Money market review

Coming to Terms with Inflation

EPW Research Foundation

Given the widespread public and government concerns about inflation, now is an appropriate time to address some issues pertaining to its measurement, inflationary expectations, outcomes and the priorities for action. The central government must attempt to construct an internationally acceptable and comparable price index series, the goal of monetary policy on inflation should be made benchmarkable in definite terms, the weights in the available price indices need to be readjusted in the light of recent changes in consumption patterns and the existing surveys on expectations should be put to practical use for developing appropriate policy perspectives.

1Introduction

ver since a wide divergence developed between the wholesale price index (WPI) inflation and the consumer price index (CPI) inflation in the middle of 2008 combined with the dominating factor of accelerated food inflation, a serious debate has ensued in policy circles. At the government level, there are repeated promises that inflation will come down in the coming months. At the central bank, more serious concerns are seen from the angle of developing proper policy perspectives. Reserve Bank of India (RBI) Governor D Subbarao, while indicating that India should not be a pure inflation targeter, acknowledged that because monetary policy is the first line of defence, it is our duty and dharma to manage inflation expectations. Deputy Governor Subir Gokarn in July stated that since supplyside pressures on inflation are easing, the RBI has been trying to address demandside pressures. He added in a recent speech on the subject of managing (the) growth-inflation balance in India that quite clearly, food and fuel prices, reflecting supply-side forces, and the prices of manufactured goods, reflecting demandside ones, have all contributed significantly to the recent rise in inflation. He added that whenever we see worrying high levels of inflation, both supply and demand
Real GDP Per Capita (Rs) Per Capita % Growth Rate

pressures seem to be at work. RBI Execu tive Director D K Mohanty in a recent separate address on perspectives on inflation in India has argued that supply shocks when accompanied by demand pressures amplified inflationary pressures. Given these concerns, this is an appropriate time to address some issues pertaining to the measurement of inflation, with the policy stance and the changing macroeconomic dynamics having a bearing on inflation behaviour, inflation expectations and outcomes and, on that basis, to prioritise some actions.

2 Measurement of Inflation
India is an exception in having multiple inflation indicators with none of them reflecting the commonly accepted representative consumer or retail price index, nor the producers price index. Nevertheless, for policy purposes, the WPI inflation has been generally used for a variety of reasons, such as its large coverage of commodities and high frequency release of data despite the index being biased to commodity prices and despite it not covering any services. Though there are four different consumer price indices, they cover different population groups and cannot be considered representative of a national level unified index. The governments commitment to bring about urban and rural consumer price indices effective from January 2011 does not seem to offer a real promise to switch over to a representative CPI inflation. The weighting pattern of all these indices also suffer from being out of alignment, particularly after the commencement of
Annual WPI Annual CPI (%) (%) Base = 2001 PFCE in Domestic Market at Current Prices (Rs Crore) Food (% Share to PFCE)

Table 1: Trends in Per Capita GDP, Private Final Consumption Expenditure and Inflation Indicators
Implicit Inflation from GDP Deflator

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

At 1999-2000 Series 2000-01 18,295 2.5 3.3 7.2 3.7 13,45,583 2001-02 18,967 3.7 3.0 3.6 4.3 14,70,301 2002-03 19,397 2.3 3.8 3.4 4.1 15,52,618 2003-04 20,735 6.9 3.4 5.5 3.7 17,03,546 2004-05 21,935 5.8 5.5 6.5 4.0 18,48,110 At 2004-05 Series 2004-05 27,251 - - - - 19,26,858 2005-06 29,377 7.8 4.7 4.4 4.2 21,58,349 2006-07 31,770 8.1 5.6 6.5 7.5 24,77,209 2007-08 34,213 7.7 5.5 4.8 6.4 28,25,356 2008-09 36,005 5.2 7.9 8.0 9.0 32,26,826 2009-10 38,155 6.0 4.5 3.6 12.4 35,71,999
Source: RBI, CSO, compiled by EPWRF and www.eaindustry.nic.in

41.3 41.1 38.8 38.1 36.4 33.5 33.1 31.5 31.0 29.2 -

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As the demand-side pressure of inflation is measured in terms of non-food, overall the role of monetary policy in a sense has become more important in addressing inflation concerns. This macro level shift in consumption is not truly reflected in either the WPI or the CPI weighting diagram. In WPI, the weight of the food index came down from 43.1% in 1970-71 to 24.3% in 2004-05 and in a way got aligned better with the shifting consumption pattern. In the case of the CPI, the share of the weight of food came down from 60.9% in 1960 to 46.0% in 2001. As at the beginning of the decade, this weight seemed to have been in alignment with the macro picture, but in the last 10 years this has drastically changed and to that extent the CPI underestimates the demand-side pressures. The policy objective regarding inflation is generally stated very clearly, though benchmarking its attainment has become more and more complicated. In short, based on official statements of different periods, the relative emphasis between price stability and growth shifts according to changes in the economic environment. Currently, it is very obvious that inflation control or price stability is an overriding concern. Thus, there is a long-standing policy commitment to maintain a balance between growth and inflation in the short run, while fostering faster growth with lower inflation over the long period. Furthermore, India has also a fairly explicit statement of what is seen as a desiraTable 2: Inflation Expectations and Outcome Survey Year Expectation Period Expectation WPI CPI ble rate of inflation, conQuarter 3-Months 1-Year Actual Actual sistent with the economy Ahead Ahead growing at its potential Sep-06 2006-07 Oct-Dec 4.8 6.9 6.8 Dec-06 Jan-Mar 5.2 6.7 7.0 rate on a sustained basis, Mar-07 2007-08 Apr-Jun 5.9 5.5 6.3 The policy reviews say Jun-07 Jul-Sep 6.1 5.6 4.1 6.7 that we would like inflaSep-07 Oct-Dec 5.3 5.8 3.7 5.2 tion to be in the 4-4.5% Dec-07 Jan-Mar 5.2 6.3 6.0 6.3 range in the medium Mar-08 2008-09 Apr-Jun 5.4 6.5 9.0 7.8 term, while aspiring for a Jun-08 Jul-Sep 7.5 6.0 11.1 9.0 3.0% rate in the long term. Sep-08 Oct-Dec 12.8 5.9 8.6 10.4 As this policy objective Dec-08 Jan-Mar 8.9 6.3 3.6 9.3 has been repeated over Mar-09 2009-10 Apr-June 5.3 7.9 0.5 8.9 Jun-09 Jul-Sep 6.3 13.5 0.3 11.8 the long term in the past, Sep-09 Oct-Dec 8.7 9.6 4.3 13.3 practically the inflation Dec-09 Jan-Mar 11.6 6.2 9.5 15.3 rate should have come Mar-10 2010-11 Apr-Jun 10.6 6.7 10.6 13.7 down currently to 3.0%. Jun-10 Jul-Sep 11.4 9.2 9.0 While the policy stance Oct-Dec 11.9 with respect to inflation Jan-March 11.0 is clearly indicated, the April-June 11.9 Source: RBI Bulletin, various issues . multiple indicators of

the high growth phase of the Indian economy in the 1990s. Spending power appears to have shifted to a mass of growing urban middle class. For them, the relative expenditure on food is on the decline. A similar pattern is observed even in rural markets, where the market for non-food manufactured items is expanding and the spending on services like health, education, entertainment, etc, is increasing. While the weights in the WPI are reportedly based on the gross value of output, without services being represented, the weights in the CPI are based on expenditure surveys of the class of population that each index represents. The most commonly used version is the CPI for industrial workers. Based on the implicit rate implied in the GDP deflator, inflation was moderate during the current decade except in 2008-09. The GDP deflator was more or less in alignment with WPI inflation during the period. CPI inflation however diverged from the other two, and showed an increase of 9.0% in 2008-09 and 12.4% in 2009-10, on an average and comparable basis. The very surprising element in the macro economic dynamics is the significant shift in the pattern of private final consumption expenditure (PFCE). The share of food in PFCE came down from 47.7% in 1990-91 to 41.3% in 2000-01, but it declined sharply to 29.2% in 2008-09, the corresponding share of non-food touched a high of 70.8% in 2008-09 (Table 1, p 73).

inflation and their non-representativeness, particularly from the demand side, very much cloud the interpretation of the policy stance in practical terms.

2.1Inflation Expectations and Outcomes

Inflation expectations play an important role in shaping the inflation consequences of economic activity and this is fully recognised by the central bank if we go by policy statements. Economic decisions such as the setting of prices and wages, and on consumption and investment are all influenced by expectations. Thus, inflation expectations can feed directly and indirectly into inflation itself. This is one reason that inflation feeds on itself when it breaches a tolerable threshold and goes out of control. Unfortunately, inflation expectations are not directly observable. Instead, expectations are generally inferred in some manner through periodic surveys. The RBI has done yeomans service by initiating such surveys in the last about five years. There are two surveys available from the RBI on inflation expectations, namely, the household survey of around 4,000 urban respondents from various professions and age groups available from 2005, and the second as part of the professional forecasters survey covering a fairly large number of more than about 25 professional agencies, available since late 2007. While these surveys are thoroughly analysed by the central bank researchers and transparently published, and they contain very useful information they carry the rider that they in no way reflect the views and forecasts of the RBI and also that they may be different from the actual wholesale and consumer inflation numbers released periodically by the government. These surveys of inflation expectations, however, provide useful directional information on near-term inflationary pressures and also supplement other economic indicators to get a better indication of future inflation. Both these surveys in August and September 2010 point to the dangers of expectations of inflation hardening. The forecasters median estimates for WPI inflation in the first quarter of 2010-11 is at 10.4%, which has been revised upwards from 9.5% in the last survey. Forecasters have assigned only a 25.8% chance that it will

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in the latter period, expec- 3 Money, Forex and Debt Markets tations lay in between the The prevailing stiff liquidity conditions in two indices, but were more the system over the past several months 12 12 attuned to CPI inflation. continued during September as well. The CPI Inflation Actual 8 8 The expectations and out- second quarter advanced tax payments of comes seem to have some- around Rs 40,000 crore by corporates fur4 4 what converged by June ther tightened the situation. In its MidPerception WPI Inflation Actual Quarter Review of Monetary Policy 2010-11, 2010 (Graph A). 0 0 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 A comparison of expecta- as part of its steps to contain inflation, the tions a quarter ahead and a RBI hiked key policy rates, ie, repo and Graph B: Inflation Rate Expectation and Actual Graph B: Inflation Rate Expectation and Actual CPI Actual year ahead with outcomes reverse repo under the liquidity adjust16 16 Expectation 1 year ahead 14 in the WPI and CPI also show ment facility (LAF) by 25 basis points and Expectation 3 month ahead 12 12 similar trends (Table 2, p 74 50 basis points, respectively to 6.0% and 10 5.0%. This narrowed the short-term money and Graph B). 8 8 These results show that market corridor to 100 basis points. 6 The system continued to remain in deficit. the RBI should draw on 4 4 these survey results to opti- During the month, a pick-up in bank credit 2 WPI Actual mal use in policymaking. caused an outflow of funds to the extent of 0 0 9/06 3/07 6/07 9/07 Dec-07 12/07 Mar-08 3/08 Jun-08 6/08 Sep-08 9/08 12/08 3/09 Jun-09 6/09 Sep-09 9/09 12/09 3/10 Jun-10 6/10 Sep-06 12/06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-08 Mar-09 Dec-09 Mar-10 The current trends show, Rs 71,000 crore. The additional burden to fall in the 6.0-6.9% range in end-March of however, that at around 6.5% the inflation the system in the second half of the month Expectation 3 month ahead Expectation 1 year ahead WPI Actual CPI Actual 2010-11. Over the next five years, the foreexpected by the end of the current year is due to advance tax payments resulted in a casters expect WPI inflation to be 6.0%, fraught with upside risks. WPI inflation higher injection of funds through the RBIs which has been revised upwards from may turn out to be not less than 7.0% and LAF repo window. As in the previous 5.5% in the last survey. CPI-Industrial that of CPI may converge to that level month, in September as well government Workers (IW) inflation for the next five though it may not touch the same level. securities auctions, net of redemptions, years is put at 7.0%, the same as in the last This would however require further pre- contributed to an outflow of funds to the survey. Over the next 10 years, WPI based ventive monetary policy actions in the extent of another Rs 44,000 crore. The inflation is expected to be 5.0%, the same coming months of the current fiscal. short-term money market rates moved in a as in the last survey and CPI-IW-based relatively wider range and crossed the infla tion is expected to be 6.5%, revised 2.2Immediate Priorities 6% mark in September. upwards from 6.0% in the last survey. To conclude: (i) the central government In the government securities market, the Thus, based on the survey of forecasters, must initiate a serious attempt to construct securities prices touched their highest after over the next 10 years, the goal of 3.0% an internationally acceptable and compara- the finance ministry cut debt sales for inflation and even a 4-4.5% inflation is ble price index series; (ii) the goal of mon- 2010-11 by 2% to Rs 4.47 lakh crore on 23 etary policy in terms of inflation should be September surprisingly further relaxing likely to remain a pipedream. The household survey findings provide made benchmarkable in definite terms; limits on foreign holdings of Indian corpoonly a three-month and one-year time (iii) the available indices will require some rate bonds and government securities. horizon for expectations. These are based readjustments of weights based on changThe performance of the US dollar against on the respondents own consumption ing consumption patterns in the last dec- other currencies was appallingly poor basket and are not linked to any of the ade; (iv) monetary policy has become more owing to growing concerns over the ecoofficial price indices. The June 2010 survey relevant since demand-side pressures are nomic recovery in US. The rupee appreciindicates that households expect inflation evidently gaining more weight; (v) the ated significantly during the month and to rise further by 30 and 80 basis points expectations surveys should be put to prac- touched a four-month high, particularly during the next quarter (11.4%), and the tical use in developing appropriate policy due to enormous foreign inflows into the next year (11.9%), respectively, from the perspectives; and (vi) the government and country on the back of improving optimism expected current rate of 11.1%. The move- the RBI should evolve a quick road map to about the domestic economy. In the curment of inflation expectations shows that achieve all of the above. rency futures segment, the entry of the the future inflation expectations are Table 3: Money Market Activity (Volume and Rates) September 2010 August 2010 usually higher than current inflation. This Instruments Daily Average Monthly Range of Weighted Daily Average Monthly Weighted Range of Weighted is indicative of a continued firming up of Volume (Rs Crore) Weighted Average Daily Volume Average Rate (%) Average Daily Rate Average Rate (%) Rate (%) (Rs Crore) (%) inflationary expectations. Call Money 7,827 5.39 3.79-6.15 7,297 5.30 4.22-5.84 A comparison of current inflation per- Notice Money 1,649 5.53 3.65-6.12 1,886 5.13 3.57-5.76 ceptions of households and the actual WPI Term Money @ 120 - 5.00-8.50 75 - 5.10-7.55 54,615 5.13 4.00-6.05 44,217 5.02 4.09-5.72 and CPI inflation shows that till September CBLO 16,910 5.23 2.00-6.03 15,030 5.12 2.00-5.71 2008 expectations were aligned with out- Market Repo @: Range of rates during the month. comes of both WPI and CPI inflation rates; Source: www.rbi.org.in. and www.ccilindia.com.
Graph A: Current Inflation Rate Perception and Actual
16 16
Sep-06 Sep-07 Sep-08 Mar-07 Mar-08 Mar-09 Sep-09 Mar-10 Jun-07 Jun-08 Jun-09 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10

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newly set-up United Stock Exchange (USE) created history by recording a more than 50% market share on the very first day of trading. Thus, the overall turnover also increased during September over the previous month. In the corporate bond market, the mobilisation of resources through issuance of bonds remained restrained compared to August.
Table 4: RBIs Market Operations (in Rs crore)
Month/Year OMO (Net Purchase(+)/ LAF (Average Daily Sale(-)) Injection (+)/Absorption(-))

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

10 0 -2 -16 -11 8

-54,009 -34,749 43,123 48,740 1,207 14,364

Source: RBIs Weekly Statistical Supplement.

3.1 Money Market

The unrelenting pressure of liquidity kept the short-term money markets in a sceptical mood and the rates crossed the 6%-mark across segments during September. The easing trend in rates observed in late August was not sustained during the month as the tight liquidity and policy rate hikes kept the upward pressure on the rates. During the month, the weighted average call rates moved in a wide range of 3.75% to 6.15%. During the first week of September, the weighted average call rates ruled in a broad range of 3.79-5.09%, following the fluctuations in the liquidity scenario observed at the beginning of the month. During the second week, the rates displayed a somewhat softening trend. From the third week onwards, the rates continued their hardening trend since the banks were under strain after companies paid the second instalment of advance tax on 15 September. The overnight rates breached the upper corridor set by the repo rate of 6% during the last week of the month, due to extremely tight liquidity conditions as banks preferred to cover their reserve needs before the half yearly closing of accounts. Falling in line, the notice money rates also hardened and stayed in a range of 3.65% and 6.12% in September. The term money market too witnessed the rates touching as much as 8.5% during the month. Likewise, the monthly weighted average rate of collateralised borrowing and lending obligations (CBLO) and market repo ruled higher at 5.13% and 5.23%,

pressure on the rates of this instrument. In contrast, the volume of outstanding commercial papers (CPs) shed around Rs 700 crore during the fortnight ending 31 August. After the introduction of a new base rate system, the rates firmed up on CPs which continued during the review period. The easing of liquidity conditions in the system was reflected in the RBIs LAF window in the initial part of the month as the average daily absorption of funds by the central bank in its reverse repo window stood at Rs 7,800 crore till 9 September and no bids were received or accepted in repo window. During the remaining part of the month, RBI infused an average of Rs 32,000 crore through its repo window, following the cash crunch in the system. Overall, during the month of September, the persisting liquidity pressure and the banks need for funds resulted in RBI injecting a higher amount at Rs 14,360 crore on a daily average basis, as against Rs 1,200 crore infused during the pre vious month. The RBIs open market operaTable 5: Foreign Exchange Market: Select Indicators tions con tinued to be practically Month Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Rate (Last Friday Depreciation (-) ($ Million) (Month-end Index non-operational (Table 4). of the Month) of Rs/$ (in %) Closing) The interest rate futures segApr-10 44.44 2.03 2,783 17,559 81.99 ment of the NSE hardly showed May-10 46.54 -4.51 -1,505 16,945 86.58 an improvement in its turnover. Jun-10 46.54 0.00 2,424 17,701 86.28 Jul-10 46.46 0.17 5,285 17,868 81.65 There are strong expectations Aug-10 46.86 -0.85 3,163 17,971 83.25 that the policy rates may see Sep-10 45.54 2.90 7,100 20,069 78.72 another round of hikes in early Source: RBI (www.rbi.org.in), BSE (www.bseindia.com), SEBI (www.sebi.gov.in), www.futures.tradingcharts.com November 2010.
Table 6: Turnover in the Foreign Exchange Market* (Amount in $ billion)
Month Merchant Interbank Spot Forward Total

respectively, compared to 5.02% and 5.12%, in the previous month. The volumes in the money market also saw a surprisingly massive escalation in September. However, the increase in volume during the month illustrates the imperative need of funds by the system. The daily average turnover of call money transactions increased by 7% to Rs 7,827 crore in September though the notice money volume witnessed a decline of 13%. The CBLO and market repo displayed an escalating trend with an additional 24% and 13% of volumes, respectively (Table 3, p 75). Following the increase in overnight rates, the banks preferred to borrow money through the certificates of deposit (CDs) route. The volume of outstanding CDs jumped by about Rs 6,600 crore during a period of one fortnight ending 10 September 2010; over the period of two fortnights they added an enormous Rs 20,600 crore taking the total outstanding amount to Rs 3,48,200 crore. The demand for CDs put

Apr-10 May-10 Jun-10 Jul-10 Aug-10

233.6 320.9 281.2 253.4 284.2

-(9.8) (37.3) -(12.4) -(9.9) (12.2)

689.0 839.9 803.4 747.5 796.3

-(6.9) (21.9) -(4.3) -(7.0) (6.5)

489.7 -(4.5) 595.8 (21.7) 547.1 -(8.2) 492.4 -(10.0) 517.7 (5.1)

433.0 -(11.0) 565.0 (30.5) 537.6 -(4.9) 508.5 -(5.4) 562.9 (10.7)

922.6 -(7.6) 1160.8 (25.8) 1084.7 -(6.6) 1000.9 -(7.7) 1080.5 (8.0)

*: Includes trading in FCY/ INR and FCY/FCY. Figures in brackets are percentage change over the previous month. Source: Weekly Statistical Supplement, various issues.

Table 7: 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 %)

3-Sep-10 9-Sep-10 24-Sep-10

7.46% 2017 8.08% 2022 8.30% 2040 7.17% 2015 8.13% 2022 8.26% 2027 7.99% 2017 7.80% 2020 8.30% 2040

R R R R R R R R R

4,000 5,000 3,000 4,000 4,000 3,000 5,000 4,000 2,000 34,000 46,000

2.31 2.56 2.16 2.55 2.19 2.61 3 2.28 2.32

nil nil nil nil nil nil nil nil nil

8.01% (Rs 97.11) 8.03% (Rs 100.37) 8.40% (Rs 98.90) 7.69% (Rs 97.95) 8.02% (Rs 100.85) 8.35% (Rs 99.20) 7.88% (Rs 100.57) 7.86% (Rs 99.57) 8.37% (Rs 99.25)

Total for September Total for August

R: Reissue Source: RBI press releases.

2.47 2.11

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3.2 Forex Market

In the forex market, the US dollar was under immense pressure, following the mediocre economic data and a note worthy softer shift in policy guidance from the Federal Reserve. The dollar ended the month sharply lower against almost all the global counterparts as market sentiments remained weak throughout the month due to the mounting concerns about the recovery in the US economy. The euro, on the other hand, outperformed most of the major currencies and gained substantially against the US dollar, thanks to the euro zone government debt markets successful auctions of a number of sovereign bonds. Due to the impact of the weakness in the dollar overseas, the rupee posted one of its best monthly gains in 15 months. The
Descriptions

local currency appreciated by 2.9% followed by robust portfolio investments on the back of strong economic fundamentals in the domestic economy and euphoria on the prospects of stock market returns. The rupee started the month with an appreciation of 21 paise to touch Rs 46.87 per dollar on 1 September tracking positive stock market performance. The rupee continued to appreciate till 6 September and rose to Rs 45.48 against the dollar responding to the continued flow of funds into the domestic stock market. Soon after, the rupee dipped to Rs 46.71 per dollar on 7 September amid broad gains by the dollar overseas along with a weak Euro. Again, the rupee bounced back on 9 September and continued its appreciation for two days in a row and touched Rs 46.31 per greenback on 13 September, boosted
September 2010 First Week (3rd) AMT YTM

by gains in Asian peers. From 14 September, the rupee was stable against the dollar for three days, but on 17 September the rupee breached the Rs 46-level and hit Rs 45.97 and ruled above the Rs 46-level for the remaining part of the month. On 20 September the rupee moved along with other Asian currencies and added 36 paise and thereafter witnessed some mixed trends till 24 September, when it was hurt by dollar buying by oil firms. On 27 September, the rupee added a massive 50 paise and continued to appreciate till the end of the month and closed the month at Rs 44.92 per dollar (Table 5, p 76). Following the sharp appreciation in rupee against the dollar, the forward premia across three maturity segments continued their hardening trend. The softening trend experienced in the latter part
Three Months Ago (June 2010) AMT YTM Six Months Ago (March 2010) AMT YTM

Table 8: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)
Last Week (24th) AMT YTM Total for the Month AMT YTM Previous Month (August 2010) AMT YTM

1 Treasury Bills A 91-Day Bills B 182-Day Bills C 364-Day Bills 2 GOI Dated Securities Year of Maturity 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

3,789.23 2,931.47 102.76 755.00 47,837.04 6.10 6.09 6.44 7.95

5,704.12 4,014.12 934.82 755.18 52,754.13 5.86 6.23 6.13

15,768.39 11,315.07 1,356.91 3,096.41 5.97 6.21 6.31

18,372.72 13,500.25 1,954.83 2,917.64 5.9 6.03 6.25 7.57

24,724.29 14,148.87 4,300.24 6,275.18 3,61,583.98 5.24 5.2 5.27

26,754.93 21,121.57 2,084.11 3,549.25 4.15 4.54 4.87 7.52

7.73 2,29,375.66

7.84 2,50,927.49

7.45 1,47,852.12

(No of Securities) - 3,369.67 6,480.61 4,539.88 2,415.13 28,191.58 3,723.28 10,415.43 49.66 130.74 99,039.92 15.00 61,290.80 - 0.05 - - 5,370.36 - 2,708.29 113.60 - 4.30 63.50 1,453.85 2,338.57 - 6.31 7.01 7.23 7.43 7.68 7.85 7.89 7.99 8.01 7.88 8.09 7.99 - 8.20 - - 8.34 - 8.33 8.24 - 8.32 8.23 8.21 910.55 4,540.57 7,330.38 4,172.63 2,693.66 10,582.32 8,914.66 242.46 161.13 453.14 1,54,498.78 34.16 88,556.25 160.57 460.57 70.00 147.13 4,437.29 37.00 2,535.89 106.75 54.75 39.84 0.40 3,172.84 5.37 5.21 6.08 6.61 6.98 7.32 7.63 7.53 8.20 7.51 7.54 8.63 7.89 8.04 8.16 8.12 8.17 8.18 8.07 8.21 8.12 8.09 7.21 7.91 7.34 2,227.50 2,197.78 8,020.77 2,920.99 2,032.58 1,786.66 45,201.72 413.64 83.51 2,300.99 37,001.72 260.24 347.17 135.01 2,806.92 14.98 10.11 1,689.74 6.42 187.15 92.81 102.35 15.60 65.00 5,743.37 4.50 5.32 6.17 6.80 7.34 7.52 7.59 7.90 7.93 7.99 7.88 8.12 8.17 8.44 8.44 8.31 8.45 8.35 8.30 8.35 8.31 8.30 8.32 8.35 8.31 4 5 4 4 6 4 2 4 3 3 3 1 315.16 1,025.48 200.10 105.00 7,271.68 324.00 2,576.94 130.17 25.00 24,412.64 16,111.35 0.05 6.49 7.00 7.27 7.50 7.70 7.95 7.91 8.09 8.03 7.93 8.03 8.14 230.00 295.00 750.00 5.00 10,027.50 495.00 2,259.23 8.00 5.00 35,353.79 19,237.47 5.00 6.39 6.83 7.13 7.61 7.68 7.88 7.98 8.07 8.09 615.16 3,056.57 1,535.36 855.00 27,528.91 1,332.10 6,822.84 138.17 205.21 2.04 63,454.84 5.05 6.43 6.93 7.20 7.54 7.71 7.91 7.96 8.09 8.02 7.95 8.24 8.04 8.51

2010

7.96 1,06,674.04 8.02 8.51

2024 2025 2026 2027 2028 2032 2 1 3 2,202.57 0.32 177.42 0.90 8.35 8.35 8.18 1,186.52 40.87 36.50 8.36 8.36 8.32 6,224.54 3.42 518.74 60.00 50.00 1,240.39 2,679.40 8.36 8.18 8.25 8.26 8.40 8.38 8.20 7.81

2034 2036 2040

2035 1 1 355.86 874.58 8.38 8.30 279.11 745.96 8.39 8.03 2039 3 State Govt Securities Grand total (1 to 3)

8.39 3,18,032.25 1,42,419.65

59,898.44

76,664.07 2,38,770.17 2,50,086.95

(-) means no trading YTM = Yield to maturity in per cent per annum NDS = Negotiated Dealing System OM = Order Matching Segment 1) Yields are weighted yields, weighted by the amounts of each transaction. Source: Compiled by EPWRF; base data from RBI, CCIL. Economic & Political Weekly EPW october 23, 2010 vol XLV No 43

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of August was not sustained during September as the rupee started the month with huge appreciation and continued the trend throughout the month. Among the three tenors, the one-month premia was more volatile and started the month at 5.63% and touched a 17-month high on 29 September at 6.95%. The forex market turnover reversed its previous months trend and expanded by 8% during August over the previous month following the progress in imports in July. The turnover in the merchant segment showed a rise of 12%, while interbank transactions improved by 6.5% during the month. Similarly, the spot and forward markets turnover also increased by 5% and 11%, respectively, during the same period (Table 6, p 76). Trading in the currency futures segment saw aggregate turnover touching all time highs following the USEs entry into the currency derivatives segment. Trading in the newly set-up USE which began its trading in currency futures on 20 September recorded a Rs 45,486-crore turnover on the very first day. The average daily turnover of MCX-SX increased by 32%, while that of NSE rose by 49% during September. The market share of MCX-SX and NSE saw notable decline as it was split by the new entrant USE. Still, the maximum portion of
Descriptions

market share remained with MCX-SX with 42% while those of NSE and USE were at 33% and 25%, respectively during the month. The total number of contracts traded in these three exchanges increased by 81% over the previous month, while the open interest position saw a marginal rise of 8% at the month end. Among the traded currencies, the rupee-dollar futures continued to enjoy the top place contributing to 97% of the total notional value.

3.3 Government Securities Market

In September, three auctions of central government securities were held, ending the planned government borrowing for the first half of the current financial year. The total auctioned amount was 26% lower at Rs 34,000 crore in September against Rs 46,000 crore in the previous month. First two auctions were held consecutively (on 3 and 9 September) while the third auction had a gap of two weeks and was held on 24 September. In all, nine securities were auctioned during the month, all reissues, and were fully subscribed. The interest of investors increased after the governments approval to double the investment limit of FII in government securities, from $5 billion to $10 billion, though the maturity restriction of not less than five years acted as a dampener. Curtailment in
September 2010 First Week (3rd) AMT YTM

the government borrowing by a meagre Rs 10,000 crore was disappointing after realisation of huge revenues through spectrum auctions. However, the bid cover ratio for September stood at 2.47 times, higher than 2.11 times in August. The yield rates at cut-off prices varied in the range of 7.69% for 2015 maturity and 8.40% for 2040 maturity. The third auction saw some softening in yields (Table 7, p 76). In the secondary market, the total traded amount dipped by almost 4% to Rs 2,20,322 crore with YTM of 7.93% in September, against Rs 2,29,375 crore in August with YTM of 7.84%. Release of the auctions calendar for the second half of the financial year, with very little reductions in auctioned amounts in the second half and expectation of key policy rate hikes dampened trading sentiments in the secondary market. In general, yield rates remained flat. However relatively shorter term securities were traded at higher yields, resulting in a narrowed yield spread between one- and ten-year and one and five-year maturities. The yield curve for the month did not show any significant shift (Tables 8, 9, 10). There were two issues of state development loans (SDLs) for an aggregate amount of Rs 9,800 crore in September against Rs 7,921 crore in August. In the
Three Months Ago (June 2010) AMT YTM Six Months Ago (March 2010) AMT YTM

Table 9: Predominantly Traded Government Securities (Amount in Rs crore)

Last Week (24th) AMT YTM Total for the Month AMT YTM Previous Month (August 2010) AMT YTM

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

55.00 260.00 700.00 190.00 50.00 7,270.00 - 120.00 1,356.46 - 5.12 24,407.52 5,667.35 10,308.19 135.80 9.00 2,193.57 65.42 44.00 355.86 55,234.63

6.45 6.50 6.99 7.27 7.55 7.70 - 7.88 7.95 - 8.05 7.93 8.03 8.03 8.12 8.35 8.35 8.38 8.38 8.38 7.92

- - 220.00 750.00 - 9,982.50 - 415.00 2,259.23 - 146.05 35,207.74 1,573.97 17,075.00 588.50 6.50 1,180.02 31.00 9.87 279.11 70,213.99

- 55.00 - 330.00 6.80 1,275.00 7.13 1,525.00 - 695.00 7.68 27,120.23 - 2.00 7.88 1,040.00 7.98 5,602.36 - 175.00 8.06 246.74 7.96 1,06,427.26 8.03 18,856.37 8.02 43,655.74 8.15 942.72 8.35 25.50 8.36 6,199.05 8.36 96.42 8.38 329.32 8.39 1,240.39 7.93 2,20,322.38

6.45 875.00 6.46 634.42 6.92 4,371.50 7.20 4,259.82 7.56 840.00 7.70 25,476.01 7.81 2,645.30 7.90 3,698.08 7.98 10,359.13 8.02 130.14 8.05 352.33 7.95 98,687.42 8.04 - 8.03 59,726.77 8.14 1,564.03 8.35 840.89 8.36 4,529.47 8.37 112.30 8.19 2,558.99 8.39 1,453.85 7.93 2,29,375.66

6.27 6.40 7.00 7.23 7.47 7.68 7.70 7.85 7.90 8.02 8.00 7.88 - 7.99 8.14 8.34 8.34 8.37 8.33 8.39 7.84

1,060.00 1,541.03 4,380.60 3,928.25 1,350.00 6,244.97 3,824.00 8,822.43 60.70 271.50 694.03 1,53,204.49 32.00 220.00 88,193.39 363.85 4,073.34 1,194.86 374.92 - 2,90,135.12

5.34 560.00 4.81 935.08 6.03 6,205.03 6.61 2,684.99 6.98 1,540.17 7.26 - 7.39 - 7.63 44,781.52 7.29 75.00 7.81 2,108.99 7.84 36,571.62 7.55 - 7.98 - 8.03 31.00 7.89 298.84 8.18 1,615.84 8.17 45.00 8.21 119.65 8.22 - - - 7.56 1,09,921.36

5.10 5.25 6.14 6.79 7.34 7.59 7.80 7.99 7.92 8.15 8.17 8.35 8.33 8.32 7.50

(-) means no trading. YTM = Yield to maturity in percentage per annum. (1) Yields are weighted yields, weighted by the amounts of each transaction. Source: As in Table 8.

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first auction, five state governments took part, namely, Maharashtra, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal, and raised Rs 5,548 crore. In the second auction, Andhra Pradesh, Gujarat, Meghalaya, Punjab, Uttar Pradesh and West Bengal took part to raise Rs 4,252 crore. The bid cover ratio for the second auction was higher at 3.62 times against 3.32 times of the first auction. The yield rate in the second auction came down marginally. In the secondary market also, higher traded amount in SDLs at Rs 2,679 crore was noticed in September, with YTM of 8.20% against Rs 2,339 crore in August with YTM of 8.21%.

3.4Treasury Bills
The total auctioned amount for treasury bills in September was Rs 16,500 crore, against Rs 13,000 crore in August. Five auctions in 91-day treasury bills, three in 182-day treasury bills and two for 364-day treasury bills were held in September. The bid cover ratio across the categories improved. The cut-off yield also went up for 182 and 364-day treasury bills. The high demand for short-term funds caused 91-day treasury bills yield in auctions to ease marginally over the month (Table 11). The total traded volume of the treasury bills in the secondary market fell by about 14% to Rs 15,768 crore in September against Rs 18,373 crore in August. Across categories, a firmness in yield rates was witnessed during the month. The total traded volume of 91-day treasury bills however plunged by more than 16% in September at Rs 11,315 crore as compared to Rs 13,500 crore in the previous month. While for 182-day treasury bills, the total traded volume plummeted by almost 31% to Rs 1,357 crore compared to Rs 1,955 crore in the previous month. 364-day treasury bills however recorded a marginal increase in traded volume. The secondary market yield rates increased respectively by 7 basis points, 18 basis points and 6 basis points in 91, 182 and 364 day treasury bills.

3.5 Corporate Bonds Market

The primary issuances in the corporate bonds market continued to fall during September and the total mobilised amount, at Rs 4,100 crore, was lower by 45% compared to the previous months Rs 7,342

crore. This fall was partly Table 10: Yield Spreads (Weighted Average): Central Government Securities attributed to the improved September 2010 (basis points (bps)) Yield September 2010 Previous Three Six Months Last Week First Week Entire Month Month Months Ago Ago stock market conditions Spread in bps 1 Year-5 Year 121 129 128 136.882 211 220 which drove the primary 5 Year-10 Year 23 28 24 19.903 22 36 equity market as a favoura10 Year-15 Year - - - - 58 43 ble route for institutions to 1 Year-10 Year 144 157 152 156.785 233 256 garner funds. Source: As in Table 5. The corporate bond market saw spreads Table 11: Auctions of Treasury Bills (Amount in Rs crore) Date of Auction Bids Bid Cover Cut-off Weighted Cut-off Weighted widening on the back of a Accepted Ratio Yield (%) Average Price (Rs) Average Yield (%) Price (Rs) rally in government A: 91-Day Treasury Bills securities yields. Banks/ 01-Sep-10 2,000 3.22 6.07 6.03 98.51 98.52 financial institutions (FIs) 08-Sep-10 2,000 3.02 6.03 6.03 98.52 98.52 and NBFCs emerged as the 15-Sep-10 2,000 2.75 6.15 6.11 98.49 98.5 major issuers, accounting 22-Sep-10 2,000 2.92 6.19 6.15 98.48 98.49 2,000 3.65 6.27 6.27 98.46 98.46 for 38% each of the 29-Sep-10 Total for September 10,000 3.11 6.14 6.12 98.49 98.50 total mobilisation through Total for August 8,000 2.14 6.15 6.08 98.49 98.51 10 issues, raising an B: 182-Day Treasury Bills aggregate amount of 01-Sep-10 1,500 2.89 6.37 6.31 96.92 96.95 Rs 3,100 crore. Mobilisa- 15-Sep-10 1,500 2.49 6.44 6.39 96.89 96.91 tion of funds by banks and 29-Sep-10 1,500 3.14 6.57 6.57 96.83 96.83 FIs more than halved dur- Total for September 4,500 2.84 6.46 6.42 96.88 96.90 ing the month; yet six dif- Total for August 3,000 2.22 6.41 6.64 96.91 96.80 ferent banks tapped the C: 364-Day Treasury Bills 1,000 3.78 6.48 6.45 93.93 93.96 market to mobilise a total 08-Sep-10 22-Sep-10 1,000 2.37 6.70 6.61 93.74 93.82 amount of Rs 1,550 crore. Total for September 2,000 3.07 6.59 6.53 93.84 93.89 Among the six issues, Total for August 2,000 2.91 6.48 6.41 93.93 93.99 Canara Bank raised the Source: RBI's press releases. highest amount of Rs 500 crore through upper tier II Table 12: Details of Commercial Bond Issues during September 2010 Institutional Category No of Issues Volume in Range of Range of Maturity bonds by offering 8.62% Rs Crore Coupon Rates in Years (Y) and (in %) Months (m) with put/call option at the FIs/Banks 6 1,550 8-00-9.05 3y-10y end of 10 years. Other NBFCs 4 1,550 8.00-9.00 3y-15y banks also offered similar Corporates 1 1,000 9.00 10y coupon rates for the bonds Total for September 2010 11 4,100 8.00-9.05 3y-15y maturing in the years Total for August 2010 19 7,342 7.50-11.69 1y-15y ranging from three to 10 Source: HSBC InvestDirect (India) Limited. the bond issues carried AAA ratings by the years. The bonds carried coupon rates varying between 8% and rating agencies. As in the previous month, 9.5%, marginally lower than the previous state and central undertakings stayed months rates of 7.50% to 10.40% for away from the bond market. Only one corporate, Infotel Broadband maturity periods ranging from one year to 15 years. Except for Yes Bank, the other Services tapped the bond market during five issues carried the triple A ratings from the month of September and raised Rs 1,000 crore, through issuance of NCDs by agencies like Crisil, ICRA and Care. The non-banking financial corpora- offering 9% for 10 year maturity (Table 12). The secondary market transactions in tions (NBFCs) participation showed a drastic decline during the month. The commercial bonds increased marginally mobilised amount was lower by 38% com- during the month over the previous month. pared to the previous month and the According to the data published by SEBI, NBFCs raised Rs 1,550 crore from four the aggregate turnover as well as the averissues in September. Two NBFCs, IDFC and age daily turnover in the corporate bonds LIC Housing Finance entered the bond reported by BSE, NSE and FIMMDA was up by market twice each during the month and 4% each over the month. The average daily garnered an aggregate amount of Rs 300 turnover improved from Rs 2,400 crore in crore and Rs 1,250 crore, respectively. All August to Rs 2,508 crore in September.

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