Base Rate Transition

8/8/2019 Base Rate Transition

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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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MONEY MARKET REVIEW

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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MONEY MARKET REVIEW

august 21, 2010 vol XLV No 34 EPW Economic & Political Weekly28

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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MONEY MARKET REVIEW


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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MONEY MARKET REVIEW


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)


6/7

MONEY MARKET REVIEW


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


7/7

MONEY MARKET REVIEW


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.

Documents

Base Rate Transition