Dilemma of Indian Banking

7/27/2019 Dilemma of Indian Banking

1/7

MONEY MARKET REVIEW

Economic & Political Weekly EPW may 26, 2012 vol xlviI no 21 119

Dilemma of Indian BankingLiquidity, Capital and Return

EPW Research Foundation

In these times of inflation and the

receding prospect of growth, and

in the presence of fiscal laxity and

higher government borrowing

requirements, Indian banks are

finding it difficult to expand their

credit portfolio. Moreover, as

returns on their investments tendto be lower than those on their

advances, in this present overall

context the real challenge is in

finding the right balance as

between liquidity, capital

and return.

1 Introduction

At a time when inflationary pres-

sures have not subsided and the

prospects of growth of the Indian

economy during the current period is

not that bright, the Indian banking sys-

tem is facing the dilemma of balancing

between liquidity, capital and return. The

slower deposit growth partly explained

by high inflation and substitution of

bank deposits by households with infla-

tion hedging products like gold and real

estate has caused a dent in availability of

liquid resources to the banking system.

Afflicted with growing non-performing

loans and higher provisioning require-

ments inter alia due to pension liabilities,

banks have been put under the radar of

Basel III requirements at a faster and

tighter pace than the agreed international

requirements for compliance.If banks are liquidity or capital con-

strained due to the above factors, they

will automatically be credit constrained,

which could adversely influence their

credit decisions. They may not be able to

expand their balance sheets as per the

needs of the economy for higher credit

growth. There are therefore apprehen-

sions that at least the public sector banks

will find it difficult to expand their credit

portfolio to any significant extent in the

near future.

Furthermore, banks will perforce need

to meet the growing appetite of govern-

ment borrowing. Banks, despite the lower

level of Statutory Liquidity Ratio (SLR)

of 25% and later 24%, had been invest-

ing a much larger part of their deposits

in government securities for reasons of

higher liquidity and as a safe investment

avenue on the face of higher capital

standards. While this tendency had been

reversed during the period of high growthand fiscal consolidation during 2004 to

2008, of late, because of fiscal laxity and

The EPWRF team is led by K Kanagasabapathy

and supported by Anita B Shetty, VishakhaG Tilak, V P Prasanth, Shruti J Pandey, Pallavi

Oak, Bipin K Deokar and Sharan P Shetty.

higher government borrowing, banks

have turned to investments, crowding

out credit flow to the commercial sector.

Overall, return on funds may be affected

because of this shift in portfolio choice

since the return on investments tends tobe lower than that on advances.

Against the above backdrop, this note

presents some perspectives on the Indian

banking scenario in the immediate period

ahead, focusing upon the three key

aspects of liquidity, capital and return.

1.1 Liquidity

For some time now, the banking system

has been in a liquidity bind due to slug-

gishness in deposit growth. Credit growth,

which can spur secondary deposit growth,

also remained tardy during 2011-12

(Graph A, p 120). Liquidity in the bank-

ing system will depend essentially upon

the deposit growth, which, in turn,

depends upon the household preference

for saving in financial assets like bank

deposits. The trend in savings in the

recent past has not been encouraging.

The domestic savings rate declined in

2010-11 to 32.3% from 33.8% in 2009-10.

The decrease in the savings rate was dueto slower growth in savings of both

the household and the private corporate

sectors. The household sectors savings

rate declined to 22.8% in 2010-11, after

touching a record high of 25.4% in

2009-10.Within household savings, the

financial savings rate declined sharply

from 12.9% to 10.0% during the same

period. The decline in the net financial

savings rate was further explained by

the slower growth in households savings

inter alia in bank deposits.

The declining trend in savings in

financial assets in general and bank

deposits in particular evidently indicate

that the household sector has shifted to

inflation hedging assets like real estate

and diversion to purchase of gold. This

may also be partly due to increase in

household debt to meet the needs of con-

sumption on the face of a higher cost of

living. With lower interest rates, deposit

mobilisation might become difficult andhence, deposit rates are not expected to

come down significantly. With the easing


2/7

MONEY MARKET REVIEW

may 26, 2012 vol xlviI no 21 EPW Economic & Political Weekly120

Table 1: Differences between RBI and BIS Norms for Basel III

Minimum Capital Ratios Guideline s# BIS Guideline s# BIS Guideline s# BIS Guidelines # BIS Guideline s# BIS Guidelines # BIS

Jan-13 2013 Mar-14 2014 Mar-15 2015 Mar-16 2016 Mar-17 2017 Mar-18 Jan 19, 2019

Minimum Common Equity Tier 1 (CET1) 4.5 3.5 5 4 5.5 4.5 5.5 4.5 5.5 4.5 5.5 4.5

Capital conservation buffer (CCB) - - 0.625 1.25 0.625 1.875 1.25 2.5 2.5

Minimum CET1+ CCB 4.5 3.5 5 4 6.125 4.5 6.75 5.125 7.375 5.75 8 7

Minimum Tier 1 capital 6 4.5 6.5 5.5 7 6 7 6 7 6 7 6

Minimum Total Capital 9 8 9 8 9 8 9 8 9 8 9 8

Minimum Total Capital +CCB 9 8 9 8 9.625 8 10.25 8.625 10.875 9.25 11.5 10.5

Phase-in of all deductions from CET1 (in %) 20 40 20 60 40 80 60 100 80 100 100# - Guidelines on Implementation of Basel III Capital Regulations in India issued on 2 May 2012 by RBI.BIS - Bank for International Settlements.

Source: Compiled by EPWRF.

Table 2: Estimates by Agencies of Capital Requirements and Impact on Return

Agency Estimated Additional Capital Requirements Remarks

Fitch Rating Up to $50 bn or Rs 2.6 lakh crore of The largest requirement is by State Bank of

additional equity on top of retained India and its associate banks, followed by the

earnings mid-sized and small government banks with

weaker internal capital generation

The Macquarie Rs 1.5 lakh crore or Rs. 30,000 crore The fund-raising atmosphere is depressed;

Group and Crisil a year situation may improve, but return on equity

(RoE) levels is likely to fallICRA Rs 3.9 to 5.0 lakh crore as capital Out of which common equity requirements

will be Rs 1.3-2 trillion

Source: Compiled by EPWRF.

Graph A: Y-o-Y Aggregate Deposits, Bank Credit and Investments Growth (%)

-3

1

5

9

13

17

21

25

29

33

37

41

45

04/2001

08/2001

12/2001

04/2002

08/2002

12/2002

04/2003

08/2003

12/2003

04/2004

08/2004

12/2004

04/2005

08/2005

12/2005

04/2006

08/2006

12/2006

04/2007

08/2007

12/2007

04/2008

08/2008

12/2008

04/2009

08/2009

12/2009

04/2010

08/2010

12/2010

04/2011

08/2011

12/2011

04/2012

Bank Credit

Aggregate

Deposits

Investments (SLR)

of the policy rate, banks would be

expected to reduce their lending rates.

Thus, one challenge for the banking

system is how to balance between rather

sticky deposit rates and a reduction in

lending rates.

The Reserve Bank of India (RBI) had

been by and large pumping in liquidity to

meet the deficit in the system caused by

both structural and frictional factors, but

such liquidity injections are likely to be

brought under reasonable limits within

the comfort zone of the central bank at

plus or minus 1% of net demand and time

liabilities of the banking system (Graph B).

The credit growth is further likely to becrowded out by the huge government

borrowing programme that would in turn

also adversely impact liquidity conditions.

Overall, banks are expected to face

tight liquidity conditions in the coming

months, despite lowering of policy rates

by the RBI.

1.2 Capital

Banks in India will be required to aug-

ment their capital base for their normal

business expansion. In the coming years,

they should also be able to mobilise and

build up additional capital for meeting the

new regulations under

Basel III framed by the

RBI on 2 May 2012

which are to be imple-

mented in phases effec-

tive from 1 January

2013. The Basel III

capital ratios will befully implemented as

on 31 March 2018. The

RBI guidelines are

tighter compared to

international norms in

two respects: first, the

date of compliance

has been advanced to 2018 from 2019,

and second, the level of compliance is at

least 1 percentage point higher (Table 1).

Different agencies have estimated addi-

tional capital requirements, which range

from Rs 1.5 lakh crore to Rs 5.0 lakh

crore (Table 2).

The raising of capital from the market

will generally depend upon capital mar-

ket conditions and how the banking-

related equity market indices perform

vis--vis the general equity indices.

A comparison of bank-related indicesshows that they prominently mimic the

general equity indices, though the bank-

specific indices might vary (Table 3 and

Graph C, p 121). In any case, banks are

not placed in any disadvantageous posi-

tion compared to other sectors in raising

funds from the market.

While for private sector and foreign

banks, raising capital is not reported to

be a serious issue, for public sector banks

(PSBs), it may prove to be difficult. Since

the beginning of 2004-05, 16 of 19 PSBs

Graph B: Average Net Injection/Absorption (Rs Crore)

04/2001

07/2001

10/2001

01/2002

04/2002

07/2002

10/2002

01/2003

04/2003

07/2003

10/2003

01/2004

04/2004

07/2004

10/2004

01/2005

04/2005

07/2005

10/2005

01/2006

04/2006

07/2006

10/2006

01/2007

04/2007

07/2007

10/2007

01/2008

04/2008

07/2008

10/2008

01/2009

04/2009

07/2009

10/2009

01/2010

04/2010

07/2010

10/2010

01/2011

04/2011

07/2011

10/2011

01/2012

04/2012

Graph B: Averag e Net In ject ion /Absorpt ion ( Rs Crore)2,00,000

1,50,000

1,00,000

50,000

0

-50,000

-1,00,000

-1,50,000


3/7

MONEY MARKET REVIEW


Overall, the burden of building up

additional capital looms large on the

banking system, and it is going to be

much more difficult for PSBs.

1.3 Return

The return on bank funds depends upon

the combined influence of return onadvances and return on investments.

Since deposit rates are likely to remain

sticky for some time, till inflation rates

rule high, and there are pressures to bring

down the lending rates, the net interest

margin is likely to come under pressure.

With tightening of provisioning require-

ments, including capital and liquidity

requirements under Basel III coming into

effect shortly, in the current environ-

ment, banks would be encouraged to

build up risk-free assets in the form of a

government securities portfolio.

The return on advances being gener-

ally higher than that on investments

(Table 4 and Graph D), the tendency of

banks switching to investments will

have the consequence of reducing the

overall return in the coming months.

Some market estimates show that the

return on equity of banks may come

under pressure also because of higher

funding costs due to additional capital tobe raised in the coming years. Kotak

Institutional Equities has estimated that

for every 100-120 percentage points rise

in core equity, return on equity will fall

by 1.5-1.8 percentage points. Overall, the

have been reported to be underperform-

ing the Bankex for several years. For

PSBs there is an additional difficulty

because of the need for the matching

contribution to come from the govern-ment. In fact, the government must

ensure sufficient fiscal space to augment

its equity participation or give into

higher order of privatisation. At present

the governments policy is to maintain

51% equity stake in PSBs. In the Union

Budget for 2012-13, the finance minister

has proposed to provide a sum of around

Rs 15,000 crore for capitalisation of the

PSBs, regional rural banks (RRBs) and

other financial institutions. In addition,

the government is also examining the

possibility of creating a financial holding

company which will raise resources to

meet the capital requirements ofPSBs.

For PSBs, injection of government

capital to select banks this year will be

just about adequate for maintaining an

8% tier I capital ratio. That means banks

will need additional capital for funding

credit growth. There have been more

additions to non-performing assets (NPAs)

for PSBs in recent years than for privatesector ones. A higher level of NPAs is

ultimately a charge on the capital of

Table 5: Money Market Activity (Volume and Rates)

Instrument s April 2012 March 2012

Daily Average Monthly Range of Daily Average Monthly Range ofVolume Weighted Weighted Average Volume Weighted Average Weighted Average

(Rs Crore) Average Rate (%) Daily Rate (%) (Rs Crore) Rate (%) Daily Rate (%)

Call Money 19,295 8.65 8.08-9.32 14,429 9.05 8.34-11.77

Notice Money 4,333 8.58 7.77-9.23 3,549 9.52 7.92-13.14

Term Money@ 391 - 8.50-10.75 300 - 8.40-13.50

CBLO 38,992 8.20 7.03-8.54 38,557 8.51 7.05-12.04

Market Repo 18,760 8.32 7.96-8.59 11,493 8.71 7.00-10.98

@ Range of rates during the month. - not available.

Source: www.rbi.org.in. and www.ccilindia.com

Table 4: Cost of Funds and Spread of SCBs

Cost of Cost of Cost of Return on Return on

Deposit s Borrowings Funds Advances Investment s

2001 13.13 11.86 13.06 20.49 20.13

2002 12.92 6.63 12.4 17.89 19.2

2003 11.76 5.74 11.39 18.02 17.56

2004 9.51 4.94 9.25 15.77 15.97

2005 8.13 3.33 7.73 13.77 14.75

2006 4.48 3.3 4.38 8.19 7.65

2007 4.93 3.56 4.82 8.93 7.19

2008 5.97 3.97 5.8 9.92 7.332009 6.24 3.37 5.96 10.5 7.01

2010 5.49 1.7 5.1 9.29 6.54

2011 5.01 2.34 4.73 9.18 6.79

Source: RBI.

banks, and this would

mean much more capital

needs for PSBs.

Since the governments

ability to meet matching

requirements will be

limited, as per the second

Tarapore Committees rec-ommendations, the gov-

ernment holding in PSBs

needs to be diluted to

around one-third from the present level

of 51%. In the absence of that, if new

bank licences are issued to industrial

houses, then the PSBs share in total

banking system assets will furthershrink relative to the gain of private and

foreign banks.

Table 3: Yearly Closing Values of Sensex, Cnx Nif ty, BSE-Bankex and CNX Bank

Year BSE NSE

Close-SENSX % Growth Close-Ba nkex % Growth Closing Values % Growth CNX-Bank % Growth

(BSE) of CNX Nifty

2002 3,377.2800 - 1,342.7600 - 1,093.5000 - 1,226.5000 -

2003 5,838.9600 72.9 2,799.0400 108.5 1,879.7500 71.9 2,588.7800 111.1

2004 6,602.6900 13.1 3,721.9700 33.0 2,080.5000 10.7 3,497.3600 35.1

2005 9,397.9300 42.3 5,081.7100 36.5 2,836.5500 36.3 4,534.2000 29.6

2006 13,786.9100 46.7 7,085.7300 39.4 3,966.4000 39.8 6,008.7500 32.5

2007 20,286.990 0 47.1 11,418.0000 61.1 6,138.6000 54.8 9,863.4500 64.2

2008 9,647.3100 -52.4 5,454.5400 -52.2 2,959.1500 -51.8 5,001.5500 -49.3

2009 17,464.8100 81.0 10,030.8000 83.9 5,201.0500 75.8 9,029.5000 80.5

2010 20,509.090 0 17.4 13,379.7300 33.4 6,134.5000 17.9 11,791.4500 30.6

2011 15,454.9200 -24.6 9,153.3900 -31.6 4,624.3000 -24.6 7,968.6500 -32.4

2012$ 16,215.8400 4.9 10,661.6400 16.5 4,907.8000 6.1 9,257.6500 16.2

$ Closing value as on 14 May 2012.

Source: Websites of BSE and NSE.

Graph C: Major Indices Along With Their Respective BankingIndices (% Growth)

-50-40-30-20-10

0102030405060708090

100110120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$

Close-SENSX

Close-Bankex (BSE)

Closing Values of CNX Nifty

CNX-Bank

Close-SENSXClose-Bankex (BSE)Closing Values of CNX NiftyCNX-Bank

Graph D: Return Structure (%)

6

8

10

12

14

16

18

20

22

2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1

Return on Investments

Return on Advances


4/7

MONEY MARKET REVIEW


return on funds is likely to come under

pressure for the banking system.

2 Money, Forex and Debt Markets

The beginning of the financial year 2011-12

proved to be dull for financial markets.

However, a surprising 50 basis points

(bps) repo rate cut on top of the earlierCRRcuts, aggregating to 125 bps, enthused

market outlook to some extent. But, the

S&Ps downgrading domestic outlook

from stable to negative proved to be a

dampener. Foreign investors continued

to withdraw funds from the Indian market,

spreading an overall bearish outlook.

Uncertain global developments coupled

with disappointing domestic growth

prospects weakened investor confidence,

in turn, adversely affecting financial

markets across the spectrum.

The overall inflows of liquidity im-proved to about Rs 65,000 crore against

meagre inflows of about Rs 12,000 crore

during March. In April, the system ob-

tained significant inflows through a fall

of Rs 95,000 crore in bank credit. RBI

credit to government also increased by

Rs 75,000 crore. However, deposit growth

fell by Rs 63,500 crore in April, being a

major reason for the deficit in the system.

This was accompanied by an increase in

currency circulation and the govern-

ments market borrowing programme,

causing an outflow worth Rs 40,000

crore and Rs 58,000 crore, respectively.

2.1 Money Market

Money market activity remained cau-

tious in April with market participants

anticipating policy rate cuts either in the

repo rate or the CRRor both in the Annu-

al Policy Statement for 2012-13. After

reeling under an acute liquidity shortage

in the previous month, the system expe-rienced some moderation in the first

month of the financial year 2012-13. With

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

Date of Auction Nomenclatur e of Loan Notifi ed Amount Bid-Cover Ratio Devolve ment on YTM at Cut-off Cutt-of f Price

Primar y Dealers Price (in %) (Rs)

03-Apr-12 8.19% 2020 R 4,000 1.69 319.20 8.76 96.80

9.15% 2024 R 8,000 1.58 nil 8.84 102.31

8.97% 2030 R 3,000 1.64 875.96 9.00 99.70

8.83% 2041 R 3,000 1.48 nil 9.06 97.65

13-Apr-12 8.24% 2018 R 4,000 1.96 nil 8.56 98.518.79% 2021 R 7,000 1.82 nil 8.47 102.09

8.28% 2027 R 2,000 2.17 nil 8.74 96.16

8.33% 2036 R 2,000 3.00 nil 8.80 95.30

20-Apr-12 8.19% 2020 R 4,000 2.14 nil 8.44 98.60

9.15% 2024 R 7,000 2.12 nil 8.50 104.97

8.97% 2030 R 2,0 00 2.04 nil 8.81 101.85

8.83% 2041 R 3,000 2.49 nil 8.81 100.20

27-Apr-12 8.24% 2018 R 4,000 1.88 nil 8.64 98.16

8.79% 2021 R 7,000 2.37 nil 8.63 101.00

8.28% 2027 R 2,000 3.59 nil 8.82 95.45

8.33% 2036 R 3,000 2.72 nil 8.96 93.82

Total for April 2012 65,000 2.06 1195.16 8.70 99.92

Total for March 2012 12,000 2.17 Nil 8.37 102.14

R: Reissue.Source: RBI press releases.

Table 8: Average Daily Turnover in the Foreign Exchange Market* ($ billion)Month Merchant Interbank Spot Forward Total

Oct-2011 12.6 -(16.7) 40.0 -(10.6) 26.7 -(9.8) 25.9 -(14.4) 52.6 -(12.1)

Nov-2011 12.3 -(2.2) 41.0 (2.5) 26.6 -(0.3) 26.7 (3.1) 53.3 (1.4)

Dec-2011 11.2 -(8.4) 35.6 -(13.2) 22.8 -(14.2) 24.0 -(10.0) 46.8 -(12.1)

Jan-2012 9.9 -(11.9) 38.7 (8.6) 22.8 -(0.3) 25.8 (7.4) 48.6 (3.7)Feb-2012 11.1 (12.5) 41.3 (6.8) 25.8 (13.4) 26.6 (3.1) 52.4 (7.9)

Mar-2012 11.9 (6.6) 41.2 -(0.1) 26.2 (1.4) 26.9 (1.2) 53.1 (1.3)

* Includes trad ing in FCY/INR and FCY/FCY.

Figures in brackets are percentage change over the previous month.

Source: RBIs Weekly Statistical Supplement, various issues.

Table 7: Foreign Exchange Market: Select IndicatorsMonth Rs/$ Reference Appreciation (+)/ FII Flows BSE Sensex US Dollar Index

Rate (Last Friday Depreciation (-) (Equity+Debt) (Month-end (Month-endof the Month) of Rs/$ (in %) (in $ million) Closing) Closing)#

Oct-2011 48.82 0.21 634 17,705 70.52

Nov-2011 52.17 -6.41 -586 16,123 72.37

Dec-2011 53.26 -2.05 4,195 15,455 73.33

Jan-2012 49.68 7.20 5,087 17,194 72.60

Feb-2012 49.07 1.26 7,164 17,753 72.14

Mar-2012 51.16 -4.09 387 17,404 72.74

Apr-2012 52.68 -2.89 -927 17,319 72.27

#: Nominal Major Currencies Dollar Index.

Source: www.rbi.org.in, www.bseindia.com, www.sebi.gov.in, www.federalreserve.gov.

Table 6: RBIs Market Operations (Amount in Rs crore)

Month/Year OMO LAF Net (Average Daily(Net Purchase(+)/Sale(-)) Injectio n (+)/Absorptio n(-))

Oct-2011 6 50,708

Nov-2011 9,446 91,719

Dec-2011 33,687 1,12,599

Jan-2012 34,772 1,28,471

Feb-2012 20,690 1,33,547

Mar-2012 35,60 0 1,55,162

Apr-2012 12,700 92,436

Source: RBIs Weekly Statistical Supplement.

a cut in repo rate by 50 bps in its policy

review to 8%, money market rates for

various instruments across maturities

fell. However, the downward movement

was restrained due to expectations about

a repetition of similar policy actions in

the near future. Overnight money market

rates moved downwards from the begin-ning of the month and weighted average

one-day rates fell below the 9% levels.

Call rates softened significantly and nearly

touched 8% levels towards the end of the

month and settled at 8.08% on 27 April.

The weighted average call money rates

fell by a considerable 40 bps compared to

the previous month.

The notice money mar-

ket also displayed sharp

declines in its daily rates

and the weighted aver-

age rates fell by a sub-

stantial 93 bps to 8.65%

in period of one month.

Uncertainty over mone-

tary easing in the coming

months kept the rates of

collateralised instruments

like collateralised borrow-

ing and lending obliga-

tions (CBLO) and market

repo more volatile and therates of both the instru-

ments fell by 32 bps and

39 bps, respectively, dur-

ing the same period.

A sharp fall in rates led to heightened

trading activity in the money market. All

the short-term money market instruments

reported sizeable increases in their respec-

tive trading volumes during April. The

daily trading activity in the overnight

segment had galloped by 34% in April.

Volumes in the CBLO market improvedmarginally by 1% even as the repo market

witnessed a sharp 63% jump in its turn-

over over the period. Overall, there was

a 20% increase in money market turn-

over over the month (Table 5, p 121).

As per the latest available data from

the RBI, the issuance of certificates of


5/7

MONEY MARKET REVIEW


Table 10: Secondary Market Outright Trades in Government Papers NDS and NDS-OM Deals (Amount in Rs crore)Descrip tions April 2012 Previous Month Three Months Ago Six Months Ago

Last Week (27) First Week (6) Total for the Month (March 2012) (January 2012) (October 2011)

AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

1 Treasury Bills 8,391 3,608 37,312 40,438 27,473 16,102

A 91-Day Bills 5,585 8.35 2,282 8.82 23,273 8.48 21,206 8.94 10,206 8.50 8,780 8.38

B 182-Day Bills 1,922 8.34 580 8.67 9,236 8.48 7,731 8.81 5,962 8.49 3,258 8.48C 364-Day Bills 884 8.33 745 8.51 4,804 8.38 11,501 8.64 11,305 8.12 4,064 8.51

2 GOI Dated Securities 67,061 8.61 28,205 8.78 2,60,286 8.55 1,51,957 8.44 4,54,527 8.33 16,8357 8.74

Year of (No of

Maturity Securities)

2012 (2) 315 8.30 195 8.75 1,698 8.47 3,788 9.46 1,146 8.48 2,546 8.61

2013 (1) 50 8.04 240 8.22 345 8.17 136 8.09 730 7.89 56 8.37

2014 (3) 1 8.10 41 7.95 850 8.16 186 8.10 342 8.42

2015 (5) 13 8.18 621 8.21 471 8.30 1,566 8.10 321 8.59

2016 (2) 61 8.36 444 8.43 990 8.42 1,743 8.24 422 8.65

2017 (4) 116 8.48 0 8.65 1,444 8.49 1,963 8.43 3,626 8.28 3,375 8.70

2018 (3) 1,699 8.59 350 8.70 5,395 8.53 7,534 8.47 29,280 8.26 13,088 8.72

2019 (3) 10 8.65 30 8.58 7 8.67 39 8.37

2020 (2) 2,608 8.56 2,589 8.88 13,253 8.57 4,140 8.66 7,519 8.42 970 9.062021 (2) 22,398 8.61 8,447 8.70 99,664 8.50 1,02,738 8.39 1,91,675 8.25 1,13,304 8.73

2022 (4) 106 8.64 37 8.76 656 8.65 1,120 8.44 2,949 8.34 26,885 8.73

2024 (1) 37,429 8.61 14,158 8.79 1,26,293 8.58 22,486 8.39 1,92,833 8.39

2027 (3) 431 8.78 252 8.74 2,439 8.70 885 8.57 5,220 8.58 4,827 8.88

2028 (1) 1 9.67 1 9.67 17 8.60 4 8.48

2030 (1) 704 8.82 1,248 8.99 4,165 8.85 2,028 8.64 8,124 8.54

2032 (3) 2 8.64 22 8.64 79 8.55 3,558 8.55 102 8.91

2034 (1) 2 8.86 2 8.86 6 8.45 4 8.56

2036 (1) 387 8.95 1,003 8.83 30 8.69 0 8.85

2040 (1) 6 8.69 162 8.78 690 8.60 1,619 8.57 2,118 8.94

2041 (1) 723 8.81 689 9.04 2,610 8.91 1,988 8.63 2,694 8.57

3 State Govt Securities 1,239 9.14 2,536 9.19 7,926 9.14 7,379 8.84 4,659 8.69 2,353 8.94

Grand total (1 to 3) 76,690 34,349 3,05,525 1,99,775 4,86,660 1,86,812

(-) 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, weigh ted by the amounts of each transaction. (2) Trading in 2023, 2026, 2035 and 2039 are negligible.

Source: Compiled by EPWRF; base data from RBI and CCIL.

deposit (CDs) by scheduled commercial

banks increased by Rs 16,000 crore in

a month and the outstanding amount

stood at Rs 4,19,530 crore during the

fortnight ending 23 March 2012. Similarly,

CPs issued by corporates increased by

Rs 12,000 crore, taking the outstanding

amount to Rs 1.62 lakh crore for theperiod ending 29 February 2012. The

discount rates for CDs ranged from 9.30%

to 11.90%; CP rates ruled in the range of

8.47% to 14.75% for the respective periods.

According to the trading platform,

Fixed Income Money Market and Deriva-

tives Association (FIMMDA), CDs turnover

halved during April compared to March,

while CPs recorded a 5% rise in their

average daily traded volume.

After successfully managing the worst

ever cash crunch in March, the RBIs

injection of funds through the repo win-

dow of LAF fell to relatively moderate

levels in April. Ahead of the central

banks rate decision on 17 April, banks

borrowed less form the repo window

intentionally as the rate cut was strongly

factored in by the markets. However,

after the repo rate cut, once again the

borrowings by banks crossed Rs 1 lakh

crore at a cheaper rate and continued to

borrow till the end of the month. Despite

an ease in liquidity, bankers borrowed

around Rs 92,000 crore from the repowindow on a daily average basis in April,

well above the RBIs comfort level. In

OMO window also, the RBI purchased

securities worth Rs 12,700 crore in April.

Bankers also accessed MSF of LAF and

borrowed Rs 2,820 crore (Table 6, p 122).

2.2 Forex Market

The performance of the dollar against

other currencies remained volatile as

global financial markets remained in a

risk-averse mode in the beginning of

April following renewed fears of an

exacerbation of the eurozones sovereign

debt crisis. Weaker-than-expected US

economic data and growing concerns

about the eurozone debt crisis prompted

the market participants to avoid riskier

assets and the dollar gained significance

towards the second part of the month.

The US currency, as tracked by the US

dollar index, fell by 48 bps [Nominal

Major Currencies Dollar Index (March

1973=100)] in a period of one month,

while the JP Morgan Asian dollar index(a spot index of emerging Asias most

actively traded currency pairs valued

against the US dollar) improved by 16

bps over March to 117.14 points in April

(Table 7, p 122).

The Indian rupee remained weak

against almost all the global currencies,

including Asian currencies, during April.

The domestic currency was undermined

by the weakness in the local stock mar-

ket and huge FII outflows. Weaker-than-

expected industrial production data

worsened the growth outlook for the

economy in the beginning of the month

coupled with S&Ps downgrading of the

India outlook further depressing market

confidence. Moreover, a higher than


6/7

MONEY MARKET REVIEW


Table 11: Predominantly Traded Government Securities (Amount in Rs crore)Descript ions April 2012 Previous Month Three Months Ago Six Months Ago

Last Week (27) First Week (6) Total for the Month (March 2012) (January 2012) (October 2011)

AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM AMT YTM

GOI Dated Securities

7.40 2012 315 8.30 195 8.75 1,688 8.46 3,020 9.22 440 8.55 2,439 8.61

7.17 2015 10 8.20 314 8.17 340 8.25 1,265 8.10 251 8.46

7.59 2016 45 8.37 168 8.34 470 8.32 1,135 8.22 401 8.65

7.99 2017 105 8.49 0 8.65 1,176 8.47 1,714 8.44 3,214 8.29 1,067 8.808.07 2017 11 8.39 27 8.51 191 8.35 359 8.22 2,304 8.65

7.83 2018 75 8.48 350 8.70 975 8.53 6,578 8.47 29,270 8.26 13,087 8.72

8.19 2020 2,483 8.49 2,224 8.74 12,703 8.51 3,480 8.47 5,653 8.19

7.80 2021 652 8.63 30 8.76 2,534 8.53 1,144 8.56 6,129 8.30 1,13,304 8.73

8.79 2021 21,746 8.61 8,417 8.70 97,129 8.50 1,01,284 8.39 1,85,454 8.25

8.08 2022 95 8.64 155 8.62 73 8.39 1,465 8.33 13,995 8.71

8.13 2022 6 8.65 37 8.76 496 8.67 1,041 8.44 1,249 8.33 12,885 8.76

9.15 2024 37,429 8.61 14,158 8.79 1,26,293 8.57 22,486 8.39 1,92,833 8.39

8.26 2027 45 8.60 250 8.74 630 8.67 109 8.54 498 8.48 1,785 8.91

8.28 2027 379 8.80 2 8.75 1,796 8.70 757 8.57 4,704 8.58 3,041 8.87

8.97 2030 704 8.82 1,248 8.99 4,165 8.86 2,028 8.64 8,124 8.54

8.28 2032 10 8.55 39 8.50 3,530 8.55 103 8.91

8.30 2040 6 8.69 162 8.78 690 8.60 1,619 8.57 2,118 8.94

8.83 2041 723 8.81 689 9.04 2,610 8.91 1,988 8.63 2,694 8.57

Total (All Securities) 67,061 8.61 28,205 8.78 2,60,286 8.55 1,51,957 8.44 4,54,527 8.33 1,68,357 8.74

(-) means no trading YTM = Yield to maturit y in percentage per annum. (1) Yields are weighted yields, weighted by the amounts of each transact ion.

Source: As in Table 10.

Table 12: Yield Spreads (Weighted Average) Central GovernmentSecurities (basis points)Yield April 2012 Previous Three Six Months

Spread in bps Last Week First Week Entire Month Month Months Ago Ago

1 Year-5 Year 44 43 32 34 39 33

5 Year-10 Year 16 11 16 1 6 3

10 Year-15 Year 14 -2 5 13 24 15

1 Year-10 Year 60 54 48 35 45 36

Source: As in Table 10.

expected policy rate cut reduced the

attractiveness of rupee-denominated

assets while some fall in oil prices helped

the rupee to see some gains.

The rupee-dollar exchange rate began

the month on a positive note and added

59 paise on the very first day. Hurt by ris-

ing crude oil prices hovering above $125per barrel, the rupee depreciated sub-

stantially by 71 paise in the next two

trading sessions and rose to Rs 51.28 per

dollar on 9 April. After recouping some

of its value once again, the rupee fell

back on 11 April and shed another 34 paise

versus the dollar. Thereafter, the per-

formance of the rupee remained mixed

till 18 April. However, its value deceler-

ated significantly by 129 paise till 24

April. With the tardy growth of the Indi-

an economy the local currency was

poised to cross the crucial Rs 53 per US

dollar mark. But intervention by the RBI

kept the rupee value under control from

25 April and the currency managed to

gain 27 paise against dollar in the last

four trading days of April despite mas-

sive portfolio outflows from the Indian

market. Overall, in a period of one

month the Indian rupee depreciated by

2.9% against dollar and closed at Rs 52.68

on 27 April (Table 7).The widening current account and

fiscal deficits, rising crude oil prices and

a passive domestic outlook for the rupee

kept the forward premia across three

tenures firm throughout April. However,

the one-month premia eased by 11 bps in

April compared to March, while the

three-month and six-month premia

hardened by 18 bps and 51 bps, respec-

tively, during the same review period.

The uncertainty in the forex market

prompted increased turnover duringMarch. The daily trading in different

segments of the forex market improved

by 1.3% in March compared to February.

The highest rise in turnover was reported

in the merchant segment while the spot

and forward markets also recorded 1.4%

and 1.2% increases over the period.

However, inter-bank dealings fell mar-

ginally in March (Table 8, p 122).

After showing some revival in trading

activity in March, the currency deriva-

tives market once again reflected a

dismal trading volume. The movement

of the rupee against other currencies

and lesser participation by foreign

investors influenced the turnover in

April. The domestic exchanges report-

ed a 24% fall in their aggregate turno-

vers over a period of one month, while

the aggregate daily average

turnover decelerated by

15%. Segment-wise, the

turnover of futures andoptions decreased by 15%

each during the month, on

daily average terms. USD-

INR contracts continued

their dominance in the futures segment

and garnered 94% of market share as in

earlier months.

Among the exchanges trading in cur-

rency derivatives products, the National

Stock Exchange (NSE) reported an 18%

fall in trading activity, but sustained its

dominance with a 57% market share.Similarly, the Multi-Commodity Exchange

(MCX-SX) reported a 27% reduction in its

trading and contributed 43% towards

the total currency derivatives turnover.

United Stock Exchange (USE) registered

a huge fall and reported a volume of just

Rs 805 crore in April.

2.3 Central Government Securities

Beginning 2012-13, issuances of central

government securities heightened while

issuances of SDLs and t-bills declined

over the month. Corporate bond issu-

ances dried up in April. In the second-

ary market, turnover ofG-secs and SDLs

moved up but turnover of treasury bil ls

and corporate bonds dropped. Overall,

yields of central government securities

and SDLs inched up, while they declined


7/7

MONEY MARKET REVIEW


Table 14: Auctions of Treasury Bills (Amount in Rs crore)

Date of Auction Bids Bid-Cover Cut-off Weighted Cut-off WeightedAccepted Ratio Yield (%) Aver age Price (Rs) Aver age

Yield (%) Price (Rs)

A: 91-Day Treasury Bill s

04-Apr-12 6,000 4.30 8.81 8.81 97.85 97.85

11-Apr-12 9,000 3.43 8.77 8.73 97.86 97.87

18-Apr-12 9,000 3.37 8.31 8.25 97.97 97.98

25-Apr-12 9,000 2.67 8.39 8.33 97.95 97.96

Total for April 2012 33,000 3.36 8.55 8.50 97.91 97.92

Total for March 2012 40,000 2.95 9.02 9.00 97.80 97.81

B: 182-Day Treasury Bills

11-Apr-12 5,000 2.08 8.57 8.55 95.9 95.9125-Apr-12 5,000 2.40 8.38 8.33 95.99 96

Total for April 2012 10,000 2.24 8.48 8.44 95.95 95.96

Total for March 2012 12,000 2.91 8.69 8.67 95.85 95.86

C: 364-Day Treasury Bills

04-Apr-12 5,000 3.69 8.34 8.32 92.32 92.34

18-Apr-12 5,000 2.92 8.17 8.12 92.47 92.51

Total for April 2012 10,000 3.30 8.25 8.22 92.4 92.43

Total for March 2012 8,000 4.89 8.42 8.41 92.25 92.26

Source: RBIs press releases.

Table 13: 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 AverageStates Accepted Price (%) Yield (%)

10-Apr-12 3 2,850 3.51 9.19 9.19

17-Apr-12 1 75 6.36 8.80 8.80

24-Apr-12 5 4,715 2.21 9.23 9.17

Total for April 2012 9 7,640 2.74 9.21 9.17

Total for March 2012 32 21,261 1.74 9.02 8.96

Source: RBI press releases.

Table 15: Details of Private Placement in Corporate Bonds

Institut ional Categor y No of Volume Range of Range of Maturit yIssues (Rs Crore) Coupon Rates in Years (y) and

(in %) Months (m)

Banks/FIs 1 750 9.60 3

Corporates 1 350 0 9

Total for April 2012 2 1,100 9.60 3 to 9

Total for March 2012 45 7,672 9.25-12.00 1.1 to 20

Source: ww w.nseindia.com.

in the case of treasury bills, thanks to

the repo rate cut by the RBI.

Against only one issue of central govern-

ment securities in March for Rs 12,000

crore, the borrowing programme for the

current financial year commenced in full

swing absorbing Rs 65,000 crore

through four auctions in April. In the

first auction, the pressure of the huge

borrowing programme, front loaded for

the current financial year, resulted in a

hike on the notified amount set for the

auction to Rs 18,000 crore, which affected

investor sentiments. The auction resulted

in devolvement worth Rs 1,195 crore, but

afterwards, the remaining three auctions

were fully subscribed. Overall, yields

inched up to 8.70% over the month with

a lower bid-cover ratio of 2.06. A total ofeight securities were auctioned during

April. At the time of the first auction,

yields hardened, which

declined afterwards as the

annual monetary policy

approached on 27 April.

But a set of securities

issued in the second and

again in the fourth auc-

tion commanded higheryields in the latter auction

(Table 9, p 122).

The RBI took the decision

to cut the repo rate by 50

bps to 8% on 17 April. In

order to provide a greater

liquidity cushion the RBI

raised the borrowing limit

of scheduled commercial

banks under the marginal

standing facility (MSF)

from 1% to 2% of their net

demand and time liabilities

(NDTL).

The turnover of central

government securities im-

proved by 71% over the

month to Rs 2,60,286 crore.

Overall, yield firmed up by

11 bps to 8.55% over the

month.The top five securi-

ties contributed 93% to the

total turnover. The highesttrade was recorded for

9.15% 2024 security worth

Rs 1,26,293 crore pushing

the 10-year benchmark

security 8.79% 2021 to the second posi-

tion. The remaining three traded securi-

ties were 8.19% 2020, 8.97% 2030 and

8.83% 2041 (Table 10, p 123, Tables 11

and 12, p 124).The spread of yields for

10-year maturities over one-year and

five-year maturities broadened to 48 bps

and 16 bps, respectively, over the month.

The hardened yields of longer term

maturities resulted in a widening of

yield spreads.

Not only the number of states issuing

loans fell over the month but also the

amount raised had dwindled by 64% to

Rs 7,640 crore. Overall, the cut-off and

weighted average yields hardened over

the month to 9.21% and 9.17%, respec-

tively, with an improved bid-cover ratio

of 2.74 (Table 13). In the secondarymarket, aggregate turnover during the

month was Rs 7,926 crore, showing an

increase by about Rs 547 crore over

March. Overall, the yield firmed up to

9.14% from 8.84% over the period.

2.4 Treasury Bills

Four issuances of treasury bills (TBs)

were made in April, when 91-day, 182-day

and 364-day TBs mopped funds worthRs 33,000 crore, Rs 10,000 crore and

Rs 10,000 crore, respectively. Unlike the

central government securities and state

loans, TBs across maturities fetched lower

yields over the month. The bid-cover

ratio of 91-dayTBs improved to 3.36. The

notified amount of 91-dayTBs in the first

auction was revised downward by

Rs 3,000 crore to Rs 6,000 crore in the

wake of a tepid response received by the

first auction of central government secu-

rities one day before, on 3 April. The

issuance of 91-dayTBs and 182-dayTBs

were reduced by Rs 7,000 crore and

Rs 2,000 crore to Rs 33,000 crore and

Rs 10,000 crore, respectively, while it

was higher by Rs 2,000 crore in the

case of 364-dayTBs at Rs 10,000 crore

(Table 14).

In the secondary market, total turnover

fell by 7% to Rs 37,312 crore during the

month. Yield rates across maturities

softened; for 91-day bills, yield eased by46 bps to 8.48%; for 182-dayTBs it dropped

by 33 bps to 8.48%; and in the case of 364-

dayTBs, it fell by 26 bps to 8.38%. The

total traded volume of 91-day TBs was

the highest at Rs 23,273 crore, followed

by 182-dayTBs worth Rs 9,236 crore.

2.5 Corporate Bonds Market

There was no public issue in the corpo-

rate bonds market during April. Moreover,

private placements on the NSE also

plummeted sharply by about 86% to

Rs 1,100 crore. As against 45 issues in

March only two issues were made in

April. GMR Infrastructure issued zero

coupon bonds with nine years maturity

for Rs 350 crore, while the National

Housing Bank issued bonds worth Rs 750

crore with 9.60% coupon and of three

years maturity (Table 15).

Turnover in the secondary market

recorded a 31% fall in April to Rs 36,038

crore. FIMMDA reported a turnover worthRs 21,219 crore, followed byNSE reporting

a turnover worth Rs 12,155 crore.

Documents

Dilemma of Indian Banking