26.9

14.9 15.8 21.8 34.3 42.5

61.8 64.4 71.8 72.1 40.5

14.2 18.3 28.6 39.2 31.6

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

98,237 21,729 15,455 1,11,275 20,825 14,274 1,09,504 67,779 56,224 2,42,317 1,18,138 1,03,766 3,94,358 1,31,122 1,14,883 3,25,414 99,529^ 1,47,999$ 4,35,872* 1,04,998+ NA

12.0 13.6 10.4 11.4 26.5 33.9 27.1 30.0 21.0 22.6 18.6 31.26$ 14.3 NA

72.6 17.0 80.5 16.9 102.9 71.5 73.3 77.3 94.2 57.1(RE) 83.7 68.8(BE)$ 85.5 NA

^: This is against the budgeted amount of Rs 1,63,640 crore. +: Based on auction data till 12 January 2012. $: These are expected to be lower because of lower gross borrowings. *: Includes additional borrowings over budgeted level by Rs 92,872 crore. Sources: RBI Handbook of Statistics on Indian Economy, State Finances: A Study of Budgets 2010-11.

january 28, 2012

vol xlviI no 4

119

MONEY MARKET REVIEW

and 2009-10. Accordingly, the state governments 84 fiscal targets were also States relaxed from 3% to 3.5% 60 in 2008-09 and further 36 to 4% in 2009-10. The states did not seem to 12 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (Revised have made full use of Estimates) Graph B: Gross Fiscal Deficit as Percentage to GDP these relaxations, but the 10 10 fiscal deficit of the states 99 Combined deficit 8 still remained substan77 tially higher at 2.4% in 6 55 2008-09 and 3.3% in 4 Central government 2009-10. It was budget33 State governments 2 ed at 2.5% for 2010-11. 11 The trends in gross 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12* (RE) * Projected by EPWRF. borrowings and data the states worsened after 2007-08. The available on their surplus cash balances best performance came in 2007-08 with show that the states have further tightened the central governments fiscal deficit at their fiscal position since 2010-11. Gross 2.5% and that of the states at 1.5%, pro- market borrowings by the states increased ducing the lowest ever combined deficit of from Rs 1.31 lakh crore in 2009-10 to a budaround 4%. The position worsened since geted level of Rs 1.64 lakh crore in 2010-11. then, more sharply in the case of the central The auction data available however shows government compared to the states. The that actual market borrowings of the states centres deficit jumped to 6% and 6.4% in amounted only to Rs 1.3 lakh crore in the next two years. Though it came down 2010-11. During the current financial year, to 5.1% in 2010-11, it is expected to again while the budgeted borrowings level is not touch about 6% during the current fiscal available, gross borrowings, as per auction due to substantial additional borrowings data up to 12 January, amounted to only announced recently (Table 2 and Graph B). Rs 1.05 lakh crore. Investment of surplus cash It is now common knowledge that it would balances in 14-day treasury bills (TBs) by be a Herculean task for the central govern- the states also came down from Rs 1.17 lakh ment to restore fiscal consolidation soon. crore as at end March 2011 to Rs 0.66 lakh
Graph A: Share of Market Borrowing in Financing Fiscal Deficit
Centre
108

definitely encourage the states to demand justifiably so additional borrowing allocations. This tendency will exacerbate the overall combined fiscal position with all its adverse consequences for the debt market and the interest rate structure.

1.2 Market Borrowings and Interest Rates

The risk free yields of central government securities determine the overall term structure of interest rates in the fixed income market. State government securities are on par with central government securities for purposes of the statutory liquidity ratio (SLR). Technically, they should command the same yield in the primary and secondary markets. In fact, during the pre-reform period of fixed coupon floatation, no distinction was made between state and central loans. However, practically, the states are in a subordinate position as far as market borrowings are concerned. The states are placed relatively in a disadvantageous position constitutionally compared to the centre. While the centre can borrow both in domestic and foreign markets, the states cannot borrow directly from abroad. Secondly, the states cannot borrow effectively even in the domestic market without taking permission from the central government and these borrowings are practically allocated by the centre to the states. Furthermore, Table 2: Key Deficit Indicators of the Central and State Governments (Amount in Rs crore) state securities are not held Year Central Government State Governments Combined Deficit by the RBI in its investment Gross Fiscal Ratio to Revenue Ratio to Gross Fiscal Ratio to Revenue Ratio to Gross Fiscal Ratio to Revenue Ratio to Deficit GDP (%) Deficit GDP (%) Deficit GDP (%) Deficit GDP (%) Deficit GDP (%) Deficit GDP (%) account though, of late, repos are permitted in state securi2000-01 1,18,816 5.5 85,234 3.9 87,922 4.1 55,316 2.6 1,99,852 9.2 1,38,803 6.4 2001-02 1,40,955 6.0 1,00,162 4.3 94,261 4.0 60,398 2.6 2,26,425 9.6 1,59,350 6.8 ties. Presumably, because of 2002-03 1,45,072 5.7 1,07,879 4.3 99,727 3.9 57,179 2.3 2,34,987 9.3 1,62,990 6.4 these reasons, state securities 2003-04 1,23,273 4.3 98,261 3.5 1,20,631 4.3 63,407 2.2 2,34,501 8.3 1,59,408 5.6 are sold at higher yields in auc2004-05 1,25,794 3.9 78,338 2.4 1,07,774 3.3 39,158 1.2 2,34,721 7.2 1,14,761 3.5 tions and hence have a spread 2005-06 1,46,435 4.0 92,299 2.5 90,084 2.4 7,013 0.2 2,39,560 6.5 99,312 2.7 over the auction yields of 2006-07 1,42,573 3.3 80,222 1.9 77,509 1.8 -24,857 -0.6 2,30,432 5.4 55,366 1.3 central government securities 2007-08 1,26,912 2.5 52,569 1.1 75,455 1.5 -42,943 -0.9 2,03,922 4.1 9,626 0.2 ever since the auction system 2008-09 3,36,992 6.0 2,53,539 4.5 1,34,589 2.4 -12,673 -0.2 4,72,807 8.5 2,40,864 4.3 2009-10 4,18,482 6.4 3,38,998 5.2 2,16,101 3.3 46,663 0.7 6,25,009 9.5 3,75,724 5.7 was introduced (Table 3, p 121). 2010-11 (RE) 4,00,998 5.1 2,69,844 3.4 1,98,539 2.5 24,370 0.3 5,76,583 7.3 3,00,881 3.8 This can also be attributed to 2011-12 (BE) 4,12,817 6.0* 3,07,270 3.4 several other factors: state For Central Governent Data for 2010-11 are revised estimates and data for 2011-12 are budget estimates. loans have a fixed maturity of (-) Negative sign indicates surplus. *: Estimated by EPWRF For state governments in 2010-11 data are for revised estimates and data for 2011-12 are budget estimates. 10 years; their market lots Fiscal deficits as a ratio of GDP at market prices. Source: Handbook of Statistics on Indian Economy. are significantly low when During 2008-09 and 2009-10 when the crore as on 12 January 2012. Overall, it considered state-wise; and the yields of centres deficit crossed 6%, the states were would appear therefore that the states did state loans may depend upon the fiscal also allowed to raise additional borrow- not resort to fiscal excesses as much as the position of the states, their borrowing size ings to the extent of 0.5% of gross state centre. But, continued slippage in borrow- and other economic factors such as the domestic product (GSDP) each in 2008-09 ing targets by the central government will banking spread.

120

january 28, 2012

vol xlviI no 4

EPW

Economic & Political Weekly

MONEY MARKET REVIEW

Table 3: Spread of SDLs over Central Government Securities (10-year maturity)
Month SDLs YTM Bid-cover CGS Bid-cover Spread of (%) Ratio of 10-Year Ratio of SDLs over SDLs YTM (%) G-sec CGS (bps)

2006-07 2007-08 2008-09 2009-10 2010-11

8.11 8.25 7.90 8.11 8.39

3.27 2.73 2.44 3.03 2.92

7.80 8.06 8.32 7.26 7.84 7.94 8.36 8.25 8.36 8.39 8.30 8.78 8.81 8.56

2.70 2.77 2.64 2.25 2.15 2.56 1.85 2.24 1.95 1.90 2.32 1.79 2.04 2.05

30 20 (41) 86 56 46 29 33 27 18 34 11 40 32

For Financial Year 2011-12 Apr-2011 8.40 2.98 May-2011 8.65 Jun-2011 Jul-2011 Sep-2011 Oct-2011 Nov-2011 Dec-2011 8.58 8.63 8.64 8.89 9.21 8.88 3.02 2.54 2.28 1.97 1.72 1.89 1.34 2.04

Aug-2011 8.57

Source: RBI website, compiled by EPWRF.

In general, government securities, both of the centre and states, also determine corporate bond yields. In recent months, the spread of corporate bond yields over central government securities has widened. The expanded borrowing programme of the central government will likely have a continuing pressure on this spread in the coming months. Yet another disadvantage with state loans is that they are auctioned on a multiple price basis and, to that extent, this discourages secondary market trading soon after primary issues. The difference of weighted cut-off yield over weighted average yield ranged between two and seven bps. The RBI should consider, in consultation with the states, introducing a uniform price auction for the states. This may also make bidding more aggressive and encourage secondary market activity, thereby improving market liquidity and resulting in better price discovery.

1.3 Borrowing by States: Certain Indicators

The yields of state loans in auctions moved up from 7.90% in 2008-09 to 8.39% in 2010-11 in tandem with comparable 10year central government securities. During 2011-12, it has touched a peak of 9.21% in November but due to a pause in rate hikes, the yield came down to 8.88% in December 2011. Partly because of higher coupon and partly because they provide an opportunity for diversification, state government auctions received relatively better responses
Economic & Political Weekly EPW

compared to the corresponding 10-year government from the path of fiscal consolsecurity of the central government as idation is bound to have a demonstration reflected in relative bid-cover ratios. From effect on the states, taking the countrys 2006-07 to 2010-11, barring 2008-09, the fiscal rating into inferior territory. That bid-cover ratios of the states were much would prove to be much more serious in the higher, ranging from 2.73 times to 3.27 context of the widening current account times compared to a range of 2.15 times to deficit. The central government should 2.77 times in the case of 10-year central show the way to the states by consolidatgovernment loans. ing its fiscal position sooner than later. However, during the current financial year, the bid-cover ratios of state loans 2 Money, Forex and Debt Markets showed that investor response is waning Overall, market activities remained bleak and the bid-cover of the states is converging during December following a slowdown in to the level of central government securities. gross domestic product (GDP) growth in This can be attributed to a bombarding of addition to the precarious fiscal situation additional primary issues by the central of the government leading to a further rise government in the later part of the year, in its borrowing programme over the crowding out and competing more aggres- budgeted figure. A falling index of indussively with state loan issues. It has really trial production (IIP) and poor corporate proved to be a testing time for the RBI in results already hammered investor confideploying its debt management skills. dence while a sharp depreciation of rupee, Data on state-wise aggregate borrowings despite the RBIs intervention, further disduring the period 2006-07 to 2011-12 (till 12 tressed market sentiments. However, soothJanuary 2012) shows that the top six states, ing headline inflation with food price namely, Maharashtra, West Bengal, Andhra inflation falling into negative territory Pradesh, Uttar Pradesh, Table 4: State-wise Aggregate Borrowings during 2006-07 to 2011-12 Gujarat and Tamil Nadu, States No of Times State-wise Weighted Weighted Spread of Bid-cover Auctioned Gross Cut-off Average Cut-off Ratio each with aggregate borrow- Borrowing Yield (%) Yield (%) Yield over (Rs Crore) Weighted ing exceeding Rs 40,000 Yield crore and above, accounted From FY 2006-07 to FY 2011-12 for as high as 62% of total Maharashtra 41 66,049 8.21 8.16 5.41 2.40 54 65,273 8.29 8.25 4.29 3.02 borrowing by all the states West Bengal Andhra Pradesh 62 60,093 8.24 8.19 4.08 2.57 (Table 4). Data on trends in 44 53,420 8.43 8.36 6.54 2.32 auction yields show that few Uttar Pradesh Gujarat 45 45,227 8.20 8.16 3.88 2.67 states remained consistently Tamil Nadu 53 43,721 8.20 8.16 3.99 2.72 among the top 10 states Rajasthan 54 29,701 8.18 8.15 3.51 3.20 commanding the lowest Kerala 43 29,534 8.27 8.22 4.70 2.75 yields in auctions during the Punjab 55 25,077 8.25 8.21 3.30 3.48 14 19,417 8.17 8.11 6.83 2.59 period 2006-07 to 2011-12. Karnataka Madhya Pradesh 21 17,553 8.22 8.17 4.64 2.39 The identification of factors 17 13,745 8.26 8.22 4.14 2.22 influencing this trend would Haryana Bihar 14 12,422 8.28 8.18 9.54 1.98 require further research.

Way Forward
With fiscal slippage in the recent past and substantial excesses by the centre over its budgeted market borrowings, the centre has started setting a bad example. While the states, thus far, have exercised prudence and appear to be managing their cash and debt flows more efficiently, the continued deviation of the central
vol xlviI no 4

Uttarakhand Jammu and Kashmir Assam Jharkhand Himachal Pradesh Goa Nagaland Puducherry Manipur Meghalaya Mizoram Sikkim Tripura Chhattisgarh Arunachal Pradesh

25 32 14 17 26 19 23 9 14 23 18 8 10 1 8

11,943 10,266 7,759 6,426 6,093 2,600 2,262

8.26 8.44 8.53 8.05 8.17 8.37 8.21

8.22 8.37 8.33 7.98 8.14 8.31 8.18

3.66 7.27 20.50 7.27 3.51 5.93 2.07

2.90 2.45 2.16 2.57 3.24 3.55 3.31

1,787 1,560 1,380 1,104 1,026 976 700 349

8.39 8.12 8.32 8.53 7.92 8.28 8.25 8.21

8.37 8.11 8.30 8.43 7.89 8.24 8.19 8.20

1.82 0.48 1.94 10.39 2.79 3.59 6.45 1.75

2.38 3.18 3.54 3.79 3.72 4.13 2.41 4.16

Data are updated up to 10 January 2012. Source: RBI website, compiled by EPWRF.

january 28, 2012

121

MONEY MARKET REVIEW

increased expectations about some respite on the rate front with the RBI also retreating from its prolonged monetary tightening in its policy review on 16 December 2011. In addition, the RBIs move to stem the rupees fall by encouraging foreign capital inflows through various measures also improved the market outlook. However, eurozone worries continued to affect domestic market activities and the exchange rate, while some positive developments in the US renewed confidence about the overall global economic outlook. A huge outflow of funds owing to thirdquarter (Q3) advance tax payments caused a cash crunch in the system during December. In addition, the central banks intervention in the forex market to stem the fall of the rupee coupled with around Rs 65,000 crore outflows by way of government securities auctions prompted the banks to make excessive use of the RBIs liquidity adjustment facility (LAF) repo window to meet these requirements during December. The expansion of bank credit by as much as Rs 1.7 lakh crore further disturbed the balance, while a similar growth in deposits towards the end of the month brought some relief. Considering tight liquidity conditions, the RBI relaxed borrowing limits by banks from it, while it also conducted additional repo auctions and continued to utilise its open market operation (OMO) window to infuse liquidity. Still, shortterm money market rates escalated to their highs in December with overnight rates poised to cross 10% levels. The forex market was under the limelight throughout the month with the rupee-dollar exchange rate touching new lows. However, the RBI took various steps to limit rupee depreciation to 2% against the US dollar. In the government securities market, government further revised its borrowing programme for the current fiscal by announcing additional Rs 40,000 crore auctions of securities. Yields across maturities however witnessed signs of easing taking cues from falling food inflation and stable interest rates, but the extra market borrowing programme kept the yields firm. The yields of 10-year benchmark paper remained above the 9% mark in December. The corporate bond market reflected buoyant activity in the primary segment and coupon rates continued to move in an upper range.

2.1 Money Market The money market experienced significant signs of volatility in December following severe liquidity tightness in the system. Largely anticipating a pause in policy tightening by the RBI in its Mid-Quarter Monetary Policy Review of 16 December 2011, the rates softened in the beginning of the month, but moved upward from the middle of the month on the back of the tapering liquidity situation owing to Q3 advance tax payments by companies. Despite the RBI taking a break in its monetary tightening cycle, the rates hardened since the government continued its extensive borrowing. Expanding bank credit and vital forex intervention by the RBI also sucked out funds from the system. However, the impact of the pause in rate hike by the RBI in the December policy review caused rates of overnight and notice money instruments to fall below 9.0% levels and liquidity also somewhat eased towards the month end. However, increased anticipation of a softening of interest rates in the coming days, collateralised instruments like collateralised borrowing and lending obligations (CBLO) and market repo rates ruled relatively stable compared to overnight rates. The weighted average rates also remained almost unchanged during December compared to November. With extreme volatility in call and notice money rates combined with banks dependence on these instruments to meet their immediate need of funds, both the segments reported a sharp 26% and 13% jump in their respective daily trading activity during the review period. Contrary to this, the CBLO and market repo segments recorded a fall of 8% and 9% in their average daily turnover during December compared to November (Table 5). As per the latest available data from the RBI, the certificates of deposit (CDs) market had seen a fall of Rs 3,800 crore in its outstanding amount during the fortnight ending 18 November compared to the previous
Table 5: Money Market Activity (Volume and Rates)
Instruments December 2011 Daily Average Monthly Volume Weighted (Rs Crore) Average Rate (%)

fortnight and amounted to Rs 3,78,430 crore. Discount rates fell marginally and ranged between 9.30% and 9.81% during the same period. Contrary to CDs, the outstanding amount of commercial papers (CPs) increased by Rs 7,300 crore during the fortnight ending 15 November to Rs 1,76,000 crore. The rates continued to rule in a wide range of 8.78% to 13.55% as in earlier fortnights during the review period. According to the trading platform Fixed Income Money Market and Derivatives Association (FIMMDA), CDs recorded a notable rise of 26% in their daily trading activity while CPs reported a 15% fall during December over November. While the government increased its borrowings programme, to lever the situation the RBI relaxed borrowing limits to banks and conducted special repo auctions on 16 December. Still, the average daily borrowings in the RBIs LAF window remained above Rs 1 lakh crore in December, with the RBI injecting an all-time high of Rs 1.7 lakh crore in its repo window on 23 December. Bankers also utilised the marginal standing facility (MSF) of the RBI on six trading days during the month and borrowed a total of Rs 19,545 crore. The central bank purchased securities through OMO and infused liquidity worth more than Rs 33,000 crore. Following these steps, pressure on the liquidity front eased a bit towards the end of the month (Table 6).

2.2 Forex Market

Continued stress across financial markets on account of events in the euro zone and the resultant flight to safety by global
Table 6: RBIs Market Operations (Rs crore)
Month/Year OMO LAF Net (Average Daily (Net Purchase(+)/Sale(-)) Injection (+)/Absorption(-))

Jul-2011 Aug-2011 Sep-2011 Oct-2011 Nov-2011 Dec-2011

-6 -6 5 6 9,446 33,687

37,683 36,948 52,194 50,708 91,719 1,08,095

Source: RBIs Weekly Statistical Supplement. November 2011 Monthly Weighted Average Rate (%)

Range of Weighted Average Daily Rate (%)

Daily Average Volume (Rs Crore)

Range of Weighted Average Daily Rate (%)

Call Money Notice Money Term Money @ CBLO Market Repo

10,959 3,292 297 27,400 10,571

9.01 9.00 - 8.40 8.61

8.21-9.68 7.10-9.83 7.75-10.60 6.99-9.11 8.39-9.20

8,699 2,903 201 33,347 13,024

8.58 8.57 - 8.40 8.46

8.14-8.69 7.29-8.69 8.00-10.15 7.15-8.63 8.07-8.65

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

122

january 28, 2012

vol xlviI no 4

EPW

Economic & Political Weekly

MONEY MARKET REVIEW

investors supported the US dollar which gained further. The euro sustained its depreciation against major currencies and fell by 3.6% vis--vis the dollar in a period of one month. A weak euro impelled safe-haven demand for the Japanese yen, but the Japanese governments frequent forex market intervention limited its appreciation to 0.4% against the dollar. However, improvement in the risk appetite with data from the US economy exhibiting encouraging signs of improving economic conditions prompted renewed demand for riskier assets. Thus, most of the Asian currencies limited their losses against the dollar towards the end of the month. The US dollar index [Nominal Major Currencies Dollar Index (March 1973=100)] showed a 97 bps rise during December over November (Table 7). The Indian rupee continued to be the worst performing Asian currency during 2011. With rising local demand for dollars, sustained capital outflows amid the US Feds decision to hold back on new stimulus steps, soaring inflation data and a sharp slowdown in IIP numbers coupled with other signs of slowdown of the Indian economy, the Indian rupee came under renewed depreciation pressure. The widening current account deficit and a strengthening US currency also exerted pressure on the rupee. The rupee weakened to an all-time low of Rs 54.24 against the greenback by 15 December, prompting further action from the RBI both in terms of direct intervention and inflow augmenting measures. Following RBIs swift move to stem the rupees fall and an enhanced response from foreign investors, the rupee broke its losing streak. Easing crude oil prices overseas also prompted the rupee to recover against its major trading currencies. Dull stock market activities and euro area developments continued to affect the rupees movements; thus, overall, the rupee depreciated by 2% against the dollar during December and ended at Rs 53.26 per dollar on 30 December. Still, compared to November, the rupee generally narrowed its losses. The forward premia across three maturities displayed a rising trend from the beginning of the month following the one way fall of the rupee. However, following the RBIs forex market friendly measures, the rupee limited its depreciation and thus
Economic & Political Weekly EPW

premia across maturities also softened a Segment-wise, futures turnover fell by bit from the middle of December. Overall, 5% in total terms, while options trading during the period of one month, the near- dropped by 3% during December over month premia notched up 1.2 percentage November. In the futures segment, USD-INR points, while 3-month and 6-month premia contracts garnered 96% of investor interest hardened by 1.8 percentage points and 2.1 despite the product showing a 5% fall in percentage points, respectively. The 30-days turnover. Among the exchanges trading in premia ended at 8.11%, while the 3-month currency derivatives products, the National and 6-month premia closed at 6.76% and Stock Exchange (NSE) continued its domi6.23%, respectively on 30 December. nance with a 55% market share while the Following unstable external develop- Multi-Commodity Exchange (MCX-SX) conments, forex market turnover reported a tributed 43% towards the total currency 1.4% rise in its daily trading during derivatives turnover. However, the United November. Inter-bank and forward trans- Stock Exchange (USE) also managed to gathactions reported a 3% and 2.5% increase in er 2% of overall turnover during December. turnover, while merchant and spot dealings declined marginally by 2.2% and 0.3%, 2.3 Central Government Securities respectively during November compared The status quo maintained by the RBI in its to October (Table 8). credit policy review on 16 December proved The RBIs move to sup- Table 7: Foreign Exchange Market: Select Indicators Rs/$ Reference Appreciation (+)/ Total FII Flows BSE Sensex Dollar Index# port the rupee and arrest Month Rate (Last Friday Depreciation (-) ($ Million) speculative transactions of the Month) of Rs/$ (in %) (Equity+Debt) Month-end Closing 44.16 1.27 2,399 18,197 68.53 dampened bank opera- Jul-2011 Aug-2011 46.05 -4.12 -7,903 16,677 68.85 tions in the forex segSep-2011 48.93 -5.87 -1,866 16,454 72.81 ment in addition to the Oct-2011 48.82 0.21 634 17,705 70.52 imposition of transaction Nov-2011 52.17 -6.41 -586 16,123 72.37 charges on currency Dec-2011 53.26 -2.05 4,195 15,455 73.33 trading from August *: 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. 2011. The drastic fall in Table 8: Average Daily Turnover in the Foreign Exchange Market* ($ billion) the rupee also resulted in Month Merchant Interbank Spot Forward Total the huge fall in currency Apr-2011 14.1 (10.8) 40.1 (14.7) 27.7 (20.1) 26.5 (7.6) 54.2 (13.6) derivatives market trad- May-2011 13.5 -(16.7) 48.3 -(6.3) 28.9 -(9.7) 33.0 -(8.0) 61.9 -(8.8) ing activity as well. In Jun-2011 12.7 -(5.8) 48.1 -(0.5) 27.4 -(5.2) 33.4 (1.5) 60.8 -(1.7) Jul-2011 14.0 (9.5) 45.1 -(6.3) 28.5 (4.0) 30.5 -(8.8) 59.0 -(3.0) December, the total curAug-2011 17.0 (21.6) 46.6 (3.3) 30.3 (6.2) 33.3 (9.0) 63.5 (7.66) rency derivatives trading Sep-2011 15.1 -(11.2) 44.8 -(3.8) 29.6 -(2.3) 30.3 -(9.0) 59.8 -(5.8) decreased by 4% over Oct-2011 12.6 -(16.7) 40.0 -(10.6) 26.7 -(9.8) 25.9 -(14.4) 52.6 -(12.1) November, while the daily Nov-2011 12.3 -(2.2) 41.0 (2.5) 26.6 -(0.3) 26.7 (3.07) 53.3 (1.4) trading reduced by 9% to *: 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. Rs 32,000 crore.
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

02-Dec-11 09-Dec-11 23-Dec-11 30-Dec-11

7.83%2018 8.79% 2021 8.97% 2030 7.99% 2017 FRB 2020 9.15% 2024 7.83% 2018 8.79% 2021 8.97% 2030 7.99% 2017 9.15% 2024 8.28% 2027 8.83% 2041

R R N R R N R R R R R R R

4,000 6,000 3,000 2,000 2,000 6,000 4,000 5,000 3,000 3,000 6,000 3,000 3,000 50,000 52,000

1.85 2.01 5.12 2.63 2.84 2.26 1.97 2.09 2.08 1.96 2.58 1.43 2.43 2.34 2.13

nil nil nil nil 400 nil nil nil nil nil nil nil nil 400 3,620

8.67 8.71 8.97 8.45 10.00 8.65 8.43 8.39 8.65 8.55 8.70 8.90 8.82 8.71 8.98

95.94 100.49 97.97 92.75 103.80 97.09 102.60 102.90 97.57 103.41 94.75 100.05 -

Total for December 2011 Total for November 2011

FRB: Floating Rate Bonds, R: Re-issue, N: New issue, @ Coupon decided in the auction at the cut-off yield. Source: RBI press release.

january 28, 2012

vol xlviI no 4

123

MONEY MARKET REVIEW

a booster to market sentiments as the move was factored in by investors. Overall, yields declined during the month. However, the RBIs debt management skills were put to test with the government announcing additional borrowings and slippage in the fiscal deficit becoming certain. An extra auction announced on
Descriptions

26 December created speculation regarding escalation in the governments borrowings, which was initially declined by the government. But government announced additional borrowing worth Rs 40,000 crore on 30 December. The RBI continued with its passive injection of liquidity through the LAF and in the form of OMO

December 2011 First Week (2) AMT YTM

auctions which helped investors to weather pressures on yields. Four issuances of central government securities were conducted on 2, 9, 23 and 30 December for notified amounts of Rs 13,000 crore, Rs 10,000 crore, Rs 12,000 crore and Rs 15,000 crore, respectively. As per the previous issuance, calendar
Three Months Ago (September 2011) AMT YTM Six Months Ago (June 2011) AMT YTM

Table 10: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)
Last Week (30) AMT YTM Total for the Month AMT YTM

Previous Month (November 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) 2012 (3) 2013 (2) 2014 (6) 2015 (4) 2016 (2) 2017 (4) 2018 (3) 2019 (2) 2020 (3) 2021 (4) 2022 (3) 2024 (1) 2027 (3) 2028 2030 (1) 2032 (1) 2034 (1) 2040 (1) 2041 (1) 3 State Govt Securities Grand total (1 to 3)

5,945 2,380 1,708 1,858 74,143

8.47 8.48 8.33 8.54

10,107 2,938 1,591 5,579 82,597

8.78 8.81 8.49 8.81

35,227 13,588 9,918 11,721 4,42,147

8.54 8.51 8.41 8.58

13,548 5,258 3,680 4,610 1,88,411

8.69 8.80 8.72 8.92

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

8.31 8.35 8.34 8.35

22,595 18,798 1,639 2,159 2,49,571

8.07 8.15 8.13 8.33

296 0 254 53 367 7,234 15 430 38,589 923 20,551 1,986 905 21 389 2,131 988 81,077

8.46 8.29 8.23 8.43 8.48 8.44 8.58 9.59 8.48 8.48 8.61 8.86 8.68 8.67 8.72 8.81 8.80

1383 55 1 480 116 700 8,715 742 33,609 1,954 31,344 900 710 1 1,888 646 93,350

8.72 8.39 9.01 8.65 8.69 8.68 8.70 9.67 8.74 8.78 8.87 9.05 8.95 8.90 9.19 9.16

3,805 80 265 984 976 2,304 41,070 130 7,805 1,99,127 9,490 1,52,133 3,938 11,096 113 2 4,514 4,315 8,475 4,85,849

8.62 8.37 8.23 8.44 8.42 8.51 8.47 8.46 9.59 8.50 8.55 8.63 8.86 8.75 8.65 8.49 8.94 8.74 8.87

1,516 25 230 337 421 2,202 22,669 50 1,364 1,04,712 22,117 27,914 2,374 1 1 5 2,472 2,337 2,04,295

8.76 8.59 8.66 8.65 8.84 8.87 8.87 8.93 9.25 8.89 8.96 9.01 9.07 9.27 9.17 9.15 9.21 9.15

1,003 822 266 1,067 997 5,405 12,051 25 1,590 1,74,377 42,386 4,218 1 231 4 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 8.57 8.51 8.58 8.51 8.63 8.62

1,415 180 301 2,059 4,057 3,142 13,445 1 2,630 1,42,798 73,835 2,590 0 1,119 0 256 2,587 2,74,753

8.06 8.14 8.23 8.37 8.37 8.37 8.37 8.30 8.08 8.29 8.39 8.57 9.62 8.59 8.30 8.64 8.58

(-) 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 2011, 2023, 2026 and 2035 are negligible. Source: Compiled by EPWRF; base data from RBI, CCIL.

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

Descriptions Last Week (30) AMT YTM December 2011 First Week (2) AMT YTM

Total for the Month AMT YTM Previous Month (November 2011) AMT YTM Three Months Ago (September 2011) AMT YTM Six Months Ago (June 2011) AMT YTM

GOI Dated Securities 6.85 2012 7.17 2015 7.59 2016 7.99 2017 8.07 2017 7.83 2018 7.80 2021 8.79 2021 8.08 2022 8.13 2022 9.15 2024 8.26 2027 8.28 2027 8.97 2030 8.28 2032 8.30 2040 Total (All Securities)

121 254 53 292 3 7,208 2,370 36,068 792 131 20,551 12 1,972 905 21 389 74,143

8.46 8.23 8.43 8.48 8.62 8.44 8.47 8.48 8.48 8.46 8.61 8.68 8.86 8.68 8.67 8.72 8.54

1,246 402 116 201 474 8,710 1,459 32,150 752 1,187 31,344 328 555 710 1 1,888 82,597

8.73 8.64 8.69 8.73 8.66 8.70 8.76 8.74 8.76 8.79 8.87 9.02 9.07 8.95 8.90 9.19 8.81

2,235 824 964 1,011 1,103 41,023 19,154 1,39,600 5,370 4,105 1,52,133 722 3,197 11,096 113 4,514 4,42,147

8.67 8.44 8.42 8.50 8.54 8.47 8.49 8.55 8.53 8.58 8.63 8.87 8.86 8.75 8.65 8.94 8.58

846 287 406 1,573 626 22,663 40,172 64,540 4,214 17,903 27,912 643 1,692 1 2,472 1,88,411

8.81 8.64 8.84 8.89 8.82 8.87 8.92 8.87 8.97 8.96 9.01 9.04 9.09 9.17 9.22 8.92

639 991 970 2,477 2,802 12,041 1,74,374 9,931 32,390 562 3,656 218 1,076 2,45,522

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

170 1,989 3,917 2,575 13,410 1,42,798 23,962 49,872 2,550 1,108 256 2,49,571

8.02 8.37 8.37 8.38 8.38 8.29 8.40 8.39 8.57 8.59

8.64 8.33

(-) 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 10.

124

january 28, 2012

vol xlviI no 4

EPW

Economic & Political Weekly

MONEY MARKET REVIEW

There was a steep rise in the traded volume of central government securities 1 Year-5 Year 19 29 14 28 6 23 in December to Rs 4,42,147 5 Year-10 Year 0 10 4 9 8 2 crore from Rs 1,88,411 crore 10 Year-15 Year 38 27 31 11 16 18 in November. The overall 1 Year-10 Year 19 39 18 37 14 25 Source: As in Table 10. yield dropped by 34 bps to 8.58% over the period. In Table 13: Details of State Government Borrowings (Amount in Rs crore) Date of Auction Number of Total Bid-cover YTM at Weighted the secondary market, more Participating Amount Ratio Cut-Off Average States Accepted Price (%) Yield (%) than 81% of trade was 05-Dec-11 7 4,300 2.5 9.03 9 accounted for by the top five 13-Dec-11 1 350 6.33 8.74 8.73 securities, namely, 9.15% 20-Dec-11 11 8,809 1.64 8.8 8.77 2024, 8.79% 2021 (a new Total for December 19 13,459 2.04 8.88 8.85 10-year benchmark), 7.83% Total for November 14 8,618 1.34 9.21 9.16 Source: RBI press releases. 2018, 7.80% 2021 and 8.97% Table 14: Auctions of Treasury Bills (Amount in Rs crore) 2030. The highest traded Date of Auction Bids Bid-cover Cut-off Weighted Cut-off Weighted single security contributed Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs) 34% followed by the second A: 91-Day Treasury Bills most traded security with a 07-Dec-11 4,000 4.41 8.6 8.56 97.9 97.91 share of around 32%. The 14-Dec-11 4,000 3.82 8.48 8.44 97.93 97.94 top 10 securities shared 21-Dec-11 4,000 4.18 8.39 8.35 97.95 97.96 28-Dec-11 4,000 2.63 8.48 8.44 97.93 97.94 almost 86% of the trade Total for Dec 2011 16,000 3.76 8.49 8.45 97.93 97.94 (Tables 10 and 11, p 124). Total for Nov 2011 20,000 2.75 8.81 8.8 97.85 97.85 The spread between one B: 182-Day Treasury Bills and five-year maturities 07-Dec-11 4,000 2.66 8.51 8.42 95.93 95.97 21-Dec-11 4,000 2.85 8.27 8.25 96.04 96.05 was 14 bps, while it was 18 Total for Dec 2011 8,000 2.76 8.39 8.33 95.99 96.01 bps for one and 10-year Total for Nov 2011 8,000 2.39 8.89 8.85 95.76 95.78 maturities. A softening of C: 364-Day Treasury Bills yields of 10 and five year 14-Dec-11 4,000 3.23 8.26 8.19 92.39 92.45 maturities with one year 28-Dec-11 4,000 2.45 8.35 8.26 92.31 92.39 Total for Dec 2011 8,000 2.84 8.31 8.22 92.35 92.42 yield remarkably firming Total for Nov 2011 12,000 4.59 8.68 8.66 92.03 92.05 up contributed to the fall in Source: RBIs press releases. spreads (Table 12). Table 15: Details of Public Issues and Private Placements in Corporate State development loans Bonds December 2011 (SDLs) were issued thrice Institutional Category No of Volume in Range of Range of Maturity Issues Rs Crore Coupon Rates in Years (y) and during December raising (in %) Months (m) funds worth Rs 13,459 crore, Public Issues FIs/Banks 1 300 (300) 13-13.43 2 to 5.6 with 19 states participating Central undertakings 1 1,000 (4,033.13) 8.20-8.30 10 to 15 in these three auctions. Total for December 2011 2 1,300 (4,333.13) 8.20-13.43 2 to 15 Years Five states approached the Private placements on NSE market twice, namely, Kerala, FIs/Banks 14 6,385 9.34-12.50 2 to 10 NBFCs 34 12,434 0-11.50 1 to 7 Jammu and Kashmir, Rajas Central undertakings 28 3,418 9.25-9.67 4 to 20 than, Uttar Pradesh, and Total for December 2011 76 22,237 0 to 12.50 1 to 20 West Bengal. Yields softened Total for November 2011 34 13,945 7.55-11.90 1to 15 Years in later auctions. Overall, Figures in parenthesis are of green shoe options. Source: www.nseindia.com cut-off and weighted yields auctions till 23 December were slated but on softened in December to 8.80% and 26 December the RBI announced one more 8.85%, respectively with an improved bidauction worth Rs 15,000 crore scheduled cover ratio of 2.04 (Table 13). A lower YTM at for 30 December. Out of the four auctions, 8.87% was also realised for SDLs in the secthree were fully subscribed while the sec- ondary market with turnover increasing ond auction witnessed devolvement worth more than twice to Rs 8,475 crore. Rs 400 crore. Overall, cut-off yields declined to 8.71% in December from 8.98% in Novem- 2.4 Treasury Bills ber. The bid-cover ratio also improved to Maturities of 91-day TBs were issued for 2.34 over the month (Table 9, p 123). Rs 16,000 crore and 182-day and 364-day
Table 12: Yield Spreads (Weighted Average) Central Government Securities (basis points)
Yield Spread in bps December 2011 Previous Three Six Months Last Week First Week Entire Month Month Months Ago Ago Economic & Political Weekly EPW

for Rs 8,000 crore each. A softening of yields was seen across maturities during December, while the bid-cover ratio improved for 91-day and 182-day TBs (Table 14). The huge demand for short-term instruments was reflected in the volume of trade in TBs more than doubling to Rs 35,227 crore. Yields eased by 15 bps, 29 bps and 31 bps to 8.54%, 8.51% and 8.41%, respectively for 91-day, 182-day and 364-day TBs.

2.5 Corporate Bond Market

Two public issues accessed the market in December from Muthoot Finance and Power Finance Corporation of India. Muthoot Finance approached the market with a public issue of secured non-convertible debentures (NCDs) raising Rs 300 crore with an option to retain over-subscription up to Rs 300 crore of NCDs aggregating to a total of Rs 600 crore. This issue opened on 22 December and closed on 7 January. Debentures maturing in 24 months, 36 months, 60 months and 66 months were offered at coupon rates of 13%, 13.25%, 13.25% and 13.43%, respectively. A public issue of tax free, secured, and redeemable NCDs by Power Finance Corporation for Rs 1,000 crore opened on 30 December and closed on 16 January. This issue has an option to retain over-subscription up to the shelf limit or Rs 4,033.13 crore. Debentures with two maturities, i e, 10 years and 15 years, are available with coupon rates of 8.20% and 8.30%, respectively. Private placements on the NSE also surged by 59% to Rs 22,237 crore over the period. Through 34 issues non-bank financial companies (NBFCs) raised the highest amount worth Rs 12,434 crore followed by financial institutions and banks. The highest tenor of 20 years was provided by NTPC, a central government undertaking. Cholamandalam Investment and Finance offered the highest coupon of 12.50%. Overall, the coupon rates offered moved up to a range of 9.25% to 12.50% on issues other than a zero coupon bonds offer by Tata Capital Housing Finance (Table 15). According to the data published by the SEBI, the total turnover of corporate bonds in the secondary market, reported by BSE, NSE and FIMMDA, improved by 33% to Rs 63,067 crore in December compared with the previous month.

january 28, 2012

vol xlviI no 4

125

MONEY MARKET REVIEW

www.epwrf.in

EPW Research Foundation

(A UNIT OF SAMEEKSHA TRUST)

www.epwrfits.in India Time Series

A few months ago EPWRF introduced an online database service christened as India Time Series, www.epwrfits.in. The project envisaged dissemination of data in fifteen modules displaying time series on a wide range of macroeconomic and financial sector variables in a manner convenient for research and analytical work. This is targeted to benefit particularly students, research scholars, professionals and the academic community, both in India and abroad. This online service is a part of the project funded by the University Grants Commission (UGC) and executed by the Tata Institute of Social Sciences (TISS), Mumbai and the Economic and Political Weekly (EPW). Time series data sets have been structured under various modules. EPWRF has thus far released six modules (see below as per price list). The following nine more modules will be added in stages soon. 1) 2) 3) 4) 5) 6) 7) 8) 9) National Accounts Statistics Annual Survey of Industries Finances of Government of India Finances of State Governments Industrial Production External Trade Insurance Education Health Disseminating data in time-series. Interactive on-line access to time series data updated periodically. Select data series as per requirement and download at ease. Instantly compare, plot and analyze different data in relation to each other. Export to Excel for time series analysis and econometric work. Save time and energy in data compilation. Get help needed from our team.

Key Online Database Features

The demo version can be accessed by free registration. The existing members already registered with us and accessing member services at www.epwrf.in will require no fresh registration. To gain full access, the subscription rates are:

Initial Subscription Rates Per Annum

Modules Financial Markets Banking Statistics (Basic Statistical Returns) Domestic Product of States of India (SDP) Agricultural Statistics Price Indices Power Sector India (in Rs.) Foreign (in US $) India (in Rs.) Foreign (in US $) India (in Rs.) Foreign (in US $) India (in Rs.) Foreign (in US $) India (in Rs.) Foreign (in US $) India (in Rs.) Foreign (in US $) Individuals* 5000 200 4000 160 3000 120 2000 80 2000 80 2000 80 Universities/Deemed Other Institutions Universities or Colleges According to Number of Concurrent Users Up to 5 More than 5 10000 8000 6000 4000 4000 4000 12500 500 10000 400 7500 300 5000 200 5000 200 5000 200 20000 1000 16000 800 12000 600 8000 400 8000 400 8000 400

*Individual students and research scholars in Indian universities and colleges are eligible for a discount of 25% on producing brief evidence of eligibility from the concerned institution. 1) When subscription is made for two or more modules, a discount of 10% will be available per module. 2) Initial subscription is valid for one year and renewals on an annual basis will be available on a 30% discount over initial subscription amount. For any further details or clarifications, please contact:

Director EPW Research Foundation C-212, Akurli Industrial Estate, Akurli Road, Kandivli (East), Mumbai - 400 101. (phone: 91-22-2885 4995/4996) or mail to: epwrf@vsnl.com
january 28, 2012 vol xlviI no 4
EPW Economic & Political Weekly

126