V Financial Markets (Part 1 of 2) - ఆర్బిఐ - Reserve Bank of India
V Financial Markets (Part 1 of 2)
5.1 Financial markets remained liquid and stable during 2001-02 (Chart V.1). Money markets exhibited easy liquidity conditions which were modulated through the operation of Liquidity Adjustment Facility (LAF). Call money rates generally remained stable and within the repo-reverse repo corridor. The government securities market experienced a softening in yields across the maturity spectrum with the 10-year yield declining by 287 basis points during the year to 7.36 per cent at end-March 2002. The foreign exchange market generally remained stable during the year with the exchange rate of the Indian rupee vis-à-vis the US dollar remaining range-bound within Rs.46.56-Rs.48.85 per US dollar. There were brief interruptions to the tranquil market conditions in some segments emanating from nervous reactions to the terrorist attack in the United States on September 11, 2001 and again in December 2001 in the wake of border tensions. The Reserve Bank's efforts to assuage market sentiment were, by and large, successful. Strong deposit accretions during the first half of the year coupled with reductions in CRR without any commensurate credit off-take created a situation of comfortable liquidity in the credit market for the greater part of the year. Equity markets remained subdued with the extraordinary events during 2001-02 dampening sentiment.
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A Quarterly Profile
5.2 Strong deposit accretions, primary liquidity flows from a 50 basis point reduction in the CRR and low credit off-take generated conditions of surplus liquidity in the first quarter of 2001-02. Call money rates remained well within the repo-reverse repo corridor except for a temporary spike during May 2001 marking the transition to the next stage of the LAF (Chart V.2). The range of prime lending rates of the public sector banks decreased by 25 basis points in May 2001. The foreign exchange market was flush with increased supply on account of foreign institutional investment inflows. The gilt market registered an increase in turnover and reduction in the yields across the maturity spectrum. The yield spread between AAA rated 5-year corporate bonds and government securities of equal residual maturity, however, widened. The industrial slowdown and profit warnings issued by various software companies dampened sentiments in the equity markets.
5.3 Redemption payments and coupon inflows further augmented market liquidity during the second quarter of 2001-02. Call money rates moved within the informal repo-reverse repo corridor barring a few days during the last week of July and the second half of September 2001. The rally in gilt prices was briefly halted by open market sales on July 12, 2001. Favourable interest rate expectations and comfortable liquidity revived the appetite for gilts before the September 11, 2001 incident affected market sentiment. A series of open market purchases through auctions without notified amounts by the Reserve Bank across the maturity spectrum stabilised the market and restored confidence. The foreign exchange market was affected by the events of September 11 and bid-ask spreads increased as nervous sentiments were amplified by the deceleration in FII inflows and the export slowdown (Chart V.3). The Reserve Bank's market operations in this segment quickly restored stability.
5.4 In the equity market, bearish sentiments ruled in the wake of the ban on the sale/repurchase of the US-64 units of Unit Trust of India (UTI) in July 2001. In the aftermath of the terrorist attack in the United States, the BSE Sensex declined by 17.5 per cent between September 11-21, 2001 along with the widening of the high-low spreads (Chart V.4).
5.5 In the third quarter, monetary conditions were further eased with a CRR cut of 200 basis points and a cut in the Bank Rate by 50 basis points. Call money rates remained mainly within the repo-reverse repo corridor, with minor episodes of pressure. The rally in the prices of gilts resumed and the yield on 10-year paper touched a low of 7.8 per cent on December 5, 2001. Open market sales checked the rally and kept gilt prices range-bound. In the wake of the December 13, 2001 terrorist attack on the Parliament House, bid-ask spreads widened in the gilt market and turnovers fell (Chart V.5). The corporate bond yields hardened and their spread over the sovereign paper widened since December 2001.
5.6 The foreign exchange market remained stable during the third quarter of 2001-02 on the back of the resumption of FII investments except for some downward pressure during December 11-28, 2001. The capital market showed signs of recovery with the BSE Sensex crossing the 3000 mark on October 17, 2001 but sentiments were adversely affected by border tensions in mid-December 2001, as reflected in the widening of the high-low spreads (Chart V.6).
5.7 The return of comfortable liquidity conditions in the fourth quarter of 2001-02 was reflected in call rates stabilising around 6.5 per cent except for a temporary edging up towards end-February 2002 and end-March 2002. Gilt prices rallied towards end-January 2002 on account of comfortable liquidity and a de-escalation in border tensions. The rally was halted on account of developments in Gujarat and market acclimatisation to the new electronic dealing and settlement system. The yield on 10-year security declined from 7.94 per cent as at end-December 2001 to 7.65 per cent as at end-January 2002. In February 2002, the yields continued to slide on budget expectations and touched a low of 7.18 per cent on February 18, 2002. Immediately after the budget, however, prices fell sharply due to the less than anticipated reduction in small savings rates and the yield on 10-year security temporarily hardened to 7.79 per cent on February 28, 2002. The repo rate reduction of 50 basis points to 6.0 per cent on March 5, 2002, improved sentiment before the usual end-of-the year profit booking drove down gilt prices. The foreign exchange market came under some pressure during January-February 2002 on account of increased corporate demand, inter-bank buying, increased purchases by foreign institutional investors (FIIs) as well as political uncertainties and tensions at the border. The market stabilised in March 2002 as supplies evenly matched demand, which kept the rupee range-bound. The equity market experienced a brief revival, especially following the announcement of disinvestment in public sector undertakings (PSUs).
5.8 The financial year 2002-03 commenced with easy liquidity conditions reflected in sizeable repo bids received under LAF auctions. This led to increased turnovers in money, foreign exchange and gilt markets during April 2002 (Table 5.1). Liquidity conditions tightened during mid-April 2002 to end-May 2002 leading to firming up of call rates. The gilt yields also moved up on account of the tensions at the border as also the irregular transactions of some co-operative banks. With the Reserve Bank taking a series of private placements/devolvements in government securities and following the CRR cut by 50 basis points on June 1, 2002, the market sentiment improved. The call rates eased and eventually led to a decline in the repo rate by 25 basis points to 5.75 per cent on June 27, 2002. This also restored the gilt market sentiment. The yield on AAA rated corporate bonds declined and its spread over gilt yields of comparable maturity narrowed during 2002-03 so far, particularly in July 2002. The foreign exchange market remained orderly with the depreciation in the exchange rate to Rs. 49.0 per US dollar during mid-May 2002 being recouped subsequently. The equity market was subdued following border tensions, weak trends in international stock markets and monsoon uncertainties.
MONEY MARKETS
Call/Notice Money Market
5.9 The two-step reductions in the Bank Rate and CRR undertaken during February-March 2001 ensured comfortable liquidity conditions before the financial markets witnessed the usual end-of-the-year tightening. As the March-end liquidity positions were unwound, the money market conditions turned comfortable in April 2001. The reduction in the repo rate - which effectively sets the floor for call market movements - by 25 basis points on April 27, 2001 provided the enabling conditions for a softening of the call rates. The call money rates, however, moved above the reverse repo rate during May 9-21, 2001 reflecting rationalisation of standing liquidity facilities for banks and primary dealers and the first phase restrictions imposed on non-banks for lending in the call money market. Liquidity injections through reverse repos combined with the cut in the CRR during May 2001 countered this temporary spell of tightness in the market as the next stage in the LAF commenced. The repo rate also witnessed a further reduction of 25 basis points on May 28, 2001. The subsequent easing of liquidity conditions was engendered by strong deposit growth, subdued credit demand and redemption/coupon inflows. The weighted average call money borrowing rate, after increasing from 7.5 per cent in April 2001 to 8.0 per cent in May 2001, declined to 6.9 per cent in August 2001.
5.10 The second episode of tightness in the call market followed the September 11 events and was accompanied by pressures experienced in foreign exchange and gilt segments as financial markets across the world reflected extreme risk aversion. The opening of a purchase window for select Government securities on an auction basis on September 18, 2001 and foreign exchange sales restored market sentiment. Call rates started easing again in the second half of September 2001 helped by the ebbing of fears about hardening of international oil prices and the withdrawal of US sanctions on India. Another spell of pressures in the call money market was experienced in October 2001 as, contrary to market expectations, the reduction in the Bank Rate by 50 basis points effective October 23, 2001 was not followed up with a commensurate reduction in the repo rates. With increasing demand for funds from banks to fulfill reserve requirements, the weighted average call borrowing rate spurted to touch the year's peak at 13.1 per cent on November 2, 2001. The release of cash balances following reduction in CRR effective fortnight beginning November 3, 2001 smoothened the adjustments in liquidity positions. There was some firmness again in call rates towards end-December 2001 on account of volatility in the foreign exchange market in the aftermath of the December 13, 2001 terrorist attack on the Parliament which spilled over into the beginning of January 2002. Except these episodes, orderly conditions prevailed in the call money market throughout the year with the call rates remaining well within the informal repo-reverse repo corridor (Chart V.7).
5.11 A cut in CRR by 25 basis points from the fortnight beginning December 29, 2001 brought with it easy liquidity conditions which were reflected in the absorption of large amounts under repo auctions and open market operation sales during January-March 2002. Call rates firmed up in the last part of March 2002 owing to advance tax outflows, bunching of holidays coupled with year-end balance sheet considerations. The Reserve Bank participated actively in the call money market with LAF repo operations conducted throughout the year to modulate the surplus liquidity in the market (Appendix Table V.1). Timely reverse repo operations under LAF ensured the capping of sudden spurts in the call rates and played an effective role in imparting stability to the market.
5.12 On the whole, during 2001-02, the call/notice money market experienced comfortable liquidity conditions with stray episodes of transient tightening, which were quickly eased by monetary policy operations. The weighted average call borrowing rate came down to 7.17 per cent in 2001-02 from that of 9.15 per cent in 2000-01 and the volatility of call money rates reduced markedly in 2001-02 (Table 5.2).
5.13 Interestingly, during the course of 2001-02, while average lending in the call market declined largely reflecting improved liquidity in the banking system, the net supply of funds by non-bank participants (i.e., non-banking financial institutions and mutual funds) in the repo market more than doubled from Rs.16,980 crore in May 2001 to Rs.36,178 crore in March 2002 (Chart V.8). The volume of aggregate repo transactions increased more than four-fold from Rs.11,311 crore in April 2001 to Rs.47,653 crore in March 2002.
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Low |
High |
Weighted Average |
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Min |
Max |
Avg. |
CV |
Min. |
Max |
Avg. |
CV |
Min. |
Max |
Avg. |
CV |
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(%) |
(%) |
(%) |
(%) |
(%) |
(%) |
(%) |
(%) |
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1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
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2000-01 |
0.20 |
13.80 |
7.55 |
0.21 |
7.00 |
35.00 |
10.35 |
0.32 |
3.15 |
20.34 |
9.15 |
0.24 |
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2001-02 |
3.61 |
8.00 |
5.70 |
0.12 |
6.66 |
22.00 |
8.09 |
0.25 |
6.34 |
13.13 |
7.17 |
0.11 |
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2001 |
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April |
6.00 |
7.00 |
6.35 |
0.05 |
7.30 |
19.00 |
8.93 |
0.32 |
7.01 |
11.91 |
7.49 |
0.16 |
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May |
5.42 |
8.00 |
6.66 |
0.09 |
7.15 |
9.75 |
8.72 |
0.09 |
6.85 |
9.13 |
8.03 |
0.10 |
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June |
4.70 |
6.75 |
6.05 |
0.09 |
7.20 |
8.60 |
7.84 |
0.06 |
6.87 |
7.98 |
7.24 |
0.04 |
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July |
4.70 |
7.00 |
5.95 |
0.08 |
7.05 |
11.00 |
7.97 |
0.14 |
6.70 |
8.88 |
7.19 |
0.07 |
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August |
3.90 |
6.15 |
5.69 |
0.07 |
7.05 |
8.30 |
7.34 |
0.04 |
6.73 |
7.18 |
6.94 |
0.02 |
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September |
5.06 |
6.29 |
5.74 |
0.07 |
7.00 |
15.00 |
8.24 |
0.20 |
6.85 |
9.40 |
7.30 |
0.07 |
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October |
4.68 |
7.97 |
5.58 |
0.13 |
7.10 |
12.50 |
8.26 |
0.18 |
6.55 |
10.31 |
7.40 |
0.12 |
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November |
3.73 |
8.00 |
5.15 |
0.15 |
6.80 |
22.00 |
8.56 |
0.42 |
6.51 |
13.13 |
6.97 |
0.19 |
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December |
4.64 |
6.50 |
5.41 |
0.10 |
6.70 |
12.00 |
7.92 |
0.14 |
6.53 |
8.40 |
7.08 |
0.08 |
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2002 |
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January |
4.50 |
5.75 |
4.91 |
0.09 |
6.66 |
8.25 |
7.00 |
0.06 |
6.39 |
7.88 |
6.63 |
0.04 |
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February |
3.61 |
6.00 |
5.43 |
0.08 |
6.70 |
11.00 |
7.33 |
0.14 |
6.51 |
7.56 |
6.73 |
0.05 |
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March |
4.00 |
6.00 |
5.50 |
0.08 |
6.75 |
20.00 |
8.96 |
0.46 |
6.34 |
10.35 |
6.97 |
0.14 |
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2002-03 so far |
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April |
3.54 |
5.75 |
5.19 |
0.12 |
6.45 |
20.00 |
7.43 |
0.32 |
5.99 |
10.35 |
6.58 |
0.11 |
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May |
3.54 |
6.50 |
5.62 |
0.10 |
6.55 |
9.25 |
7.55 |
0.08 |
6.04 |
7.73 |
6.90 |
0.06 |
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June |
3.00 |
5.30 |
4.82 |
0.13 |
6.25 |
7.00 |
6.51 |
0.03 |
5.32 |
6.22 |
6.04 |
0.04 |
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July |
2.71 |
4.95 |
4.46 |
0.15 |
5.80 |
6.70 |
5.99 |
0.22 |
5.66 |
5.97 |
5.75 |
0.08 |
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Min Minimum |
Max Maximum |
Avg. Average |
CV Co-efficient of Variation |
5.14 The year 2002-03 began with further easing of liquidity conditions. There was heavy repo bidding particularly during April 2-10, 2002 with outstanding amounts averaging Rs.16,134 crore, including a peak bid of Rs.30,055 crore received on April 4, 2002. The call rates softened below the repo rate of 6.0 per cent. The launching of the government borrowing programme on April 4, 2002, OMO sales on April 8 and 9 and daily absorptions of liquidity through repos under LAF balanced the money market liquidity and stabilised the call rates a shade above the Bank Rate during April 2002. The average daily turnover in the call/notice money market rose sharply to Rs.41,240 crore during April 2002 from Rs.31,667 crore during March 2002 due to increased supply of funds mainly from public sector banks on account of reimbursement of claims on the Central and State governments, temporary float pending distribution of food credit subsidy amongst eligible banks and other transient factors. Liquidity conditions tightened in May 2002 and the weighted average call money borrowing rates crossed 7.5 per cent around mid-May, 2002 prompting the Reserve Bank to undertake devolvements and private placements of government primary issuances and as also to advance the CRR cut of 50 basis points by one fortnight, from the fortnight beginning June 1, 2002. The call money rates softened thereafter to eventually drop below the repo rate and the repo rate declined by 25 basis points to 5.75 per cent on June 27, 2002. The turnover in the call/notice money market fell from Rs.39,041 crore in May 2002 to Rs.28,594 crore in June 2002, reflecting improved liquidity conditions. Following a reduction in the repo rate, the average call money rate declined further to 5.75 per cent during July 2002 and even further to 5.70 per cent during August 1-12, 2002. The turnover in the call/notice money market which had increased to Rs. 32,172 crore during July 2002 declined, on an average, to Rs. 31,670 crore during August 1-12, 2002 due to improved liquidity conditions. The volume of aggregate repo transactions declined from Rs. 47,020 crore in April 2002 to Rs. 37,848 crore in June 2002.
Other Money Market Segments
Term Money Market
5.15 The outstanding transactions in the term segment of the market declined during 2001-02 and the volumes continued to remain small. During March 2002, the daily volume of transactions (outstanding) ranged Rs.6-349 crore as compared with that of Rs. 1,216 - 2,560 crore in March 2001. The turnovers in the term money market remained mostly below Rs. 200 crore. During the year 2002-03 (up to July 2002), the daily volume of transactions (outstanding) ranged from Rs.11 crore to Rs.1,070 crore as compared with Rs.2 crore to Rs.2,556 crore during April-July 2001. A number of measures have been taken to develop the term money market (see Section IX).
Certificates of Deposit (CDs) Issued by Banks
5.16 The outstanding amount of CDs issued by scheduled commercial banks increased from Rs.771 crore in March 2001 to Rs.935 crore in May 2001 but dropped thereafter to Rs.729 crore by September 2001, reflecting comfortable liquidity conditions (Chart V.9). By March 22, 2002 the outstanding amount recovered, with intermittent fluctuations, to Rs.1,576 crore (Appendix Table V.2). During 2002- 03 so far, the outstanding amount of CDs issued by scheduled commercial banks declined from Rs.1,474 crore as on April 5, 2002 to Rs.1,303 crore as on July 12, 2002.
5.17 The typical discount rate (for three-month maturity) on CDs declined from 10.00 per cent in mid-April 2001 to 6.88 per cent by mid-December 2001 before recovering to 7.38 per cent by March 22, 2002 and further to 6.9 per cent by July 12, 2002.
Commercial Paper
5.18 The behaviour of the commercial paper (CP) market reflected the prevalent comfortable liquidity conditions as also market adjustment to the institution of new norms (see Section IX). The outstanding amount of CPs increased from Rs.6,295 crore in mid-April 2001 to Rs.8,566 crore in end-June 2001 (Chart V.10). Transition to the new dematerialised investment norms was reflected in some decline in the outstanding amount of CPs to Rs.6,982 crore by end-August 2001. It increased thereafter and peaked at Rs.8,913 crore at mid-November 2001 before declining to Rs.7,224 crore by March 31, 2002. The weighted average discount rate (WADR) decreased from 9.98 per cent to 8.12 per cent as on March 31, 2002. The easy liquidity conditions at the commencement of 2002-03 led to some increase in the outstanding amount of CPs to Rs.7,783 crore during the first fortnight of April 2002. It increased further to Rs. 8,520 crore by end-July 2002. The discount rates on CP fell from a range of 9.30-12.00 per cent in mid-April 2001 to 7.60-11.10 per cent by mid-April 2002 and further to 6.55-9.30 per cent in end-July 2002 (Appendix Table V.3). The WADR also declined from 9.98 per cent in mid-April 2001 to 7.32 per cent by end-July 2002. The spread of WADR between the prime-rated and medium-rated companies which had widened to 221 basis points by July 2001 from 124 basis points in mid-April 2001, narrowed to 45 basis points by mid-March 2002. Thereafter, it widened to 89 basis points in mid-April 2002 and further to 135 basis points in mid-July 2002 before narrowing to 85 basis points in end-July 2002. The most preferred maturity of CP is between 91 days and 180 days.
5.19 The risk premium on CPs, measured by the differential between the 91-day Treasury Bill rate and the weighted average effective rate of discount on CPs (60-90 days), widened from the fourth quarter of 2001-02 (Chart V.11). The average differential between the average discount rate on CPs (60-90 days) and 91-day Treasury Bill rate rose from 1.6 percentage points during April-December 2001 to 1.9 percentage points during January-June 2002.
5.20 The CPs were predominantly issued by manufacturing companies (Chart V.12). The share of manufacturing and other companies in the amount of CP outstanding stood at 67.4 per cent while that for finance/leasing companies accounted for 21.5 per cent in end-July 2002. The outstanding amount of CPs issued by FIs were Rs.948 crore and accounted for only 11.1 per cent.
Commercial Bill Market
5.21 The outstanding amount of commercial bills rediscounted by commercial banks with various financial institutions (FIs) was Rs.711 crore at the end of April 2001, nearly double that of Rs.370 crore a year ago. It increased to Rs.1,921 crore in September 2001 before declining to Rs.906 crore at the end of March 2002 and further to Rs. 701 crore in June 2002 (Chart V.13). The total monthly average amount of bills rediscounted by commercial banks with non-bank financial institutions worked out to Rs. 1,131 crore during 2001-02 with SIDBI accounting for a major share of 63.7 per cent. During the first quarter of 2002-03, the total monthly average amount of bills rediscounted by commercial banks with non-bank financial institutions was Rs. 512 crore with SIDBI accounting for a major share of 59.6 per cent.
Chart V.13 : Commercial Bills Rediscounted
by Banks with FIs
Repurchase Agreements (Other than LAF)
5.22 During 2001-02, the weekly transaction volume (first leg only) in the market repo segment ranged between Rs.1,350 crore and Rs.13,578 crore. While the volume of repo transactions was mostly in the range of Rs.3,000 crore to Rs.9,000 crore except during some occasions, it touched the lowest level during the week ended April 13, 2001 and reached the peak during the week ended March 22, 2002. Repo rates generally ranged between 4.00 per cent and 10.25 per cent during the year except for occasional spikes.
5.23 During the year 2002-03 (up to August 9) the weekly volume (first leg only) in the repo market ranged between Rs.6,429 crore and Rs.14,579 crore and rates ranged between 4.00 per cent and 9.20 per cent.
Forward Rate Agreements (FRAs)/Interest Rate Swaps (IRS)
5.24 There was a sharp increase in the volume in FRAs/IRS market during 2001-02. The number of contracts of FRAs/IRS transactions rose from 1,615 as on April 6, 2001 to 4,379 by end-March 2002 while the outstanding notional principal amount increased from Rs.22,865 crore to Rs.86,749 crore (Chart V.14). During 2002-03 so far, transactions in this segment have gone up to 5,421 contracts for Rs.1,22,421 crore as on July 26, 2002. In spite of the significant increase in the number and amount of contracts, participation in the market continues to be restricted mainly to select foreign and private sector banks, PDs and all-India financial institutions.
FOREIGN EXCHANGE MARKET
5.25 Orderly conditions prevailed in the foreign exchange market during the first five months of 2001-02. In the aftermath of the September 11 incident, some pressures were built up in the Indian foreign exchange market and the rupee depreciated against the US dollar during September 11-20, 2001. The excess demand in the forward segment of merchant transactions doubled from US $ 1.1 billion during August 2001 to US $ 2.7 billion during September 2001 (Chart V.15 and Appendix Table V.4). In response to a package of measures by the Reserve Bank and liquidity operations during September 15-25, 2001, stability returned to the foreign exchange market. These measures were also supported by net foreign currency sales of US $ 0.9 billion during September 2001. The excess demand in the forward segment in merchant transactions declined to US$ 1.0 billion during November 2001.
5.26 The exchange rate came under some pressure again following the attack on the Indian Parliament on December 13, 2001. The rupee traded in a narrow range of Rs.48.24-48.85 per US dollar during the last three months of 2001-02. Excess supply conditions in the market were reflected in net purchases of US $ 6,823 million by the Reserve Bank during November 2001 to March 2002 (Table 5.3 and Chart V.16). As on August 16, 2002, the exchange rate of the Indian rupee was Rs.48.58 per US dollar.
5.27 The US dollar remained strong against currencies of most of the developing as well as developed countries during January 2001 to March 2002. The movement of the Indian rupee was in line with the movement in other currencies during that period. For instance, during the period January 2001 to March 2002, the US dollar appreciated by 4.7 per cent against the Indian rupee, while the appreciation of US dollar against other select emerging market currencies ranged between 0.4 per cent for Philippines peso and 5.3 per cent for the Singapore dollar. Similarly, during the same period, the US dollar appreciated by 3.9 per cent, 7.1 per cent and 12.0 per cent against the pound sterling, euro and Japanese yen, respectively (Charts V.17). The US dollar has depreciated against most of these currencies during the recent months. While the US dollar appreciated against the Indian Rupee by 0.5 per cent, it has depreciated against the Indonesian Rupiah, Korean Won, Philippines Peso, Singapore Dollar and Thai Baht by 8.0 per cent, 4.6 per cent, 2.3 per cent, 1.6 per cent and 1.4 per cent respectively. The US dollar has also depreciated against the pound sterling, the euro and the Japanes Yen by 2.3 per cent, 4.5 per cent and 3.6 per cent, respectively, during the same period.
5.28 The dispersion in the movement in the exchange rate of the Indian rupee remained uniform for most of the period in 2001-02, except for brief spells during September and December 2001 (Chart V.18).
5.29 The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2001 by the Bank for International Settlements indicates a substantial decline in the turnover in the global foreign exchange market and a slowdown in the growth of activity in the derivatives market. According to the survey, the average daily turnover in traditional foreign exchange markets was US $ 1.2 trillion in April 2001 showing a decline of 19 per cent from US $ 1.5 trillion in April 1998. Furthermore, the trading volumes fell sharply in spot markets, while volumes fell to a lesser extent in the foreign exchange swaps segment. Trading in outright forwards increased slightly. The currency pair US dollar/euro was the most traded currency pair in 2001 and captured 30 per cent of global turnover, followed by US dollar/yen with 20 per cent and dollar/sterling with 11 per cent. Trading in local currencies in emerging markets captured about 4.5 per cent of foreign exchange activity in 2001, compared with 3.1 per cent in 1998. The survey stated that the share of India in the total global daily turnover of the foreign exchange market was comparatively low at 0.2 per cent, albeit, almost the same as other emerging markets (Table 5.4).
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5.30 In the Indian foreign exchange market, the average monthly turnover in the merchant segment declined from US$ 23 billion in 2000-01 to US $ 21 billion during 2001-02 (Chart V.19). In the inter-bank segment, the average turnover increased to US $ 97 billion. The total turnover (inter-bank plus merchant turnover) in the forex market increased from an average of US$ 116 billion per month in 2000-01 to US $119 billion per month in 2001-02.
5.31 The forward market remained stable during the first half of the year until September 11, 2001 when forward premia increased by 150-200 basis points during September-October 2002 and remained stable thereafter, within a range of 5-7 per cent till March 2002 (Table 5.5).
(Per cent per annum) |
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Month |
1-month |
3-month |
6-month |
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1 |
2 |
3 |
4 |
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2001 |
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April |
3.95 |
4.51 |
4.84 |
May |
5.02 |
4.95 |
5.06 |
June |
4.43 |
4.82 |
4.95 |
July |
4.22 |
4.50 |
4.73 |
August |
4.19 |
4.52 |
4.71 |
September |
5.57 |
5.60 |
5.50 |
October |
5.91 |
6.02 |
6.03 |
November |
5.72 |
6.16 |
6.21 |
December |
6.44 |
6.34 |
6.36 |
2002 |
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January |
5.70 |
6.00 |
5.99 |
February |
5.05 |
5.49 |
5.46 |
March |
6.91 |
6.46 |
5.93 |
April |
5.84 |
6.12 |
6.06 |
May |
6.04 |
6.23 |
6.19 |
June |
4.74 |
5.37 |
5.54 |
July |
4.08 |
4.40 |
4.56 |
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5.32 During March 2002, the forward premia for the long end of the market (3 and 6 months) were lower than the one month premia (Chart V.20). Average 3- month and 6-month forward premia declined to 4.4 per cent and 4.6 per cent, respectively during July 2002.
GOVERNMENT SECURITIES MARKET
5.33 The government securities market experienced increased activity during 2001-02. With credit and equity markets remaining subdued, investor preferences underwent a change in favour of gilts. The gross borrowings of the Central Government through dated securites moved up to Rs.1,14,213 crore during
2001-02 from Rs.1,00,183 crore during 2000-01 (Appendix Table V.5). The aggregate volume of secondary market transactions in Central and State Government dated securities and Treasury Bills (outright as well as repos) more than doubled to Rs. 15,73,893 crore during 2001-02 from Rs. 6,98,121 crore during 2000-01 (Appendix Table V.6). Surplus liquidity conditions (surplus of net demand and time liabilities available over statutory pre-emptions and credit off-take) drove down yields by an unprecedented 298 basis points (average across the 1- to 20-year segment) during 2001-02 as against a moderate decline of 57 basis points during 2000-01(Chart V.21). The decline in yields was more pronounced at the short end during the first half of the year, shifting to longer-term securities during the second half of the year.
Primary Market Developments
Dated Securities
5.34 The Central Government's market borrowing programme for the year 2001-02 began amidst ample liquidity and an easing of monetary policy. The Central Government raised a total amount of Rs.86,000 crore through auctions of dated securities during 2001-02, out of which an amount of Rs.679 crore and Rs.735 crore devolved on the Reserve Bank and PDs, respectively. Half of the total auction issuances of dated securities for the year were made during April-July 2001 itself. The month-wise ratio of bid amount received to notified amount (BR/NA) ranged between 1.5 and 3.8 during the year (Table 5.6). The market appetite for sovereign paper at the auctions remained strong for the rest of the year as well, particularly during November 2001-January 2002 when the monetary conditions were eased further (Appendix Table V.7).
5.35 Other primary market developments include issue of Floating Rate Bonds (FRBs) and the scheme of retailing of Government securities through non-competitive bidding.
Secondary Market
5.36 The secondary market recorded a sharp increase in activity as yields declined. The overall preference for gilts across the financial market spectrum also reflected build up of the SLR portfolio on account of mergers since May 3, 2002 and fresh demand from co-operative banks. The total turnover in the secondary market (calculated as twice the volume of outright transactions and four times the volume of repos transactions) during 2001-02 was Rs.38,71,640 crore compared to Rs. 16,48,195 crore in 2000-01. The turnover in Central Government dated securities more than doubled to Rs.36,20,451 crore during 2001-02 from Rs.14,54,513 crore in 2000-01. The outright turnover increased to Rs.24,23,933 crore during 2001-02 from Rs.11,44,291 crore in 2000-01, temporarily disrupted by the September 11, 2001 event and the border tensions in December, 2001 (Chart V.22). There was some decline in the turnover in the last two months of 2001-02 due to market uncertainty before the Union Budget and the usual end-of-the-year profit bookings. The turnover to stock ratio in Central Government securities moved up to 5 during 2001-02 from 3 during 2000-01 for outright transactions. The turnover in State Government securities during 2001-02 amounted to Rs.14,229 crore as against Rs.6,005 crore during 2000-01. The turnover in the repo transactions remained sizeable and stable except for a spike during January 2002.
5.37 Secondary market yields showed a perceptible downward shift across the maturity spectrum during 2001-02. The yields of 5-year, 10-year and 20-year securities fell by 291 basis points, 287 basis points and 311 basis points, respectively, between March 2001 and March 2002 (Chart V.23). These were among the sharpest reductions in interest rates during the course of a year in the last three decades. The easing of yields was more pronounced for the short-term securities during the first half of 2001-02 and for long-term securities during the second half of 2001-02 (Chart V.24).
5.38 The yield spreads between 10-year and 1-year gilts widened during August-October 2001 before narrowing subsequently. The behaviour of yield spreads indicated the moderation of inflation expectations. Narrowing of yield spreads occurred throughout 2001-02 barring few episodic aberrations when market preference was for shorter tenor securities during July 2001 and when there was hardening of long-term yields during March 2002 (Chart V.25).
5.39 During 2001-02, the yield spread between 5-year AAA rated corporate bonds and the secondary market yield of comparable maturity widened reflecting investor preference for sovereign paper (Chart V.26).
5.40 The secondary gilt market remained bullish during the first week of April 2002. Thereafter, sentiments turned cautious in the run-up to the annual monetary and credit policy announcement but turned bearish in the absence of a cut in the Bank Rate. The monetary easing and the repo rate cut in June 2002 eventually activated the gilt market with the yield curve as at end-June 2002 shifting down from its position at end-May 2002. During the first quarter of 2002-03 as a whole, the gilt yields hardened with the yield of the 10-year security firming up by 18 basis points to 7.54 per cent. The improved market sentiment in July 2002 softened the yields with the yield on the 10-year security falling to 7.32 per cent. The gilt market was further buoyed during the first week of August 2002 by announcement of a 7 per cent government Relief Bond of 6-year tenor.
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