base rate transition
TRANSCRIPT
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MONEY MARKET REVIEW
August 21, 2010 vol XLV No 34 EPW Economic & Political Weekly26
Team led by K Kanagasabapathy and supported
by V P Prasanth, Bipin K Deokar, Rema K Nair,
Anita B Shetty, Shruti J Pandey, Vishakha G
Tilak and Sharan P Shetty.
Base Rate Transition andTransparency Issues
EPW Research Foundation
While it will take some time for
the new base rate system to have
its full impact on the pricing of
loans, certain patterns are
already discernible. The BRof all
banks is considerably lower than
the former benchmark prime
lending rate and the range of the
BRin various bank groups is also
narrower than the BPLRearlier.
Following the State Bank of
Indias decision to launch
BR-based deposits, an intriguing
question is that while deposit
rates are to influence the BR, if
the latter itself determines the
former, what then is to determinethe BR?
With the shift to the BR,
corporates are showing signs of
moving to non-bank sources for
their working capital. The burden
of higher borrowing costs may
then fall on the public sector
which was earlier drawing on
sub-BPLR
finance.
The new base rate (BR) system came
into force effective July 2010. But,
first, the initial evidence shows
that the fog has not cleared insofar as the
much expected transparency is con-
cerned. Second, because of some of the
transitional provisions, the full impact of
the BR system on loan pricing by banks
will be reflected only after a considerable
lapse of time. An attempt is made here to
raise related issues and other implications
of the shift, based on an analysis of the
benchmark prime lending rate (BPLR) BR
matrix that has emerged after the BRsys-
tem came into vogue.
1.1 Transitional Provisions
The BRsystem has been made applicable
for all new loans and for those old loans
that come up for renewal. Existing loans
based on the BPLR system may run tilltheir maturity. In case the existing bor-
rowers want to switch to the new system
before expiry of the existing contracts, an
option may be given to them on mutually
agreed terms.
The transparency of the BR system
would depend upon two fundamental
things. First, while each bank can choose
its own benchmark for fixing the BRthey
should document the detailed formula for
the calculation of the BRand the methodo-
logy. They are expected to consistently
apply this until as and when a revision
takes place based on a quarterly review.
This formula needs to be disclosed to the
Reserve Bank of India (RBI), which can
also scrutinise and check for its consistent
application. When the BPLR regime was
introduced, it was supposed to take into
account almost the same set of parameters
but no such documentation and disclosure
requirements were placed for a consis-
tency check.Second, banks are not allowed to lend
below the BR, subject however to a few
exceptions which are very clear. One fall-
out of this is that if some corporates enjoy
borrowing at below the BRthat is being
fixed, then they may be chasing banks
with a lower BRto maintain their current
borrowing costs or attempt to substitutetheir bank borrowings with either exter-
nal commercial borrowings which prove
to be cheaper because of interest rate dif-
ferentials or with medium or short-term
papers such as bonds and debentures or
commercial paper.
It is not clear whether there is a require-
ment that the detailed formula of each
banks BRbe made public or it is only to be
available for review and scrutiny by the
RBI. Apparently, excepting one or two
banks, so far no bank has placed its cards
in the open regarding the method of fixa-
tion of the BR.
Who are the new borrowers and who
are the old borrowers? If the existing
borrower has a cash credit limit and if
this does not come up for renewal, that
might be treated as an old loan on the
basis of a long-term relationship with the
borrower. State Bank of India (SBI) Chair-
man O P Bhatt is reported to have recom-
mended a sunset clause according to which borrowers would have to switch
over to the new BRsystem at a predeter-
mined date. Unless this is done, a parallel
run of the BPLRwith BRmay add to the
complexity of lending rates. For instance,
SBI itself has announced a change in its
BPLRfrom 11.75% to 12.25% while the BR
has been kept unchanged. Should the BR
also not be changed?
1.2 BPLR-BR Matrix
A comparison of the prevailing BPLRwith
the BRafter its announcement by different
banks presents some intriguing questions.
While the BRs announced by banks are on
the expected lines, the puzzling questions
are: if the same set of parameters was to
guide BR fixation, why is there such a
large divergence between these two rates?
Second, the bank group-wise reactions
are difficult to fathom.
Table 1 and Graph A (p 27) showing the
distribution of banks according to theBPLR/BR reveal that (i) all banks have
fixed BRs at considerably lower levels
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Economic & Political Weekly EPW august 21, 2010 vol XLV No 34 27
Table 1: Bank-wise Shift from BPLR to Base Rate
Last BPLR Base Difference(Quarter Rate (BPLR
Ending Base Rate)
March 2010)
Public Sector Banks1 State Bank of India* 11.75 7.50 4.25
2 State Bank of Bikaner and
Jaipur 12.25 7.75 4.50
3 State Bank of Hyderabad 12.75 7.75 5.00
4 State Bank of Mysore 12.25 7.75 4.505 State Bank of Patiala 12.25 7.75 4.50
6 State Bank of Travancore 12.25 7.75 4.50
7 Allahabad Bank 12.00 8.00 4.00
8 Andhra Bank 12.00 8.25 3.75
9 Bank of Baroda 12.00 8.00 4.00
10 Bank of India 12.00 8.00 4.00
11 Bank of Maharashtra 12.25 8.00 4.25
12 Canara Bank 12.00 8.00 4.00
13 Central Bank of India 12.00 8.00 4.00
14 Corporation Bank 12.00 7.75 4.25
15 Dena Bank 12.50 8.25 4.25
16 Indian Bank 12.00 8.00 4.00
17 Indian Overseas Bank 12.00 8.25 3.75
18 Oriental Bank of Commerce 12.00 8.00 4.00
19 Punjab National Bank 11.00 8.00 3.0 0
20 Punjab and Sind Bank 13.50 8.20 5.30
21 Syndicate Bank 12.00 8.25 3.7522 Union Bank of India 11.75 8.00 3.75
23 United Bank of India 12.00 8.25 3.75
24 UCO Bank 12.25 8.00 4.25
25 Vijaya Bank 12.25 8.25 4.00
26 IDBI Ltd 12.75 8.00 4.75
Range: 11.00- 7.50- 3.00-
13.50 8.25 5.30
Private Sector Banks
27 Catholic Syrian Bank Ltd 14.75 8.00 6.75
28 City Union Bank Ltd 14.50 8.50 6.00
29 Dhanalaxmi Bank Ltd 16.00 7.00 9.00
30 Federal Bank Ltd 14.25 7.75 6.50
31 Jammu and Kashmir
Bank Ltd 12.75 8.25 4.50
32 Karnataka Bank Ltd 13.75 8.75 5.00
33 Karur Vysya Bank Ltd 13.50 8.50 5.00
34 Laxmi Vilas Bank Ltd 15.00 8.75 6.2535 Nainital Bank Ltd 12.50 8.50 4.00
36 Ratnakar Bank Ltd 13.00 8.00 5.00
37 South Indian Bank Ltd 16.00 8.10 7.90
38 Tamilnad Mercantile
Bank Ltd 14.00 8.50 5.50
39 ING Vysya Bank Ltd 15.75 7.25 8.50
40 SBICI Bank Ltd 13.00 7.50 5.50
41 Development Credit
Bank Ltd 14.75 7.80 6.95
42 Axis Bank 14.75 7.50 7.25
43 IndusInd Bank 16.75 7.00 9.75
44 ICICI Bank Ltd 16.75 7.50 9.25
45 HDFC Bank Ltd@ 15.75 7.25 8.50
46 Kotak Mahindra Bank 15.50 7.25 8.25
47 Yes Bank Ltd 16.50 7.00 9.50
Range: 12.50- 7.00- 4.00-
16.75 8.75 9.75Foreign Banks
48 Citi Bank 14.75 7.25 7.50
49 Standard Chartered 14.25 7.25 7.00
50 HSBC 15.50 7.00 8.50
51 Abu Dhabi Commercial Bank 12.50 7.50 5.00
52 Bank of Bahrain and Kuwait 16.00 7.75 8.25
53 BNP Paribas 14.00 6.75 7.25
54 Deutsche Bank 16.00 6.75 9.25
55 Development Bank of
Singapore 14.00 7.00 7.00
Range: 12.50- 6.75- 5.00-
16.00 7.75 9.25
+ - since revise d to 12.25%.* - Cost of Deposits with tenure of six months, mainly due to thelarge base of current accounts, savings accounts deposits at 47.0%.@ - Due to its CASA ratio of about 50% - the highest in the bankingindustry. The bank has used the cost of one-three months depositsto arrive at its base rate.But for these two banks there is no clear indicative as the method offixing base rate.
Source: Data compiled from websites of respective banks.
Graph A: Base Rate-BPLR Relationship
10
10.5
11
11.5
12
12.5
13
13.5
14
14.5
15
15.5
16
16.5
17
6.0 6.5 7.0 7.5 8.0 8.5 9.0
Base Rate
PSBs Pvt Banks For.Banks
BPLR
Base ratePSBs Pvt Banks For Banks
compared to the BPLR; (ii) the range of the
BRin all bank groups has narrowed in gen-
eral compared to the BPLR; (iii) foreign
banks which had the highest range of
BPLR(12.50%-16.00%) have moved to the
lowest range of BR (6.75%-7.75%) with
high reductions in rates (5.00-9.25 per-
centage points); (iv) the public sectorbanks operated at a lower range of both
BPLR (11.00%-13.50%) and BR (7.50%-
8.25%) and the extent of reduction in BR
from BPLRwas also relatively less (3.00-
5.30 percentage points); and (v) the pri-
vate banks had a wider and high range of
BPLR(12.50%-16.75%) as also BR(7.00%-
8.75%) with higher range of reductions in
rates (4.00-9.75 percentage points).
The individual bank-wise shift from BPLR
to BR reveals that the new private sector
banks and foreign banks are more or less
on the same footing posing significant com-
petition to both public and private banks.
The old private banks are the ones to face
the stiffest competition in the process.
1.3 Benchmark for Loans
or Deposits?
On 16 July 2010 the SBI launched base
rate-linked deposit products for one, three
and five years. For one year the rate will be
50 basis points (bps) lower than the base
rate. For three years, the deposit rate will be
25 bps lower and, for a five-year tenure, the
deposit rate will be equal to the base rate.
The announcement by SBI revising itsdeposit rates has posed the question
whether the BRis a benchmark for pricing
of loans or deposits. In the RBI circular
which was based on the recommendations
of the Mohanty working group the central
bank had said that the base rate would be
linked to the cost of deposits, a negative
carry for the statutory liquidity ratio and
the cash reserve ratio, overhead costs and
a profit margin. But in practice, the for-mula has effectively turned out to be more
illustrative than being instructive. Funda-
mentally, while deposit rates are to form
the basis for BR fixation, the logic is
reversed if the BR is to form the bench-
mark for floating rate deposits. Then,
what will be the basis for fixation of the
BR? Is it going to be arbitrary or will it be
linked to some external benchmark like
any policy rate?
The growth in aggregate deposits of
scheduled commercial banks has consist-
ently been decelerating over the past three
years from 22.4% in 2007-08, to 19.9% in
2008-09 and to 17.2% in 2009-10. Year on
year as on 30 July 2010, the growth rate
has been only 14%. Against this backdrop,
the SBIs efforts to garner additional depos-
its are understandable. As the SBI is the
leader at least among the public sector
banks, if this practice is followed by other
public sector banks that might place the
entire BRsystem in a tailspin mode.
1.4 Other Implications
It was feared that large corporates mightmove to other sources of short-term financ-
ing. Even as banks raise deposit rates,
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approved the launch of exchange-traded
currency options on the rupee-dollar spot
rate and it has been allowed to introduce
premium-styled European call and put
options. The move is expected to boost
the turnover of the exchange-traded cur-
rency derivatives segment. On 23 July, the
RBI issued revised draft guidelines on for-eign exchange derivatives and overseas
hedging of commodity price and freight
risks. The draft guidelines suggest that
FIIs, persons having foreign direct invest-
ments in India and non-resident Indians
be allowed to hedge their contracted for-
eign exchange exposures through For-
ward Foreign Exchange Contracts and
Foreign Currency-INROptions.
In the corporate bonds market, the
mobilisation of resources through issu-
ance of bonds remained buoyant with
more financial institutions coming for-
ward to garner money from this route.
2.1 Money Market
During July, the short-term rates contin-
ued their hardening trend as in the previ-
ous month and stayed mostly within the
corridor of the repo rate and reverse rate
set by the RBI. The weighted average call
rates moved in a range of 4.43% to 5.88%
during July, higher than the 4.14% to5.35% range during the previous month
implying the higher demand for short-
term funds. From 26 June to 1 July the
rates moved in a range of 5.10% to 5.58%.
But they touched their high of 6.5% on 30
June the first time in three months as
many banks were weighed down by the
Table 2: Money Market Activity (Volume and Rates)
Instrume nts July 2010 June 2010
Daily Average Monthly Range of Weighted Daily Average Monthly Weighted Range of Weighted
Volume (Rs Crore) Weighted Average Daily Volume Average Rate (%) Average Daily Rate
Average Rate (%) Rate (%) (Rs Crore) (%)
Call Money 8,387 5.54 4.43-5.88 6,216 5.18 4.14-5.35
Notice Money 2,306 5.39 3.50-6.00 1,587 5.17 3.45-5.35
Term Money @ 112 - 4.40-7.60 90 - 4.25-7.00
CBLO 28,832 5.26 4.15-5.56 32,247 5.18 4.03-5.32Market Repo 11,621 5.39 350-5.89 10,233 5.27 2.00-5.36@ Range of rates during the month.Source: www.rbi.org.in. and www.ccilindia.com.
Table 3: RBIs Market Operations (in Rs crore)
Month/Year OMO (Net Purchase(+)/ LAF (Average DailySale(-)) Injection (+)/Absorption(-))
January-10 -8 -76,949
February-10 -4 -80,674
March-10 -2 -44,404
April-10 10 -54,009
May-10 0 -34,749
June-10 -2 43,123
July-10 -16 48,740
Source: RBIs Weekly Statistical Supplement.
short-term money became more expensive
over the recent period with corporations
trying to beat the base rate system. They
are instead opting to borrow through com-
mercial papers even at higher yield rates.
The commercial paper issues of Rs 75,506
crore outstanding as of end March 2010
had moved up to Rs 99,792 crore as of endJune 2010 and are expected to have moved
up further since then. Commercial banks
investment in commercial papers increased
by 7.6% and 9.6%, respectively, in mid-
June and mid-July 2010, and investment in
bonds and debentures of companies
increased by 5.9% and 9.8%, respectively,
during the same period whereas the
growth in non-food credit was only 1.9%
and 3.8% during the same period. In fact,
the banks non-food credit during July
declined by 1.3% while commercial invest-
ments increased by 5.8%.
The available data show that compared
to the private corporate sector, the public
sector companies largely relied on the
banking system for their working capital
needs. These companies might have been
enjoying the so-called sub-BPLRborrow-
ings by virtue of government backing.
Thus, if the BR system leads to some
increase in borrowing costs, the public
sector companies will be the ones hard hitcompared to their private counterparts,
which will have some fiscal implications.
2 Money, Forex and Debt Markets
The RBIs policy stance of exiting excessive
monetary accommodation has of late been
buttressed by a decisive shift in favour of
containing inflationary pressures and
expectations. The policy stance and
responses have been driven by growth-
inflation dynamics. In its first quarter
review of monetary policy for 2010-11
released on 27 July 2010, RBI raised the
repo rate from 5.5% to 5.75% and the
reverse repo rate from 4% to 4.50%, thus
narrowing the corridor to 125 bps. This
was the second time during the month
that the RBI raised these policy rates. Ear-
lier on 2 July the central bank took the
market by surprise by unexpectedly rais-
ing repo and reverse repo rates by 50 bps
each to contain the continuous accelera-
tion of inflation and to ensure that eco-nomic growth, which is back on track,
is placed on a firmer and sustainable
footing. Inflation as also the growth pro-
jection for the current year have been
scaled up by 50 bps each to 8.5% and
6.0%, respectively.
The tight liquidity conditions experi-
enced over the past three months follow-
ing an outflow of more than Rs 1 lakh
crore towards 3G licence fees along withadvance tax payment of around Rs 35,000
crore in the previous month continued to
have an impact on all the segments of the
money market during July as well. How-
ever, the end of the month reflected some
easing as banks parked with the RBI an
average amount of only Rs 4,000 crore in
the last three days of the month. Sub-
sequent to this, the RBI discontinued its
second Liquidity Adjustment Facility (LAF)
from 30 July on a daily basis.
Reflecting pressures on liquidity and
responding to policy signals, money mar-
ket rates across segments increased steeply
in July over June. Traded volume also
showed a rise. In the government securi-
ties market, central and state governments
continued with vigour their mobilisation
efforts, taking advantage of the still weak
credit demand. The secondary market vol-
umes showed a dip except in treasury bills.
The yield curve seemed tilted upwards at
the shorter end with the long-term yieldrates remaining more or less flat.
Reversing the trend of past several
months, the dollar weakened against most
global currencies. The rupee overall
appreciated marginally over the month
after a steep depreciation in May. During
the month, the global rating agency,
Moodys Investors Service, upgraded
Indias local currency government bond
rating from Ba2 to Ba1. This helped the
rupee to strengthen against the US dollar
and other currencies.
In the currency futures segment, the
turnover fell in both the exchanges as in the
previous month. However, the Securities
and Exchange Board of India (SEBI) has
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Table 5: Details of Central Government Market Borrowings (Amount in Rs crore)Date of Auction Nomenclatur e of Loan Notified Amount Bid Cover Ratio Devolvement on YTM at Cut-off Price
Primary Dealers (in %)
02-Jul-10 7.46% 2017 R 3,000 3.56 nil 7.51% (Rs 99.71)8.20% 2022 R 4,000 2.21 nil 7.92% (Rs 102.09)
8.30% 2040 N 3,000 2.87 nil 8.30%
09-Jul-10 7.17% 2015 R 4,000 3.19 nil 7.40% (Rs 99.05)
7.80% 2020 R 5,000 1.72 nil 7.67% (Rs 100.87)
8.32% 2032 R 3,000 1.89 nil 8.33% (Rs 99.92)
16-Jul-10 7.46% 2017 R 5,000 2.48 nil 7.62% (Rs 99.13)
8.20% 2022 R 5,000 2.49 nil 8.00% (Rs 101.46)
8.26% 2027 R 3,000 2.37 nil 8.24% (Rs 100.19)
30-Jul -10 7.17% 2015 R 5,000 1.87 nil 7.61% (Rs 98.22)
7.80% 2020 R 5,000 2.07 nil 7.78% (Rs 100.11)
8.24% 2027 R 3,000 1.68 nil 8.35% (Rs 99.05)
8.30% 2040 R 2,000 2.33 nil 8.33% (Rs 99.67)
Total for July 50,000 2.33
Total for June 50,000 2.24
R: Re-issue, N: New issue,Source: RBI press releases.
liquidity crunch. The mood was also influ-
enced by the forthcoming monetary policy
review on 27 July. Rates during the last
week of the month showed a somewhat
softening trend and ruled steady near the
lower end of the interest rate corridor
mainly because of improved liquidity
since 28 July, after redemptions ofRs 32,200 crore of government securities.
The month ended with call money weight-
ed average rates ruling at 4.43% on 30
July as there was not much demand for
funds with banks having borrowed ahead
to meet their fortnight-end requirements.
All the money market instruments ruled
above 5.00% level in July. The notice money
rates also followed the same trend and ruled
in a range of 3.50% to 6.0% in July. The
monthly weighted average rate of collateral-ised borrowing and lending obligations
(CBLO) hardened in July to 5.26% compared
to 5.18% in June. The daily average market
repo rate also displayed a similar trend and
weighted average rates ruled at 5.39%
against 3.74% during the same period.
The volumes in money market saw a
massive expansion during the month over
the previous month. The daily average vol-
ume of call money transactions increased
by 35% to Rs 8,387 crore in July. Similarly,
the notice money and term money volumes
witnessed a 45% and 25% rise, respective-
ly, in a period of one month. The turnover
of a major collateralised instrument, CBLO,
however shed 11% while those of market
repo recorded an increase of 14% during
the month (Table 2, p 28).
The volume of outstanding certificates
of deposit (CDs) dipped by about Rs 14,600
crore on 16 July from 2 July and the total
outstanding amount stood at Rs 3,27,720
crore on 16 July. Similarly, the volume ofoutstanding commercial papers (CPs) also
declined by around Rs 9,000 crore during
the end of June over the end of May. The
outstanding CPs stood at Rs 99,792 crore
on 30 June. The tight liquidity in the sys-
tem also had an impact on the CDs and CPs
discount rates and both the instruments
reflected a hardening of rates.
On 30 July the capital market regulator
informed all SEBI-regulated entities toreport their OTC transactions related to CDs
and CPs on the fixed income, money mar-
ket and derivatives association of India
(FIMMDA) reporting platform within 15
minutes of the trade. The move followed a
similar directive issued by the RBI to all
RBI-regulated entities.
The RBIs LAF window
continued to witness the
injection of funds to the
participating banks to
meet their daily liquidity
requirements and the RBI
infused an average daily
net amount of Rs 49,000
crore during July. The
RBIs open market opera-
tions window continued
to remain inactive with a meagre net sales
figure of Rs 16 crore (Table 3, p 28).
During the month of July, the interest
rate futures segment of the National Stock
Exchange (NSE) continued to show a dras-tic decline in its turnover and the average
daily volume plunged from Rs 78 lakh to
Rs 17 lakh during the month over the pre-
vious month.
2.2 Forex Market
Reversing the past trend, the dollar weak-
ened substantially against the euro and
most of the global currencies as the
mounting concerns about the recovery in
the US economy dampened sentiments.
This was due to the weaker than expected
second quarter USGDP growth adding to
the cautious outlook for global growth.
The poor performance of the US dollar
index observed from the beginning of thisfinancial year continued during July also
with the index losing a massive 450 bps.
Following the upbeat interest from for-
eign investors in the Indian market along
with the positive stock price movements,
the rupee recovered from its earlier lows
and appreciated marginally during the
month of July. The FIIs invested heavily in
equity and debt markets in July and the
net amount touched a high of Rs 25,000
crore or $5.3 billion. The equity market
also gained 167 points during the month.
The rupee started the month with a
marginal depreciation on 1 July at
Rs 46.68 per dollar and tracked the vola-
tile movement of the euro. The rupee was
flat against the dollar on 5 July amid low
volumes due to the nationwide strike. The
rupee weakened by 12 paise against the
dollar on 6 July, despite gains in the
domestic equity markets. Strong dollar
demand by importers and large corpo-
rates put pressure on the rupee on 7 July.Thereafter, the rupee continuously appre-
ciated for three days in a row and rose to
Rs 46.73 against the dollar on 12 July
tracking the positive equity market senti-
ment. From 15 July onwards the rupee
again continued to fall till 22 July and
touched a low of Rs 47.33 per greenback
as the Index of Industrial Production data
Table 4: Foreign Exchange Market: Select IndicatorsMonth Reference Rate Appreciat ion (+)/ FII Flows Net Purchases BSE Sensex US Dollar
(Last Friday Depreciatio n (-) ($ Million) by RBI (Month-end In dexof the Month) of Rs/$ (in %) ($ Million) Closing)
Dec-09 46.73 -0.53 1,873 (+) 525 17,465 78.22
Jan-10 46.37 0.78 1,849 (+) 525 16,358 79.65
Feb-10 46.37 0.00 946 (+) 525 16,430 80.44
Mar-10 45.34 2.27 6,465 (+) 370 17,528 81.29
Apr-10 44.44 2.03 2,783 (+) 370 17,559 81.99
May-10 46.54 -4.51 -1,505 (+) 370 16,945 86.58
Jun-10 46.54 0.00 2,424 (+) 270 17,701 86.28
Jul-10 46.46 0.17 5,285 Not availab le 17,868 81.65
Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.gov.in), Imf.org.in,www.futures.tradingcharts.com
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Table 6: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)Descrip tions July 2010 Previous Month Three Months Six Months
Last Week (30th) First Week (2nd) Total for the Month (June 2010) Ago (April 2010) Ago (January 2009)
AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM
1 Treasur y Bills 5080.67 7815.71 26139.26 24724.29 61864.45 45918.40
A 91-Day Bills 1983.52 5.72 4433.94 5.42 13697.18 5.5 14148.87 5.24 46632.98 3.85 36881.33 3.58
B 182-Day Bills 1780.25 5.75 2150 5.34 6904.65 5.51 4300.24 5.2 6865.18 4.14 3628.38 3.76
C 364-Day Bills 1316.9 6.08 1231.77 5.47 5537.43 5.71 6275.18 5.27 8366.29 4.81 5408.69 3.81
2 GOI Dated Securit ies 49902.76 7.7 73120.55 7.47 250927.49 7.57 290135.12 7.56 249090.36 7.44 226991.91 7.20
Year of (No ofMaturity Securities)
2010 2 100.11 6.22 220.00 5.37 345.00 5.53 910.55 5.37 11644.73 4.03 9822.73 4.012011 6 2105.04 6.85 2466.15 5.38 5047.57 5.54 4540.57 5.21 6146.61 5.24 11900.34 5.21
2012 5 1580.00 7.07 1985.77 6.21 6952.23 6.47 7330.38 6.08 15322.65 6.08 16921.08 6.22
2013 3 360.00 7.24 1631.00 6.75 4821.41 6.88 4172.63 6.61 6111.01 6.68 1234.87 6.84
2014 7 5513.00 7.51 612.92 7.03 1290.80 7.11 2693.66 6.98 5547.05 7.19 8793.68 7.20
2015 4 803.50 7.66 8125.60 7.29 26850.90 7.38 10582.32 7.32 19784.65 7.58 2889.79 7.43
2016 4 2215.00 7.68 1929.75 7.58 4475.99 7.61 8914.66 7.63 67632.62 7.58 35352.20 7.41
2017 4 70.10 7.88 960.00 7.52 8767.96 7.62 242.46 7.53 162.88 7.56 303.51 7.51
2018 2 11.00 7.78 0.12 7.61 115.34 7.80 161.13 8.20 89.26 7.90 70.01 7.71
2019 2 30295.01 7.72 65.00 7.72 159.93 7.75 453.14 7.51 1615.50 7.92 39462.14 7.71
2020 3 10.57 7.94 40382.02 7.55 154935.30 7.62 154498.78 7.54 63076.48 7.89 87576.09 7.55
2021 2 2861.94 8.04 114.14 8.08 331.61 7.99 34.16 8.63 96.77 7.99 300.03 7.77
2022 3 16.61 8.20 12651.40 7.92 25520.46 7.96 88556.25 7.89 42848.82 8.12 428.54 8.06
2023 3 1715.07 8.29 16.43 8.11 85.08 8.17 160.57 8.04 32.70 7.86 362.96 8.26
2024 4 - - 77.56 8.09 3237.18 8.27 460.57 8.16 241.12 8.25 739.11 7.91
2025 1 - - 1.61 7.90 1.61 7.90 70.00 8.12 6.71 8.28 15.75 8.34
2026 1 839.34 8.29 49.60 8.19 98.60 8.19 147.13 8.17 1884.23 8.34 2662.31 8.33
2027 2 - - 774.88 8.18 2953.68 8.23 4437.29 8.18 3625.49 8.36 4983.21 8.25
2028 1 647.95 8.28 0.20 8.04 0.50 8.16 37.00 8.07 42.39 8.18 3.96 8.16
2032 3 26.50 8.16 739.22 8.25 2663.25 8.27 2535.89 8.21 3023.01 8.56 2612.89 8.30
2034 1 - - 42.50 8.10 168.00 8.13 106.75 8.12 72.65 8.24 224.59 8.26
2035 1 4.60 8.30 - - 1.00 8.04 54.75 8.09 58.00 8.26 122.62 8.22
2036 1 - - - - 128.13 8.29 39.84 7.21 25.01 8.54 196.25 8.27
2039 1 727.42 8.33 - - 4.00 8.07 0.40 7.91 - - 13.25 8.06
2040 1 - - 274.68 8.30 1971.95 8.32 - - - - - -
3 State Govt Securit ies 230.61 8.17 1331.24 7.94 3040.98 8.01 3172.84 7.34 9496.66 8.07 8912.40 8.16
Grand total (1 to 3) 55214.04 82267.5 280107.73 318032.25 320451.47 281822.71
(-) Means no trading. YTM = Yield to maturit y in per cent per annum. NDS = Negotiated Dealing System . OM = Order Matching Segment. (1) Yields are weighted yields, weighted by the amounts of each transaction.
Source: Compiled by EPWRF; base data from RBI, CCIL.
for May indicated a slowdown in industri-
al production from April. The rupee fell
below the 47-level against the greenback
on 19 July due to the arbitrage opportuni-
ties in the non-deliverable forward market
putting pressure on the rupee. However,
from 23 July to 28 July, the rupee gained
by around 76 paise and touched Rs 46.57per dollar tracking a strong euro against
the greenback. This was also followed by
the raising of debt rating of Indian cur-
rency to Ba1 by Moodys Investors Service.
Another reason that stemmed the rupee
from appreciating further was the
increased capital inflows into the capital
market. On 29 July the rupee dropped by
6 paise but managed to end the month
with a marginal appreciation of 0.17% and
the rupee closed the month at Rs 46.46
per dollar on 30 July (Table 4, p 29).
The forward premia sho-
wed a continuous hardening
trend from the beginning
of the month due to paying
of interest following the
increase in yields in the gov-
ernment securities market.
Among the three tenures,the one-month premia ruled
higher than the three and
six-month premia. The one-
month premia recorded a
continuous rising trend and
moved in a range of 4.51% to 5.94% during
the month. The three-month and six-
month premia also observed a similar
trend. All the three tenures touched their
high on 30 July. On 30 July the one-month
premia ended substantially higher at
5.94% (4.51% on 3 June), three-month at
5.51% (4.21%) and 6-month at 4.91%
(3.67%) (Graph B).
The forex market turnover recorded a
fall of 6.6% during July over June. The
turnover in the merchant segment showed
the maximum fall of 12% while inter-
bank transactions shed 4% during June.
Graph B: Spot Quotations and Annualised Forward Premia for the USDollar in the Domestic Inter-Bank Market
0
10
20
30
40
50
60
-1
0
1
2
3
4
5
6
1-month
6-month
Spot (Daily) Working DaysJuly 2010
Monthly Averages(April 2007 to June 2010)
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Economic & Political Weekly EPW august 21, 2010 vol XLV No 34 31
Table 8: Details of State Government Borrowings (Amount in Rs crore)
Date of Auction Number of Total Bid Cover YTM at Weighted
Participating Amount Ratio Cut-off Price Average
States Accepted (in %) Yield (%)
06-Jul-10 7 4,888 2.15 8.17 8.14
20-Jul -10 4 3,431 2.61 8.15 8.14
Total for July 11 8,319 2.34 8.17 8.14
Total for June 8 5,715 3.01 8.10 8.08
Source: RBI press releases.
Table 7: Yield Spreads (Weighted Average): Central Government Securities July 2010 (basis points (bps))
Yield Current Month Previous Three Six MonthsSpread in bps Last Week First Week Entire Month Month Months Ago Ago
1 Year - 5 Year 81 191 184 211 234 222
5 Year - 10 Year 28 26 24 22 31 12
10 Year - 15 Year - 35 28 58 39 79
1 Year - 10 Year 109 217 208 233 265 234
Source: As in Table 5.
The spot and forward market turnover
also declined by 8% and 5%, respectively,
during the same period.
The trading in the currency futures seg-
ment of both NSE and MCX-SX continued to
show the same trend as the last month and
the turnover fell by 30% during July. This
was partly due to a levy of stamp duty bythe Delhi government on proprietary
trades. The aggregate average daily turn-
over decreased by 30% over the previous
month to Rs 24,244 crore from Rs 34,203
crore. The average daily turnover in the
MCX-SX and NSE stood at Rs 14,546 crore
and Rs 9,698 crore, respectively. The mar-
ket share of MCX-SX over NSE stood at
60:40 during the month. The total number
of contracts traded in the two exchanges
also fell by 30% over the previous month.
Among the traded currencies in the cur-
rency futures segment on both NSE and
MCX-SX, the rupee-dollar futures con-
tinued to rule the top position and
accounted for 91% of the total notional
value followed by rupee-euro by 7%
during the month.
2.3 Government Securities Market
Four auctions of dated government securi-
ties were held, after skipping one sched-
uled auction in the third week of themonth for notified amounts ranging from
Rs 10,000 crore to Rs 15,000 crore mop-
ping up an aggregate Rs 50,000 crore, the
same as that in June. The bid cover ratio
for July was 2.33 times against 2.24 times
in June.
During the month, viz, five securities,
7.46% 2017, 8.20% 2022, 7.17%2015,
7.80% 2020 and 8.30% 2040 were issued
twice, in the first half of the month and
again in the second half. Among these
five securities, only two securities,
10-year benchmark security and 12-year
security, were able to improve bid cover
ratios from the first issue to the second.
Since the last auction followed the first
quarter review, the cut-off yields firmed
up with bid cover ratios coming down. A
new security issued on 2 July, maturing in
2040 with a cut-off yield of 8.30% when
issued again in the last auction of the
month witnessed a yield rate rising from
8.30% to 8.33% (Table 5, p 30). Apart from the above-mentioned five
securities, three more securities were
issued, namely, 8.32% 2032, 8.26% 2027
and 8.24% 2027. Yields of 8.32% 2032
and 8.26% 2027 were when compared
with yields of the same securities in
June auctions.
Despite the tight liquidity situation,
stubborn inflation and the expected hike
in key policy rates, all auctions werefully subscribed without devolvement on
primary dealers.
A continuing shortage of liquidity and
consistent higher inflation rate resulted in
lower traded volumes of dated central
government securities and state develop-
ment loans (SDLs) in the secondary mar-
ket. The traded volume of dated gov-
ernment securities in July dipped by
almost 14% to Rs 2,50,927 crore against
Rs 2,90,135 crore in June. Trading volume
took a hit particularly towards the end of
the month, the volume of dated govern-
ment securities in the last week of the
month, showing trades of Rs 49,903 crore
against Rs 73,121 crore in the first week of
the month. Hikes in policy rates were
somewhat anticipated by the market,
but concerns related to high inflation
led the market to believe that rates could
go up further and this dampened the
trading sentiment in the market, parti-
cularly in the second half of the month.Overall, yields increased
during the month with few
exceptions and a surge in
yields was reflected more
in short-term maturities,
which can also be seen
from the yield curve of
July. Accordingly, the yield
spread for one and five-
year maturities narrowed
to 184 bps against 211 bps
in June and the spread of
yield between one and ten-
year securities also fell to
208 bps from 233 bps in
June. The trading volume
of government securities
was shared by two predominant securi-
ties, namely, 7.80% 2020 and 8.20% 2022
comprising 83% of overall trade in gov-
ernment securities. Trading volume of
SDLs also dropped in July to Rs 3,041
crore with yield to maturity (YTM) of8.01% against Rs 3,173 crore with YTM of
7.34% in June (Table 6, p 30 and Table 7).
State governments tapped the market
twice for an aggregate amount of Rs 8,319
crore against Rs 5,715 crore in June. In the
first auction, held on 6 July, seven state
governments took part for an accepted
amount of Rs 4,888 crore with YTM of
8.17% and weighted average yield of
8.14%. In the first auction, an additionalamount of Rs 187.50 crore and Rs 200
crore, over and above the specified noti-
fied amounts, were raised by Tamil Nadu
and Uttar Pradesh, respectively. In the
second auction, on 20 July, four states par-
ticipated mopping Rs 3,431 crore with
YTM of 8.15% and weighted average yield
of 8.14%. Here again, Maharashtra and
Tamil Nadu issued additional SDLs worth
Rs 200 crore and Rs 181 crore, respectively
(Table 8). Total traded volume, in the
secondary market marginally dropped to
Rs 3,040 crore with YTM of 8.01% against
Rs 3,173 crore in June with YTM of 7.34%.
2.4 Treasury Bills
During the month, 91-day, 182-day and
364-day treasury bills were issued for
Rs 8,000 crore, Rs 3,000 crore and
Rs 2,000 crore, respectively, taking the
aggegate amount to Rs 13,000 crore in
July against Rs 15,000 crore in June.
Cut-off-yields and weighted average
yields across the maturities moved
northward due to liquidity pressure
prevailing in the market along with a
high inflation rate and expected rates
hike in the quarterly review of the mone-
tary policy. Bid cover ratio for 91-daytreasury bills remained constant,
improved for 182-day treasury bills and
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august 21, 2010 vol XLV No 34 EPW Economic & Political Weekly32
Table 9: Auctions of Treasury Bills (Amount in Rs crore)
Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted
Accepted Ratio Yield (%) Average Price (Rs) AverageYield (%) Price (Rs)
A: 91-Day Treasury Bills
07-Jul-10 2000 4.18 5.37 5.32 98.68 98.69
14-Jul-10 2000 2.75 5.41 5.37 98.67 98.68
21-Jul-10 2000 2.76 5.74 5.61 98.59 98.62
28-Jul-10 2000 4.76 5.74 5.74 98.59 98.59
Total for July 8000 3.61 5.56 5.51 98.63 98.65
Total for June 10000 3.61 5.29 5.24 98.70 98.71
B: 182-Day Treasury Bills
07-Jul-10 1500 1.83 5.78 5.63 97.20 97.27
21-Jul-10 1500 3.04 5.95 5.86 97.12 97.16
Total for July 3000 2.44 5.86 5.75 97.16 97.215
Total for June 2000 3.52 5.31 5.29 97.42 97.43C: 364-Day Treasury Bills
14-Jul-10 1000 5.46 5.69 5.66 94.63 94.66
28-Jul-10 1000 3.05 6.30 6.21 94.09 94.17
Total for July 2000 4.26 5.99 5.93 94.36 94.42
Total for June 3000 2.91 5.49 5.42 94.81 94.87
Source: RBI's press releases.
fell in the case of 364-day treasury
bills (Table 9).
In the secondary market, yield rates of
short-term securities went up in July. The
traded volume of treasury bills witnessed
during July increased to Rs 26,139 crore
against Rs 24,724 crore in June. But
across the maturities, volumes of 91-day
and 364-day treasury bills came down
in July as compared to amounts traded
in these categories during June. But thetraded amount of 182-day treasury
bills compensated for the fall in the other
securities traded. The traded amount
increased by more than Rs 2,000 crore to
Rs 6,905 crore in July against Rs 4,300
crore in June.
2.5 Corporate Bonds Market
The finance ministry has placed a limit on
the value of infrastructure bonds that
IFCI, IDFC, LIC and infrastructure financ-
ing companies can issue during 2010-11.
The Central Board of Direct Taxes (CBDT)
has said that the volume of issuance dur-
ing the financial year will be restricted to
25% of the incremental infrastructure
investments made by the issuer during
2009-10. While the minimum tenure for
the bond should be 10 years, a minimum
lock-in of five years has also been speci-
fied for an investor.
In the primary market for corporate
bonds, there was a tremendous 40% risein the mobilisation of resources during
July over the previous month and the
total amount raised stood at Rs 12,515
crore in July against Rs 8,923 crore in
the previous month and Rs 10,430 crore
a year ago.
In the overseas market, SBI has raised
$1 billion (nearly Rs 4,700
crore), selling bonds that
will mature in five years. As per the banks state-
ment the bond sale, exe-
cuted through SBIs Lon-
don branch, was sub-
scribed by 4.8 times and
saw demand from over 350
investors. The debt will
carry a coupon of 4.50%
per annum, the same as
SBIs previous $750 million
(over Rs 3,500 crore) bond
offering of October 2009.
ICICI Bank has raised
$500 million through an
international bond issue
through the banks Hong
Kong branch. As per the
press release, the coupon rate for the
5.5 year bond is 5%, with a spread of
275 basis points over Libor.
In the domestic bonds market, banks/
financial institutions (FIs) accounted for
36% of the total mobilisation througheight issues raising an aggregate amount
of Rs 4,555 crore. The bonds carried
coupon rates varying
between 7.29% and 8.79%
for maturity periods from
three years to 15 years.
HDFC raised the highest
amount among the banks
by hitting the market four
times during July through
issuance of upper tier II
bonds for Rs 1,105 crore,
lower tier II bonds for
Rs 500 crore and NCDs for Rs 1,000 crore.
The bank offered 7.29% and 7.65% for
NCDs maturing in two years while for
upper tier II bonds it offered 8.70%
with the step up of 50 bps if call
is not exercised at the end of 10 years.
The lower tier II bonds carried the
coupon rate of 8.79% for 10 years. All the
four issues enjoyed the triple A rating.
Among other FIs/banks, EXIM Bankoffered the highest rate of 8.68% for
12-year maturity.
The non-banking financial corpora-
tions (NBFCs) participation improved
notably during the month and they
contributed around 15% of the total mobi-
lisations and raised Rs 1,930 crore in July.
Indiabulls raised the highest amount of
Rs 1,260 crore by issuing zero coupon
NCDs for three years. Bajaj Auto Financealso issued zero coupon NCDs. Among the
four issues, three were NCDs. Infrastruc-
ture Development Finance Corp raised
money through issuance of bonds and
offered the maximum coupon rate of
8.80% for 15 years paper.
Central undertakings renewed interest
continued in July also and they accounted
for 45% of primary issues during the
month amounting to Rs 5,680 crore
through issuance of bonds offering 7.10%
and 8.75% for 2 to 15 years maturity.
Power Grid Corporation raised the highest
amount of Rs 2,880 crore by offering
8.50% for 10 years through issuance of
Separate Trading of Registered Interest
and Principal of Securities (STRIPS). Rural
Electrification Corporation also raised
Rs 2,000 core by issuance of bonds and
offered 8.70% and 8.75%, respectively for
9 years and 15 years maturity.
In July, only one corporate tapped the
market through issuance of NCDs forRs 350 crore offering 9.15% for 15 years
(Table 10).
The secondary market transactions in
commercial bonds increased marginally
during the month over the previous month
despite reduced participation from FIIs.
According to the data published bySEBI,
the aggregate turnover as well as the aver-
age daily turnover in the corporate bonds
reported by BSE, NSE and FIMMDA
improved by 17% each over a period of one
month. The average daily turnoverenlarged to Rs 2,899 crore from Rs 2,473
crore recorded in the previous month.
Table 10: Details of Commercial Bond Issues during July 2010
Institutiona l Category No of Issues Volume in Range of Range of Maturity
Rs Crore Coupon Rates in Years (Y) and
(in %) Months (m)
FIs/Banks 8 4,555 7.29-8.79 3y,6m-15 y
NBFCs 4 1,930 7.23-8.80 1y-15y
Central Undertakings 5 5,680 7.10-8.75 2y-15y
Corporates 1 350 9.15 15y
Total for July 2010 18 12,515 6.85-11.50 1y-15y
Total for June 2010 15 8,923 6.85-11.50 2y-20y
Source: www.debtonnet.com.