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V. Financial Markets

International financial market conditions during 2005-06 continued to remain favourable, notwithstanding a sharp rise in international crude oil prices and growing global financial imbalances. Although short-term interest rates moved up in a number of economies following tightening of monetary policy to anchor inflationary expectations in view of pressures emanating from higher energy prices, long-term nominal rates remained largely benign with real long-term interest rates ruling at very low levels. Equity markets remained buoyant, especially in emerging market economies (EMEs), on steady improvement in the fundamentals, improved growth prospects and increased appetite for risk. Emerging market spreads continued to hover around record low levels, reflecting shortage of foreign currency denominated bonds on account of improvements in the fiscal position of many EMEs as well as buybacks of outstanding bonds.

Short-term rates increased in a number of economies during 2005-06 as central banks raised their policy rates to ward off inflationary pressures from higher international crude oil prices in an environment of strong demand (Table 36). Amongst the advanced economies, the US recorded the maximum increase in rates, reflecting hikes by the Federal Open Market Committee (FOMC) in the federal funds rate target in each of its meetings held since June 2004. In some

Table 36: Short-term Interest Rates

               
   

(Per cent)

   

Region/Country

March

March

June

September

December

March

   

2004

2005

2005

2005

2005

2006

   

1

 

2

3

4

5

6

7

   

Advanced Economies

Euro Area

1.96

2.15

2.10

2.15

2.48

2.80

Japan

 

0.03

0.02

0.02

0.02

0.02

0.04

Sweden

 

2.12

1.97

1.48

1.46

1.68

1.99

UK

 

4.31

4.95

4.75

4.56

4.59

4.58

US

 

1.04

2.90

3.33

3.85

4.23

4.77

Emerging Market Economies

Argentina

2.88

4.56

6.94

6.69

8.00

9.63

Brazil

 

16.02

19.25

19.74

19.51

18.03

16.54

China

 

n.a.

2.25

2.30

4.38

2.90

2.40

Hong Kong

0.17

2.79

3.36

4.12

4.18

4.47

India

 

4.24

5.37

5.37

5.49

6.02

6.11

Malaysia

 

3.00

2.82

2.87

2.92

3.20

3.51

The Philippines

9.19

7.25

5.88

8.13

7.69

7.38

Singapore

0.69

2.06

2.06

2.34

3.22

3.44

South Korea

3.90

3.54

3.52

3.94

4.07

4.26

Thailand

 

1.31

2.64

2.75

3.90

4.50

5.10

n.a. : Not available.
Note :Data for India refer to 91-day Treasury Bills rate and for other countries
3-month money market rates.
Source :The Economist.

economies such as the UK short-term rates eased in response to weakening of economic activity.

In contrast to the uptrend in short-term rates, long-term Government bond yields in the US as well as in the Euro area remained largely range-bound during 2005-06. Structural factors such as increased demand for fixed income products from pension funds and insurance companies in response to regulatory changes provided support to long-term gilts. Excess of global savings over global investment and reduction in inflation risk premium also contributed to the flattening of the long-term yields during 2005-06. Yields in the US declined initially during April-June 2005 on expectations that monetary authorities could slow down policy tightening due to fragility in the economic recovery. The US 10-year Treasury yield was at a 14-month low at 3.8 per cent in early-June 2005. Yields, however, firmed up during July 2005 in the run up to the widely anticipated revaluation of the Chinese currency on July 21, 2005. With the Chinese authorities continuing to manage the renminbi tightly, the yields reversed their increasing trend. Long-term Government bond yields increased in the third quarter of 2005-06 in the US and in the Euro area in tandem with sharp rise in headline inflation and higher short-term rates which increased expectations regarding future policy rates. In the second half of December 2005, 10-year yields eased again and by the close of December, the yield curve in the US became inverted (Chart 36). Yields again increased from the second week of January 2006. The 10-year yield rose to 4.86 per cent on March 31, 2006, the highest since June 2004 on the back of strong data and expectations that the US FOMC may push the federal funds rate target higher than expected. In the Euro area, the increase in long-term yields was also on account of improved economic outlook. In Japan, long-term yields increased, reflecting recovery in domestic demand and better economic prospects. The

decision of the Bank of Japan in March 2006 to change the operating target of money market operations from the outstanding balance of current accounts at the Bank to the uncollateralised overnight call rate also pushed up yields in Japan. In the UK, the yields eased marginally during 2005-06 in tandem with short-term rates.

Equity markets in many economies, especially EMEs, exhibited buoyancy during 2005-06. Improvements in the fundamentals of EMEs as well as higher risk appetite in an environment of very low long-term real interest rates also increased foreign investors’ enthusiasm for emerging market equities, pushing up valuations sharply and in some cases to new highs. Intra-year movements in equity prices were influenced by concerns over oil prices led by inflationary pressures and the likely future course of monetary policy. In the wake of sharp increase in inflation during September 2005 and the prospects of a faster pace of monetary tightening, equity prices declined in October 2005 around the world. Equity markets, however, bounced back in November 2005 on signs of robust economic activity in the US and some moderation in international crude oil prices. During 2005-06, the Indian equity markets outperformed major international equity markets except Colombia, Russia and Egypt (Chart 37). Equity markets in the US, however, under-performed significantly as equities struggled to cope with the impact of higher US interest rates and increasing activity by the US investors in overseas markets. Equity markets in Asia witnessed some decline in the second week of April 2006 on concerns that higher commodity prices could lead to further monetary tightening.

Notwithstanding concerns over the widening current account deficit in the US, the US dollar appreciated during 2005-06 benefiting from the growing interest and growth differential in favour of the US and a year-long tax break designed to encourage US multinationals to repatriate cash held overseas (Chart 38).

 

 

Indian financial markets remained orderly during 2005-06 even as interest rates edged up across the spectrum. Liquidity conditions turned tight from mid-December 2005 due to the redemption of the India Millennium Deposits (IMDs) in the wake of sustained credit growth and some build-up of cash balances by the Government of India. Reflecting the liquidity conditions, call money rates which had remained generally close to the reverse repo rate during the most part of the first half of 2005-06 crossed the repo rate during the fourth quarter. Interest rates in the collateralised segment of money markets also edged up during the year, although they remained below the repo rate during the fourth quarter. The foreign exchange market remained more or less orderly, exhibiting two-way movements. Yields in the Government securities market hardened during 2005-06, with the increase at the longer end less than at the short-end. In the credit market, deposit and lending rates edged up during the year as credit demand accelerated further. Capital markets remained buoyant during 2005-06. Resources raised by the Indian corporates through domestic as well as Euro issues increased substantially. The stock indices reached record highs, driven by increased interest by domestic as well as foreign investors on the back of strong macroeconomic fundamentals (Table 37).

Money Market

Money market conditions, which remained comfortable up to October 2005, turned somewhat tight thereafter. During April 2005, the Reserve Bank supplemented reverse repo operations with the sale of Government paper under the Market Stabilisation Scheme (MSS) to absorb liquidity and balance market conditions. Average daily call money borrowing rates ruled at sub-reverse repo

Table 37: Domestic Financial Markets at a Glance

Month

 

Call Money

Government

 

Foreign Exchange

 

Liquidity

 

Equity

 
         

Securities

         

Management

       
                                   
     

Average

Average

Average

Average

Average

Average

RBI’s net

Average

Average

Average

Average

Average

Average

Average

     

Daily

Call

10-Year

Turnover

Daily

Exchange

Foreign

Forward

MSS

Daily

Daily

Daily

BSE

S&P

   

Turnover

Rates*

Yield@

in Govt.

Inter-

Rate

Currency

Premia

Out-

Reverse

BSE

NSE

Sensex**

CNX

     

(Rs.

(Per

(Per

Securities

bank

(Rs. per

Sales(-)/

3-month

standing#

Repo

Turnover

Turnover

Nifty**

     

crore)

cent)

cent)

(Rs.

Turnover

US $)

Purchases

(Per

(Rs.

(LAF)

(Rs.

(Rs.

     

crore)+

(US $

(+)

cent)

crore)

Out-

crore)

crore)

     

million)

(US $

standing

     

million)

(Rs.

     

crore)

     

1

   

2

3

4

5

6

7

8

9

10

11

12

13

14

15

     

2004-05

 

April

   

12,916

4.29

5.10

10,029

10,302

43.93

7,427

- 0.35

14,296

75,006

2,243

5,048

5809

1848

May

   

10,988

4.30

5.19

6,202

8,882

45.25

-220

-1.33

27,518

74,502

2,188

4,710

5205

1640

June

   

10,974

4.35

5.50

5,860

7,847

45.51

-413

0.93

35,283

61,981

1,681

3,859

4824

1506

July

   

8,632

4.31

5.91

4,206

7,756

46.04

-1,180

2.25

43,739

59,594

1,793

4,265

4973

1568

August

 

11,562

4.41

6.38

4,173

5,947

46.34

-876

2.85

48,541

42,692

1,736

3,948

5144

1615

September

17,088

4.45

6.08

5,854

7,348

46.10

19

2.20

52,421

31,589

1,800

4,023

5423

1692

October

 

16,666

4.63

6.73

3,636

7,262

45.78

-99

2.87

53,660

10,805

1,730

3,785

5702

1795

November

13,820

5.62

7.14

2,607

9,930

45.13

3,792

2.20

54,157

-5,066

1,787

4,102

5961

1874

December

 

19,526

5.28

6.72

4,305

9,447

43.98

1,393

2.02

52,058

7,570

2,184

5,026

6394

2022

January

 

16,534

4.72

6.68

3,566

9,114

43.75

0

2.50

53,790

18,721

2,310

5,249

6307

1978

February

 

16,041

4.76

6.58

4,640

11,583

43.68

4,974

1.99

58,141

19,895

2,484

4,999

6595

2067

March

 

15,294

4.72

6.65

2,835

11,286

43.69

6,030

1.82

63,737

29,809

2,706

5,139

6679

2096

     

2005-06

 

April

   

17,213

4.77

7.02

3,001

9,880

43.74

0

1.96

65,638

30,675

1,890

4,136

6379

1987

May

   

15,269

4.99

7.13

3,805

10,083

43.49

0

1.57

68,539

22,754

1,971

3,946

6483

2002

June

   

20,134

5.10

6.88

6,807

10,871

43.58

-104

1.40

70,651

13,916

2,543

4,843

6926

2134

July

   

20,046

5.02

7.13

3,698

11,003

43.54

2,473

1.56

70,758

10,754

3,095

6,150

7337

2237

August

 

16,158

5.02

7.04

4,239

11,749

43.62

1,552

0.69

71,346

34,832

3,452

6,624

7726

2358

September

16.292

5.05

7.04

5,207

11,040

43.92

0

0.62

67,617

31,570

3,871

6,923

8272

2512

October

 

17,164

5.12

7.13

2,815

13,087

44.82

0

0.69

68,602

18,608

2,955

6,040

8220

2487

November

22,620

5.79

7.10

3,314

11,228

45.73

0

0.67

67,041

3,268

2,635

5,480

8552

2575

December

 

21,149

6.00

7.13

2,948

13,632 P

45.64

-6,541

1.51

52,040

1,452

3,516

6,814

9162

2773

January

 

17,911

6.83

7.16

3,094

16,365 P

44.40

0

2.60

40,219

-15,386

3,966

7,472

9540

2893

February

 

13,497

6.93

7.32

2,584

15,644 P

44.33

2,614

2.85

33,405

-13,532

3,687

7,125

10090

3019

March

 

18,290

6.58

7.41

2,203

n.a.

44.48

n.a.

3.11

29,652

-6,017

5,398

9,518

10857

3236

                                   

*:Average of daily weighted call money borrowing rates.
+:Average daily outright turnover in Central Government dated securities.
@:Average of daily closing rates.
**:Average of daily closing indices.
LAF : Liquidity Adjustment Facility.
MSS:Market Stabilisation Scheme.
BSE:The Stock Exchange, Mumbai.
NSE : National Stock Exchange of India Ltd.
#:Average of weekly outstanding MSS.
P:Provisional
n.a. : Not available.
Note:In column 11, (+) indicates absorption and (-) indicates injection of liquidity.

rate levels on many occasions. With the increase in the fixed reverse repo rate by 25 basis points on April 29, 2005, call rates also edged up by a similar magnitude. Towards the end of June 2005, call rates rose above the reverse repo rate under liquidity pressures on account of advance tax payments and scheduled Treasury Bills auctions. Liquidity conditions improved by the second half of July 2005 due to cancellation of some scheduled Treasury Bills auctions and return of advance tax payments to the banking system. Large foreign currency purchases from the authorised dealers during July-August 2005 also improved liquidity conditions. This was reflected in a jump in average balances under LAF reverse repos from Rs.10,754 crore in July to Rs.34,832 crore in August 2005. The call money market, thus, remained broadly stable during August 2005 and first half

of September 2005. During the second half of September 2005, the call money market witnessed mild pressure, on account of advance tax outflows and scheduled auctions. For the most part of October 2005, the call money rate hovered around the reverse repo rate as liquidity conditions remained comfortable (Charts 39 and 40). During November 2005, the call money rate remained generally above the reverse repo rate and also exceeded the repo rate on a few occasions reflecting liquidity pressures emanating from sustained credit demand, festival demand for currency and scheduled auctions. The Reserve Bank, therefore, injected liquidity into the system through LAF repos on seven occasions during the month. The notified amount of Treasury Bills auctions under the MSS was also cancelled.

To fine tune the management of liquidity and in response to suggestions from the market participants, the Reserve Bank introduced a Second Liquidity Adjustment Facility (SLAF), with effect from November 28, 2005.

Beginning with the second half of December 2005, call money rates again edged up as the market witnessed frictional liquidity pressures emanating from sustained large credit offtake and quarter-end advance tax payments amidst uncertainty relating to the redemption of IMDs. The call money rates hovered above the repo rate for the most part of the fourth quarter of 2005-06. In contrast, the interest rates in the collateralised segments of the money market – which account for a growing and predominant share (about 70 percent) of the total money market turnover – remained below the repo rate (Chart 41). For instance, the rates in the Collateralised Borrowing and Lending Obligation (CBLO) segment averaged 6.23 per cent during January-February 2006, lower than that of 6.88 per cent in the call money market. The higher call money rates during the last quarter of 2005-06 reflected not only liquidity pressures but also the divergent nature of the overnight markets between the collateralised and uncollateralised segments. The call rates eased from the second half of March 2006, reflecting improvement in liquidity conditions. The call money rate was 5.55 per cent as on April 12, 2006. The turnover in the call/notice money market during 2005-06 remained range-bound, in contrast to the uptrend in the collateralised segments. This reflected the relatively higher rates in the call money market as well as the process of phasing out of non-bank participants from the call money market, which was completed on August 6, 2005 (Table 38). The supply of funds in the CBLO segment has been augmented by the participation of banks, mutual funds and financial institutions. Members operating in the CBLO segment of the Clearing Corporation of India Limited (CCIL) increased from 110 as on March 31, 2005 to 152 as on March 31, 2006.

 

Table 38: Activity in Money Market Segments

             

(Rupees crore)

 

Average Daily Turnover

Outstanding Amount

Forward Rate

Month

Call Money

Term Money

Repo Market

Collateralised

Commercial

Certificates

Agreements/

 

Market

Market

(Outside the

Borrowing and

Paper

of Deposit

Interest Rate

 

LAF)

Lending

Swaps (Notional

 

Obligation

Amount)

 

(CBLO)

1

2

3

4

5

6

7

8

 

2004-05

April

12,916

325

15,195

2,496

10,362

4,725

5,76,808

May

10,988

372

15,932

3,872

11,038

4,860

6,11,595

June

10,974

274

17,517

4,015

10,950

5,438

6,04,669

July

8,632

445

19,226

4,508

11,038

5,478

5,90,118

August

11,562

311

13,561

4,962

11,002

4,480

6,40,173

September

17,088

487

18,178

6,149

11,371

5,112

8,53,195

October

16,666

539

15,719

8,466

10,409

4,785

9,25,175

November

13,820

407

18,560

9,651

10,719

6,118

9,50,151

December

19,526

504

21,922

9,962

13,272

6,103

9,75,135

January

16,534

514

17,556

7,701

13,092

4,236

10,14,442

February

16,041

878

17,562

8,952

13,189

9,214

9,46,293

March

15,294

1,253

14,688

9,625

14,235

12,078

10,62,242

2005-06

April

17,213

661

12,174

10,370

15,598

16,602

10,76,513

May

15,269

545

13,688

12,233

17,182

17,689

10,72,684

June

20,134

534

17,163

11,792

17,797

19,270

10,93,367

July

20,046

717

18,103

15,292

18,607

20,768

12,18,072

August

16,158

754

21,325

14,544

19,508

23,568

13,15,084

September

16,292

1,116

18,872

17,143

19,725

27,641

13,17,829

October

17,164

734

20,980

21,763

18,726

29,193

13,42,335

November

22,620

917

25,660

20,496

18,013

27,457

14,75,384

December

21,149

775

25,574

21,265

17,234

32,806

13,92,606

January

17,911

1,089

24,596

25,634

16,431

34,521

13,16,351

February

13,497

813

24,096

34,162

15,876

33,986

13,37,720

March

18,290

1,338

31,964

35,775

12,693 *

36,931 #

n.a.

               

n.a. : Not available. * : Provisional. # : As on March 17, 2006.

Other Money Market Instruments

Issuances of commercial paper (CP), which had exhibited sustained increases till mid-September 2005, witnessed a slowdown during the second half of 2005-06, reflecting tight liquidity conditions. Outstanding CPs after increasing from Rs.14,235 crore at end-March 2005 to Rs.20,019 crore by mid-September 2005 declined to Rs.12,693 crore by end-March 2006 (Chart 42). The weighted average discount rate (WADR) on CPs increased from 5.84 per cent on March 31, 2005 to 8.59 per cent on March 31, 2006. Leasing and finance companies with their share at 74.1 per cent (as on March 31, 2006) continued to be the largest issuers of CPs, partly reflecting the policy of phasing out the access to these companies to public deposits. Manufacturing and other companies and financial institutions are the other major issuers with shares of 15.4 per cent and 10.5 per cent, respectively, as on March 31, 2006.

Issuances of certificates of deposit (CDs) increased sharply during 2005-06, reflecting banks’ demand for funds in the wake of acceleration in demand for bank credit (Chart 43). The amount of CDs outstanding nearly trebled during 2005-06 from Rs.12,078 crore at end-March 2005 to Rs.36,931 crore by March 17, 2006 (constituting 4.3 per cent of aggregate deposits of issuing banks, broadly the same as a year ago). The increase in the outstanding amount was mainly on account of higher issuances by some private sector banks, reflecting the cost attractiveness of the CDs to the banks vis-à-vis time deposits. The higher recourse to CDs was also driven by reduction in the minimum maturity period to seven days. The typical three-month discount rate on CDs at 8.50 per cent on March

 

17, 2006 was higher by 263 basis points over its level at end-March 2005. As in the case of CPs, mutual funds have emerged as key investors in CDs.

Treasury Bills

Yields in Treasury Bills (TB) auctions increased during 2005-06, reflecting tight liquidity conditions. After remaining generally range-bound during the first half of 2005-06, the yields edged higher in the subsequent months. In view of the prevalent liquidity conditions, the Reserve Bank rejected all the bids for the Treasury Bills auctions under the MSS scheduled on November 9, 2005 and discontinued the auctions under the MSS from November 16, 2005. The yields after having recorded a sharp increase during January-February 2006, however, eased during March 2006 reflecting improvement in liquidity conditions. Yields in March 2006 were 103-127 basis points higher over their March 2005 levels. The yield spread between the 91-day and 364-day TBs was 15 basis points during March 2006 as compared with 39 basis points during March 2005 (Table 39 and Chart 44).

Table 39: Treasury Bills in the Primary Market

Month

Notified Amount

Average Implicit Yield at Minimum

Bid-Cover Ratio

 

(Rupees crore)

Cut-off Price (Per cent)

 
 

91-day

182-day

364-day

91-day

182-day

364-day

 

1

2

3

4

5

6

7

8

 

2004-05

April

13,500

4.38

4.44

2.15

2.47

May

12,000

4.39

4.33

2.93

2.46

June

14,000

4.44

4.55

2.61

1.28

July

10,000

4.46

4.60

2.39

2.06

August

10,000

4.76

5.00

1.81

3.36

September

12,000

4.72

5.14

2.51

2.83

October

16,000

5.15

5.46

1.82

2.75

November

5,500

5.47

5.71

2.80

2.64

December

9,500

5.30

5.69

2.69

2.81

January

12,000

5.31

5.69

2.19

2.06

February

12,000

5.25

5.65

2.99

2.81

March

12,000

5.24

5.63

2.31

2.74

 

2005-06

April

19,000

5.17

5.36

5.62

4.03

4.48

2.54

May

15,000

5.19

5.35

5.58

3.30

3.37

2.29

June

18,000

5.29

5.37

5.61

1.54

2.42

1.81

July

11,500

5.46

5.67

5.81

1.21

2.58

1.68

August

21,000

5.23

5.42

5.63

3.07

2.68

2.54

September

23,000

5.24

5.37

5.70

1.52

1.45

1.61

October

15,000

5.50

5.71

5.84

1.69

1.53

3.44

November

11,000

5.76

5.87

5.96

2.12

1.97

2.30

December

5,000

5.89

6.04

6.09

3.07

2.97

2.36

January

5,000

6.25

6.22

6.21

2.86

2.83

2.72

February

5,000

6.63

6.74

6.78

3.04

2.07

2.71

March

6,500

6.51

6.66

6.66

4.17

3.43

3.36

               

Note : 182-day TBs were reintroduced with effect from April 2005.


Foreign Exchange Market

In the foreign exchange market, the Indian rupee exhibited two-way movement vis-à-vis the US dollar during 2005-06, moving in a range of Rs.43.30–46.33 per US dollar. The rupee initially appreciated against the US dollar from Rs.43.76 at end-March 2005 to Rs.43.30 per US dollar on May 12, 2005, despite outflows by FIIs and a higher merchandise trade deficit. Subsequently, the rupee depreciated reaching Rs.43.76 per US dollar on June 2, 2005 due to strengthening of the US dollar in the international markets. With the revaluation of the Chinese renminbi on July 21, 2005, there were appreciation pressures and the rupee reached Rs.43.56 per US dollar on August 18, 2005. The Reserve Bank made net market purchases of US $ 4.0 billion during July-August 2005. The rupee again came under pressure from end-August 2005 under the impact of high oil prices, sharp increase in the current account deficit and strong US dollar. The exchange rate moved to Rs.46.33 per US dollar on December 8, 2005. With the revival of FII inflows and weakening of the US dollar in the international markets, the rupee strengthened sharply beginning with the second half of December 2005. It touched Rs.44.07 per US dollar on January 31, 2006. During February-March 2005, the rupee was largely range-bound and stood at Rs.44.61 per US dollar as on March 31, 2006 and at this level, the Indian rupee depreciated by 1.9 per cent over its level on March 31, 2005. Reflecting cross-currency movements, the rupee, however, appreciated against the other major international currencies during 2005-06, i.e., 4.4 per cent against the Euro, 5.5 per cent against the Pound sterling and 7.3 per cent against the Japanese yen (Chart 45). The exchange rate of the Indian rupee was Rs. 44.92 per US dollar as on April 12, 2006.

Forward premia declined during the first half of 2005-06 in tandem with the narrowing of interest differential following the higher pace of monetary

 

tightening in the US. The premia, however, increased during December 2005-March 2006, reflecting higher domestic call money rates (Chart 46).

Credit Market

The demand for credit from the commercial sector strengthened further during 2005-06. The non-food credit extended by scheduled commercial banks as on March 31, 2006 grew (year-on-year) by 30.8 per cent on top of 28.8 per cent growth a year ago (net of conversion). Demand for bank credit was broad-based led by agriculture, industry and personal loans (housing, credit cards, education) sectors (Table 40). Disaggregated data show that almost 26 per cent of incremental non-food credit during April-January 2005-06 went to the industrial sector, while almost

Table 40: Deployment of Non-food Bank Credit

   

(Amount in Rupees crore)

   

Sector/Industry

Outstanding

Financial Year Variations

   

as on

   

2004-05 (Apr-Jan)

2005-06 (Apr-Jan)

   

January 20, 2006

   

Absolute

Per cent

Absolute

Per cent

1

 

2

3

4

5

6

   

Non-food Gross Bank Credit (1 to 6)

12,56,368

1,34102

18.4

2,56,580

25.7

1.

Agriculture and Allied Activities

1,53,339

17,155

18.9

28,089

22.4

2.

Industry (Small, Medium and Large)

4,93,372

35,485

11.3

66,480

15.6

 

Small Scale Industries

82,041

3,211

4.9

7,453

10.0

3.

Services

42,633

n.a.

n.a.

12,049

39.4

 

Transport Operators

11,589

n.a.

n.a.

1,990

20.7

 

Professional & Others

14,774

n.a.

n.a.

1,513

11.4

4.

Personal Loans

3,13,466

n.a.

n.a.

68,386

27.9

 

Housing

1,66,159

n.a.

n.a.

37,431

29.1

   

(20,581)

(39.6)

 

Advances against Fixed Deposits

32,228

-585

-2.2

2,378

8.0

 

Credit Cards

8,832

n.a.

n.a.

3,072

53.3

 

Education

9,003

n.a.

n.a.

3,884

75.9

 

Consumer Durables

8,863

-211

-2.6

-220

-2.4

5.

Trade

71,923

6,601

26.5

13,975

24.1

6.

Others

1,81,635

74,861

25.0

67,601

59.3

 

Real Estate Loans

24,527

4,150

74.4

11,225

84.4

 

Non-Banking Financial Companies

28,507

-24

-0.1

6,023

26.8

Memo:

 

Priority Sector

4,59,648

48,303

18.3

78,172

20.5

Industry (Small, Medium and Large)

4,93,372

35,485

11.3

66,480

15.6

Food Processing

28,311

187

0.9

3,878

15.9

Textiles

52,966

2,823

8.3

8,989

20.4

Paper & Paper Products

8,532

-283

-4.7

1,650

24.0

Petroleum, Coal Products & Nuclear Fuels

17,772

1,609

13.1

2,203

14.1

Chemical and Chemical Products

44,757

-460

-1.5

5,265

13.3

Rubber, Plastic & their Products

6,069

298

11.5

2,403

65.5

Iron and Steel

43,842

1,147

4.4

7,841

21.8

Other Metal & Metal Products

13,682

1,349

16.5

2,046

17.6

Engineering

32,309

-904

-3.4

2,913

9.9

Vehicles, Vehicle Parts and Transport Equipments

16,826

556

10.5

4,964

41.8

Gems & Jewellery

18,582

1,678

18.3

4,276

29.9

Construction

11,818

1,838

30.7

3,696

45.5

Infrastructure

1,01,726

16,884

32.9

22,717

28.8

n.a. : Not available.
Note :1. Data are provisional and relate to select scheduled commercial banks which account for about
90 per cent of bank credit of all scheduled commercial banks.
2. Owing to change in classification of sectors/industries and coverage of banks, data for 2005-06 are
not comparable with earlier data. Figures in parentheses for 2004-05 pertain only to housing loans
of above Rs.15 lakhs. Data on housing loans for 2005-06, on the other hand, are also inclusive of
loans less than Rs.15 lakhs.

15 per cent of incremental non-food credit was on account of housing loans and another 11 per cent of incremental credit was absorbed by the agricultural sector and allied activities. The increase in industrial credit in consonance with sustained growth in domestic industrial production was mainly on account of infrastructure (viz., power, roads, ports and telecommunications), textiles, iron and steel, chemicals, vehicles, gems and jewellery, food processing and construction. Infrastructure sector alone accounted for more than a third of incremental credit to the industry, while textiles and iron and steel industries absorbed another one-fourth of the incremental credit to the industry. Credit to agriculture recorded a robust growth, reflecting the impact of various policy initiatives to improve the flow of credit to the sector. Credit to the housing sector continued to be strong, benefiting from low interest rates and tax incentives. Apart from housing, strong credit demand emanated for education and other personal loans as well as from credit card holders. Credit to the commercial real estate increased sharply, although it still constitutes only a small part - less than two per cent of outstanding non-food bank credit and around four per cent of incremental non-food credit. Loans to shipping and tourism related companies also recorded a sharp rise.

As noted in Section III, banks were able to finance the sustained credit demand through liquidation of their investments in Government as well as non-SLR securities, continuous access to funding from FIs, raising of capital through equity issuances, higher internal resources and higher deposit mobilisation.

During the second half of 2005-06, banks increased their deposit rates by about 75-100 basis points across various maturities (Table 41). As regards lending rates, some private sector banks increased their Benchmark Prime Lending Rates (BPLRs), while some other banks revised upwards their sub-PLRs.

Government Securities Market

Yields in the Government securities market hardened during 2005-06, with the increase being more pronounced at the short-end of the market. Intra-year movements in yields were influenced by domestic liquidity conditions, inflationary expectations, volatility in crude oil prices and movements in US yields. Yields edged higher in the second week of April 2005, reflecting concerns arising from the persistent rise in international crude oil prices, higher than expected inflation and the hike in the reverse repo rate. The 10-year benchmark yield firmed up from 6.65 per cent on March 31, 2005 to 7.31 per cent on April 30, 2005. With the easing of headline WPI inflation, yields softened during May 2005 touching 6.94 per cent in early June 2005. The yields edged up again during the first half of July 2005 reaching 7.23 per cent on July 13, driven by higher crude oil prices, liquidity concerns and anticipation of an increase in the reverse repo rate. With the reverse repo rate being left unchanged on July 26, 2005 in the First Quarter Review of the Annual Statement on Monetary Policy and comfortable

Table 41: Movements in Deposit and Lending Rates

               
   

(Per cent)

Interest Rate

March

March

June

September

December

March

   

2004

2005

2005

2005

2005

2006 @

   

1

 

2

3

4

5

6

7

   

1.

Domestic Deposit Rate

 

Public Sector Banks

 

Up to 1 year

3.75-5.25

2.75-6.00

2.75-6.00

2.00-6.00

2.00-6.00

2.25-6.25

 

More than 1 year and up to 3 years

5.00-5.75

4.75-6.50

5.25-6.25

5.25-6.25

5.50-6.50

5.50-6.50

 

More than 3 years

5.25-6.00

5.25-7.00

5.50-6.50

5.50-6.00

5.80-7.00

6.25-7.00

 

Private Sector Banks

 

Up to 1 year

3.00-6.00

3.00-6.25

3.00-6.25

3.00-6.25

3.50-6.25

3.50-7.00

 

More than 1 year and up to 3 years

5.00-6.50

5.25-7.25

5.00-7.00

5.00-7.00

5.50-7.00

5.50-7.75

 

More than 3 years

5.25-7.00

5.75-7.00

5.50-7.25

5.75-7.25

6.00-7.25

5.75-7.75

 

Foreign Banks

 

Up to 1 year

2.75-7.75

3.00-6.25

3.00-5.50

3.00-5.75

3.00-5.75

3.00-6.15

 

More than 1 year and up to 3 years

3.25-8.00

3.50-6.50

3.50-6.50

3.50-6.50

4.25-6.00

3.65-6.50

 

More than 3 years

3.25-8.00

3.50-7.00

4.00-7.00

4.00-7.00

5.00-7.00

4.05-6.50

2.

Benchmark Prime Lending Rate

 

Public Sector Banks

10.25-11.50

10.25-11.25

10.25-11.25

10.25-11.25

10.25-11.25

10.25-11.25

 

Private Sector Banks

10.50-13.00

11.00-13.50

11.00-13.50

11.00-13.50

11.00-13.50

11.00-14.00

 

Foreign Banks

11.00-14.85

10.00-14.50

10.00-14.50

10.00-14.50

10.00-14.50

10.00-14.50

3.

Actual Lending Rate*

 

Public Sector Banks

4.00-16.00

2.75-16.00

3.35-16.50

4.00-16.50

4.00-16.50

n.a.

 

Private Sector Banks

3.00-22.00

3.15-22.00

3.15-24.94

3.15-20.22

3.15-20.50

n.a.

 

Foreign Banks

3.75-23.00

3.55-23.50

4.00-25.00

2.86-25.00

2.86-24.00

n.a.

               

n.a. : Not available. @ : As on March 17, 2006.
* :Interest rate on non-export demand and term loans above Rs.2 lakh excluding lending rates
at the extreme five per cent on both sides.

liquidity conditions, yields softened, reaching 6.98 per cent on July 29, 2005. Although the reverse repo rate was increased by 25 basis points in the Mid-Term Review (October 25, 2005) and the money markets were marked by liquidity tightness during November-December 2005, the yields remained broadly stable -hovering at around seven per cent - during August-December 2005 on the back of easing of headline inflation. The yields edged up during January 2006 in tandem with an increase in the reverse repo rate by 25 basis points in the Third Quarter Review (January 24, 2006) and remained largely range bound during February-March 2006. The 10-year yield was 7.52 per cent on March 31, 2006, 87 basis points higher than its end-March 2005 level. The spread between 1-year and 10-year yields narrowed to 98 basis points at end-March 2006 (from 114 basis points at end-March), mirroring liquidity tightness in money markets. The spread between 10-year and 30-year yields narrowed to 30 basis points (from 54 basis points at end-March), reflecting increased appetite for long-term securities from non-bank participants such as insurance companies and pension funds (Chart 47). The 10-year yield was 7.56 per cent as on April 12, 2006.

The yields on 5-year AAA-rated corporate bonds increased during 2005-06 in tandem with higher yields in Government securities. The yield spread over 5-

year Government securities - after remaining broadly stable at 30 basis points during April-October 2005 - increased to 98 basis points at end-March 2006 from 67 basis points at end-March 2005 (Chart 48).

Equity Market

The capital market exhibited buoyancy during 2005-06, with the benchmark stock indices reaching record highs driven by strong support from foreign institutional investors (FIIs) and domestic mutual funds on the back of robust macroeconomic fundamentals, congenial investment climate and strong corporate profitability. Resources raised by the Indian corporates through initial

public offerings, private placements and Euro issues increased significantly. Resource mobilisation by mutual funds also increased sharply.

Primary Market

Resources raised through the public issues increased by 50.5 per cent to Rs.25,649 crore during April-February 2005-06 (Table 42). However, the average size of issue declined to Rs.217 crore from Rs.370 crore during the corresponding period of the previous year. Non-Government public limited companies (private sector) accounted for the bulk (77.4 per cent) of the resources mobilised. Out of 118 issues, 67 issues were initial public offerings (IPOs), constituting 47.0 per cent of resource mobilisation as compared with 19 out of 46 issues being IPOs during the corresponding period of the last year (constituting 25.2 per cent of resource mobilisation). All the IPOs in the current financial year so far have been by companies in the private sector, barring one which was from a public sector non-financial company. Resource mobilisation by way of debt issues during April-February 2005-06 was less than one per cent of total resource mobilisation from the public issues market.

Table 42: Mobilisation of Resources from the Primary Market

             
     

(Amount in Rupees crore)

     

Item

 

April-February 2004-05

April-February 2005-06 P

     
     

No. of Issues

Amount

No. of Issues

Amount

     

1

   

2

3

4

5

     

A.

Prospectus and Rights Issues*

 

1.

Private Sector (a+b)

43

12,020

111

19,863

   

a) Financial

9

5,108

9

7,575

   

b) Non-financial

34

6,912

102

12,288

 

2.

Public Sector (a+b+c)

3

5,018

7

5,786

   

a) Public Sector Undertakings

-

-

-

-

   

b) Government Companies

1

2,684

1

373

   

c) Banks/Financial Institutions

2

2,334

6

5,413

 

3. Total (1+2)

46

17,038

118

25,649

   

Of which:

   

(i) Equity

43

13,729

117

25,531

   

(ii) Debt

3

3,309

1

118

B.

Private Placement +

 

1. Private Sector

533

25,543

672

29,547

   

a) Financial

198

13,894

281

18,242

   

b) Non-financial

335

11,649

391

11,305

 

2.

Public Sector

121

23,345

108

37,741

   

a) Financial

79

14,320

84

25,477

   

b) Non-financial

42

9,025

24

12,264

 

3.

Total (1+2)

654

48,887

780

67,288

Memo:

 

Euro Issues

11

2,606

43

10,099

             

P : Provisional. * : Excluding offers for sale. – : Nil/Negligible.
+: April-December 2005.

Mobilisation of resources through private placement increased by 37.6 per cent during April-December 2005 as compared with an increase of 15.4 per cent during April-December 2004 (Table 42). This was mainly on account of a turnaround in resources mobilised by public sector entities - an increase of 61.7 per cent during April-December 2005 as against a decline of 21.1 per cent during April-December 2004. Public sector entities accounted for 56.1 per cent of total mobilisation through private placement during April-December 2005 as compared with 47.8 per cent during the same period of last year. Resources raised by financial intermediaries (both from public sector and private sector) accounted for 65.0 per cent of the total mobilisation by private placement during April-December 2005 (57.7 per cent during April-December 2004).

In addition to domestic issuances, the Indian corporates also took a large recourse to Euro issues – American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). Amounts mobilised through the euro issues more than trebled to Rs.10,099 crore during April-February 2005-06 (Table 42).

Net mobilisation of funds (net of redemptions) by mutual funds also increased substantially by 591.0 per cent to Rs.44,973 crore during April-February 2005-06 over the corresponding period of the previous year (Table 43). Net inflows were witnessed in the case of both income/debt-oriented schemes and growth/ equity-oriented schemes.

Secondary Market

The stock markets witnessed bullish conditions during 2005-06 with the benchmark indices touching all time high levels, driven mainly by support from the FIIs on the back of strong macroeconomic fundamentals of the Indian economy, congenial investment climate, sound business outlook and robust corporate earnings (Table 44). Profits after tax of sample non-financial non-Government companies recorded a growth of more than 40 per cent for 11 successive quarters from October-December 2002 to April-June 2005. Subsequently, growth in profitability decelerated, but still remains high given the strong base of the previous

Table 43: Resource Mobilisation by Mutual Funds

 

(Rupees crore)

 
 

2004-05 (April-February)

2005-06 (April- February)

 

Mutual Fund

Gross

Net

Net

Gross

Net

Net

 

Mobilisation

Mobilisation @

Assets *

Mobilisation

Mobilisation @

Assets *

 

1

2

3

4

5

6

7

 

Private Sector

6,51,929

9,192

1,21,114

8,00,735

32,756

1,67,021

Public Sector

50,244

216

11,303

97,019

9,628

23,067

UTI

40,006

-2,899

20,836

63,996

2,589

27,619

Total

7,42,179

6,509

1,53,253

9,61,750

44,973

2,17,707

             

@ : Net of redemptions. * : As at end of February.
Source : Securities and Exchange Board of India.


Table 44: Corporate Financial Performance

                   

(Growth rates in per cent)

   

2003-04

2004-05

2004-05

2005-06

2004-05

2005-06

   

(April-

(April-

   

Q1

Q2

Q3

Q4

Q1

Q2

Q3

   

December)

December)

   

1

 

2

3

4

5

6

7

8

9

10

11

12

   

Sales

 

15.4

25.2

25.9

15.7

24.8

23.7

24.1

21.0

18.5

16.4

13.2

Expenditure

12.5

24.0

24.9

15.3

23.4

22.4

24.3

19.8

18.0

16.3

12.7

Gross Profit

26.6

38.9

37.8

24.1

36.0

35.8

30.5

35.3

32.0

19.1

21.2

Interest Cost

-11.5

-2.0

-2.1

-6.4

-3.2

2.1

-13.0

-5.4

-13.5

-8.0

4.6

Profits After Tax

57.9

53.8

48.0

35.0

51.2

45.3

45.5

51.4

54.2

27.5

27.0

                         

Memo:

                     
                   

(Amount in Rupees crore)

                         

No. of Companies

2,201

1,273

895

2,010

1,255

1,353

1,464

1,301

2,355

2,361

2,366

Sales

 

4,28,072

5,68,476

3,63,140

5,77,271

1,35,156

1,53,040

1,62,193

1,79,632

1,94,608

2,12,693

2,19,098

Expenditure

4,06,838

4,90,204

3,11,105

4,95,121

1,15,656

1,31,227

1,40,574

1,56,647

1,66,972

1,83,717

1,88,934

Gross Profit

48,852

72,406

47,591

77,286

17,234

20,448

20,017

23,736

25,577

27,620

28,135

Interest Cost

14,724

12,528

7,831

12,140

3,597

3,584

3,273

3,177

4,241

4,467

4,555

Profits After Tax

26,281

47,333

31,066

51,364

10,396

13,004

13,196

16,798

16,726

18,169

18,790

                         

Note : 1.Growth rates are percentage change in the level for the period under
reference over the corresponding period of the previous year.
2.Data are based on the audited / unaudited abridged results of the
non-financial non-Government companies except column (2)
which are based on audited balance- sheets for 2003-04.

quarters. Liquidity support from mutual funds, firm trends in the major international equity markets and surge in ADR prices also buoyed up stock markets. Positive measures announced in the Union Budget, 2006-07 such as raising FII investment limit in Government securities and corporate debt, treating open-ended and close-ended equity-oriented schemes on par for dividend distribution tax, rationalisation of excise duties and relaxation in fringe benefit tax also helped to boost the market sentiment. Reflecting all these factors, the BSE Sensex reached an all time high level of 11,747 on April 5, 2006 (Chart 49).

Table 45: Stock Market Indicators

Indicators

BSE

NSE

 
 

2003-04

2004-05

2005-06

2003-04

2004-05

2005-06

 

1

2

3

4

5

6

7

 

BSE Sensex / S&P CNX Nifty

End-period

5591

6493

11280

1772

2036

3403

Average

4492

5741

8280

1428

1805

2517

Volatility (CV)

22.95

11.16

16.68

23.30

11.28

15.59

P/E Ratio (End-period)*

18.57

15.61

20.92

20.70

14.60

20.26

Turnover (Rupees crore)

5,03,053

5,18,716

8,16,074 P

10,99,535

11,40,071

15,69,555

Market Capitalisation (Rupees crore)

(End-period)

12,01,207

16,98,429

30,22,189

11,20,976

15,85,585

28,13,201

P: Provisional. CV: Coefficient of Variation.
* : For 30 scrips included in the BSE Sensex and 50 scrips included in the S&P CNX Nifty.
Source : The Stock Exchange, Mumbai (BSE) and National Stock Exchange of India Ltd. (NSE).

The market witnessed some correction on April 12, 2006 and the BSE Sensex was 11,356 as on April 12, 2006.

The BSE Sensex increased by 73.7 per cent between end-March 2005 and end-March 2006, while the S&P CNX Nifty increased by 67.2 per cent over the same period. The price-earnings (P/E) ratios increased during the year; for instance, the P/E ratio for the 30 scrips included in the BSE Sensex increased from 15.6 at end-March 2005 to 20.9 at end-March 2006. The total turnover in the cash segment increased sharply during 2005-06. The market capitalisation also surged on account of increase in stock prices as well as listing of new securities. The volatility in terms of coefficient of variation increased during 2005-06 as compared with the previous year (Table 45).

The rally in the stock markets during 2005-06 was wide-spread (Chart 50). On a point-to-point basis, while BSE 500 increased by 65.2 per cent, BSE Small-cap and BSE Mid-cap increased by 76.9 per cent and 73.6 per cent, respectively. Amongst the major sectors, BSE capital goods index registered the highest gain (156.0 per cent), followed by consumer durables (115.4 per cent), fast moving consumer goods (FMCG) (109.9 per cent), IT sector (49.2 per cent), public sector undertakings (PSUs) (44.0 per cent) and banking sector (36.8 per cent). Gains by the capital goods stocks reflected the pick-up in investment activity and the Government’s emphasis on infrastructure developments in the Union Budget, 2006-07. The consumer durables stocks were buoyant on the back of strong growth in sales, good financial results of some of the companies and mergers and acquisitions in the sector. The FMCG stocks benefited from the normal progress of monsoon and its positive effect on sales, and abolition of excise duty on branded foods and reduction in excise duty from 16 per cent to 8 per cent on select fast food items in the Union Budget, 2006-07. Banking sector scrips gained due to several factors such as pick up in non-food credit of the banks and permission to banks to issue perpetual bonds and other hybrid instruments. Favourable proposals in the Union

Budget, 2006-07 relating to the banking sector such as conversion of non-tradable special securities into tradable SLR Government of India dated securities, and inclusion of fixed deposits of scheduled banks of maturity not less than 5 years in Section 80C of the Income Tax Act also boosted the banking sector scrips.

According to the Securities and Exchange Board of India (SEBI) data, foreign institutional investors (FIIs) made net investment of Rs.48,487 crore (US $ 10.9 billion) in the equity market during 2005-06 on top of net purchases of Rs.40,991 crore (US $ 9.1 billion) during the previous year (Chart 51). Mutual funds also made net purchases in equities of Rs.14,308 crore during 2005-06 as compared with net purchases of only Rs.448 crore during the previous year.

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