5.39 The Government securities market during 2000-01 was driven by expectations of declining yields in the wake of reductions in the administered interest rates on small savings, provident funds, and the Bank Rate. The easing of yields over the year was interrupted by the impact of the Government borrowing programme and monetary measures to counter foreign exchange market conditions. Comfortable liquidity at the beginning of 2000-01 built up a positive market sentiment leading to a mild rally in the Government securities during April-mid-May 2000. Pressures in the foreign exchange market in mid-May and July 2000, the tightening of liquidity during June 2000 on account of advance tax outflows, monetary tightening in July 2000 and a steady increase in the repo cut-off rates in August 2000 caused a mid-year hardening of gilt yields. The Reserve Bank undertook substantial devolvements and private placements to absorb market pressures. In the wake of the IMD inflows, interest in government paper revived and a smart rally in prices enabled a decline in yields from November 2000. The rally in the gilt segment gathered momentum as monetary conditions were eased during February-March 2001. During 2001-02 (up to August 10) the gilt yields generally declined due to expectations of fall in the interest rates.

5.40 Dated securities aggregating Rs.1,00,183 crore were issued during 2000-01 as against Rs.86,630 crore during 1999-2000 (Appendix Table V.4). The Central Government's market borrowing commenced in April 2000 with the entire notified amount of Rs.5,000 crore in the first auction being absorbed by the market at a YTM cut off of 10.26 per cent (Appendix Table V.5). The ratio of bid amount received to notified amount (BR/NA) was 2.10 during April 2000, indicative of the favourable market response (Table 5.8). The devolvement on primary dealers (PDs) of Rs.3,055 crore and of Rs.5,401 crore on the Reserve Bank during April-May 2000 reflected the policy preference for easier interest rates. With the tightening of liquidity conditions during mid-May-August 2000, market sentiment turned unfavourable resulting in a fall in the BR/NA ratio below unity in June and August 2000. The Reserve Bank had to undertake private placements besides accepting devolvements of 39 per cent and 42 per cent of the gross amounts raised through auctions during June and August 2000, respectively. The weighted average cut-off yields of primary gilt issuances moved up from 10.28 per cent in April 2000 to 10.71 per cent in June 2000 and further to 11.47 per cent in August 2000.

5.41 As the liquidity conditions stabilised and IMD inflows poured into the system, the BR/NA ratio moved up from 1.34 during September 2000 and remained above 2 up to January 2001 rising even further to 3.43 in February 2001 as the mid-year monetary measures were unwound. There was complete market absorption of the primary gilt issuances between October 2000-March 2001 except for a devolvement upon the Reserve Bank of Rs.1,000 crore in the auction on December 26, 2000 and a devolvement of Rs.1,911 crore on the PDs in the auction on March 29, 2001. The primary market cut-off gilt yield of a ten year paper declined from 11.69 per cent in October 2000 to 11.10 per cent in December 2000 (Chart V.6).

5.42 The issuances of securities to accommodate the market's preference for shorter-term paper during phases of market uncertainties reduced the weighted average maturity of debt issued to 10.6 years during 2000-01 from 12.6 years during 1999-2000. Furthermore, the range of maturities of loans issued also widened to 2.9 years-20 years during 2000-01 from 5.3 years-19.6 years during 1999-2000. The weighted average cost of primary issuance during the year, however, was lower at 10.95 per cent against 11.77 per cent during the previous year.

5.43 During 2001-02 (upto August 13), the Central Government raised a gross amount of Rs.70,000 crore through issue of dated securities with about 30 per cent privately placed with/devolved on the Reserve Bank.

5.44 The year 2000-01 was characterised by volatility in secondary market both in terms of yield movements and turnover. Under the easy liquidity conditions during April-mid-May, the yield curve shifted downwards, particularly at the short-end as long tenor securities were issued by the Reserve Bank. Thereafter, the yield curve shifted up particularly in the short-end, as the liquidity conditions tightened. The turnover declined sharply during June 2000 over the level in the previous month. There was some easing of yields during the first half of July 2000 on account of inflows of coupon payments and redemption of Government securities as well as aggressive open market operations by the Reserve Bank. The turnover rose sharply in July 2000.

5.45 Yields began to rise again during the second half of July and August 2000 eroding the earlier gains in gilt prices. The upward movement in yields reflected the impact of monetary measures and the absorption of liquidity through repos. The illiquidity of longer maturity papers prompted the Reserve Bank to offer the PDs switches from medium- to long-term Government securities to 364-day Treasury Bills. The turnover fell during August 2000 as banks and other participants turned to money and foreign exchange market segments in search of better returns.

5.46 Activity in the secondary market revived during September-October 2000 and yields at the short- and medium-segments declined. As the proceeds of IMDs entered the system, activity picked up for the first time in 2000-01 at the longer-end of the maturity spectrum. The yields of longer dated maturities fell in the face of a strong rally in the prices of Government securities. The aggressive auctioning of Government securities could arrest this rally temporarily. In December 2000, the rally resumed at the long-end with improved sentiment and stable financial market conditions.

5.47 The two-stage cut in the Federal Reserve Bank’s interest rate by a total of 100 basis points in January 2001 fuelled market expectations of an imminent adjustment in key interest rates in India to the pre-July 2000 level. As the liquidity conditions eased and there was a slowdown in the non-food credit of the scheduled commercial banks the Reserve Bank reduced the Bank Rate and the Cash Reserve Ratio by 50 basis points each. With a conducive environment created by the 150 basis point reduction in the administered interest rates on small savings announced in the Union Budget for 2001-02 on February 28, 2001, the Bank Rate was reduced by a further 50 basis points effective close of business on March 1, 2001. This reduction did not bring down yields any further as the market had already discounted it prior to the presentation of the Union Budget. In March 2001, the market remained volatile on year-end considerations, viz., profit booking and reluctance to take fresh positions as also the developments in the capital markets. The profile of the yield curves captures the three liquidity phases during the year (Chart V.7).

5.48 The secondary market for Central Government dated securities and Treasury Bills (outright as well as repos) deepened during 2000-01 to register an aggregate volume of transactions of Rs.6,95,135 crore (Appendix Table V.6), as compared with Rs.5,35,602 crore in 1999-2000. As much as 82 per cent (Rs.5,69,174 crore) of the transactions were on outright basis with the balance by way of repos. Transactions in State Government securities, however, were lower at Rs.2,986 crore as against Rs.3,632 crore during 1999-2000. The turnover in Central Government securities (calculated by counting twice the volume of transactions in the case of outright transactions and counting four times the volume of transactions in the case of repos) during 2000-01 amounted to Rs.16,42,190 crore as against Rs.12,36,678 crore in 1999-2000. The outright turnover aggregated Rs.11,38,348 crore as compared with Rs.9,05,722 crore in 1999-2000. Thus, the average monthly turnover in Central Government securities aggregated Rs.1,36,849 crore in 2000-01 as compared with Rs.1,03,056 crore in 1999-2000. The average monthly turnover of outright transactions amounted to Rs.94,862 crore during 2000-01 as against Rs.75,477 crore in 1999-2000. The average daily turnover was also higher at about Rs.4,512 crore as against Rs.3,388 crore in 1999-2000. The turnover in State Government securities during 2000-01 amounted to Rs.6,005 crore as against Rs.7,265 crore during 1999-2000. The turnover in Central Government securities during 2001-02 (up to June) amounted to Rs. 7,96,558 crore. The outright turnover aggregated to Rs. 5,40,485 crore. The turnover in the State Government securities was Rs. 2,175 crore during the period.

5.49 An analysis of the most heavily traded securities in the secondary market during 2000-01 indicates that during April and May the tenor of these securities ranged mostly between 4-10 years showing the market preference for medium to long term securities. During June-September, 2000 it mostly ranged between 1-8 years exhibiting the shift to shorter to medium tenor bonds while from October 2000 onwards, it was mostly 6-12 years exhibiting the shift towards medium to long-term securities.

5.50 During 2001-02 upto mid-August, easy liquidity conditions in the financial markets and interest rate cuts in the developed economies turned the domestic gilt market buoyant. The reduction in the LAF repo rate by 25 basis points to 6.75 per cent on April 27, 2001 was positively received. The reduction in the CRR by 50 basis points to 7.5 per cent of net demand and time liabilities effective May 19, 2001 was followed with another reduction in the LAF repo rates by 25 basis points to 6.5 per cent on May 28, 2001. Gilt prices surged across the spectrum as these measures seemed to have the desired effect upon the cost and availability of liquidity in the banking system.

5.51 Liquidity management in the short-term consisted of absorption of excess liquidity through repos and injection of liquidity through the reverse repos during tight liquidity conditions. Long-term management of liquidity was conducted through outright open market sales to absorb excess liquidity in conjunction with private placement/devolvement operations and outright open market purchases in tight liquidity conditions.

5.52 The Reserve Bank's initial subscriptions during the first quarter of 2000-01 amounted to Rs.7,961 crore with net open market sales of Rs.2,025 crore (Table 5.9). The open market activity picked up in July 2000. The liquidity conditions turned easy during the first half of July 2001. With foreign exchange market conditions turning uncertain and market appetite for gilts remaining weak, the Reserve Bank resorted to private placement of an 11-year paper on July 3, 2000 and subsequently conducted open market sales of shorter maturity gilts and Treasury Bills. As the monetary conditions were tightened, the Reserve Bank's open market purchase of 11.9 per cent Government Stock 2007 enabled stability of yields in the 4-8 year tenor. Subsequently, the Reserve Bank again undertook private placements, offloading them to the market on tap basis. The net OMO sales amounted to Rs.5,966 crore during July 2000 (up to the last reporting Friday of the month). PDs were offered a switch from long dated papers to Treasury Bills between August 24 and September 7, 2000.

5.53 The return to easy liquidity conditions on account of inflow of IMD proceeds prompted a step up of open market sales during November 2000. The net open market sales during this month amounted to Rs.11,536 crore (up to the last reporting Friday of the month) as against an average monthly sale of Rs.1,218 crore during April-October 2000 in order to mop up the excess liquidity. Furthermore, the Reserve Bank conducted an OMO auction of 11.19 per cent Government security 2005 from its own portfolio for a notified amount of Rs.3,500 crore for the first time since 1995 on November 16, 2000 to facilitate price discovery. The market response was, however, lukewarm with an off-take of Rs.1,200 crore at a cut-off yield of 10.66 per cent. There were no major OMO conducted during the rest of 2000-01. The net sales of Central Government dated securities and Treasury Bills under OMO amounted to Rs.21,892 crore during 2000-01 as against Rs.30,861 crore during 1999-2000.

5.54 During the first quarter of 2001-02, low levels of advance tax collections as well as tax shortfall in the previous fiscal year necessitated not only direct borrowing by Government from the market but also private placement of its securities with the Reserve Bank. The Reserve Bank undertook private placement of three gilts aggregating to Rs.12,000 crore on April 20, 2001 whose monetary impact was neutralized partially through the subsequent open market sales to the tune of Rs.5,000 crore. Securities of Rs.5,000 crore privately placed on May 30, 2001 could only be partially off-loaded subsequently during the first week of June 2001. Securities of Rs.4,000 crore privately placed on June 20, 2001, could be completely sold off in the open market sales conducted on the next day. During this quarter the Reserve Bank's initial subscriptions amounted to Rs.21,000 crore with the net open market sales aggregating to Rs.10,929 crore. With a view to provide short-term investment avenues the Reserve Bank conducted open market sales (on an auction basis) during July 2001. During 2001-02 (up to August 10), the Reserve Bank’s initial subscriptions amounted to Rs 21, 679 crore, with net open market sales aggregating to Rs. 16,050 crore.

Treasury Bills

5.55 The easing of interest rate environment during 2000-01 was reflected in the yield movements of Treasury Bills. The structure of the implicit primary yield for minimum cut-off price of Treasury Bills flattened with the average cut-off yield of the 14-day Treasury Bills remaining unchanged at 8.23 per cent while those of 91-day, 182-day and 364-day Treasury Bills declining by 5 basis points, 25 basis points and 33 basis points, respectively, to 8.98 per cent, 9.43 per cent and 9.76 per cent during 2000-01 in relation to their respective average yields during 1999-2000. In contrast, the average yield levels for all the Treasury Bills had increased during 1999-2000 compared to the previous year.

5.56 The intra-year dynamics between events and yield movements of the Treasury Bills in the auctions were clearly in evidence during the 2000-01 (Chart V.8). The setting of easy liquidity and monetary conditions at the start of 2000-01 provided a conducive environment for successful auctions at lower implicit yields especially at the shorter ends and, therefore, the yield structure shifted down and became steeper between end-March 2000 and early-April 2000.

5.57 As the liquidity conditions started to tighten and the implicit cut-off yields began to firm up in June 2000, the Reserve Bank took substantial devolvement to contain the further firming up of yields. The liquidity conditions eased somewhat in early half of July 2000. From July 21, 2000 onwards, the cut-off yields rose in the primary Treasury Bill market. Despite increasing yields there was devolvement on the Reserve Bank in Treasury Bill auctions during August 2000. The yield levels of the Treasury Bills touched the peak for 2000-01 and the yield structure inverted as on end-August 2000 with the yield of 14-day Treasury Bills highest at 10.97 per cent, followed by that of 10.91 per cent for the 364-day, 10.47 per cent for 91-day and 10.42 per cent for 182-day Treasury Bills. The yields for 14-day, 91-day, 182-day and 364-day Treasury Bills were higher by 471 basis points, 247 basis points, 189 basis points and 162 basis points, respectively, over their levels at the beginning of April 2000.

5.58 Market sentiment improved from September 2000 accompanied by a decline in the repo cut-off rates during October 2000. Price expectations turned positive with the external inflows of the IMDs. The cut-off yields came down reflecting the movement in the call money rates and the yields of 14-day Treasury Bills realigned at lower levels than the yields of the other Treasury Bills. After the easing of monetary conditions by February 2001 and early March 2001, the yields declined. The year ended with the hardening of interest rates. This was reflected in the upward shift of the yield structure by end-March 2001.

5.59 During 2001-02 so far (August 13) barring spurts in the second and third weeks of May as well as in the first week of June in respect of the yield of 91-day Treasury Bill, the cut off yields of both 91-day and 364-day Treasury Bills witnessed a gradual easing with softening of the call/notice money market after the cut in CRR on May 19, 2001. In July 2001, the yields of both these Treasury Bills showed fluctuation and thereafter declined during August 2001 (up to August 13).

5.60 The total issues of 14-day auction Treasury Bills during 2000-01 amounted to Rs.10,480 crore (Appendix Table V.7), of which non-competitive bids aggregated Rs.5,280 crore and competitive bids Rs.4,436 crore representing 50 per cent and 42 per cent, respectively, of the total issues, with the balance being subscribed by the Reserve Bank. The notified amount was Rs.100 crore per auction. The outstanding at the year-end amounted to Rs.100 crore. During 2001-02 (up to May 14), the total issues aggregated to Rs.1,100 crore with 64 per cent being allocated to competitive bids and no devolvement on the Reserve Bank. The issues of 14-day Treasury Bills have been discontinued after May 14, 2001.

5.61 A gross amount of Rs.7,255 crore was raised during 2000-01 through 91-day Treasury Bills as against Rs.8,155 crore in the previous year. Out of the gross amount, non-competitive bids aggregated Rs.2,055 crore accounting for about 28 per cent of the value of the total issues. The notified amount of each auction was kept unchanged at Rs.100 crore and the year-end outstanding amount was Rs.1,830 crore. The Reserve Bank's subscription to these Bills fell to 11.8 per cent (Rs.855 crore) of the total issues during 2000-01 from 18.7 per cent (Rs.1,523 crore) during the previous year. Reflecting market absorption of these Treasury Bills, the year-end outstanding Bills were held totally outside the Reserve Bank. As against this, in 1999-2000, the year-end holdings of the Reserve Bank at Rs.288 crore accounted for about 19 per cent of the outstanding bills (Rs.1,520 crore). During 2001-02 (up to August 13, 2001), the total issues of 91-day Treasury Bills amounted to Rs.6,665 crore. The notified amount in each auction has been increased from Rs.100 crore to Rs.250 crore since the issue dated May 18, 2001.

5.62 A total notified amount of Rs.2,600 crore was raised through 182-day Treasury Bills during 2000-01 which was absorbed by competitive bids with devolvement on the Reserve Bank on only four occasions, in June 2000 and in August 2000, amounting to Rs.251 crore. The notified amount was kept at Rs.100 crore on each of the auctions. There were no non-competitive bids. The outstanding amount of Rs.1,300 crore as at end-March 2001 was held entirely outside the Reserve Bank. As against this, the Government had raised Rs.2,900 crore through these Treasury Bills during 1999-2000 with non-competitive bids that were accepted outside the notified amount on two occasions aggregating to Rs.600 crore. The total devolvement on the Reserve Bank on eight occasions was Rs.645 crore during 1999-2000. During 2001-02 (up to May 10, 2001) a notified amount of Rs.300 crore was fully absorbed by competitive bids with no devolvement on the Reserve Bank. Since May 14, 2001 the issues of 182-day Treasury Bills have been discontinued.

5.63 With a view to offering increased amount of short-term paper to the market, the notified amount of these Treasury Bills for each auction was raised from Rs.500 crore to Rs.750 crore effective the auction on December 13, 2000 and the gross mobilisation through issuance of these Treasury Bills aggregated to Rs.15,000 crore as against Rs.13,000 crore in 1999-2000. The subscription by the Reserve Bank was Rs.1,827 crore or 12.2 per cent of the value of the total issues. During 2001-02 (up to August 10), gross amount of Rs.7,500 crore was raised by issue of these Treasury Bills without any devolvement on the Reserve Bank. The notified amount in each of the auctions continued to remain at Rs.750 crore.

5.64 The movements in interest rates in term deposits and prime lending rates of scheduled commercial banks generally followed the three-phase pattern in alignment with the other segments of the financial market spectrum, albeit with some lags. On balance, term deposit rates across all maturities as well as the PLRs were lower as at end-March 2001 than the corresponding levels as at end-March 2000 for the three groups of scheduled commercial banks, viz., PSBs, foreign banks and private banks.

5.65 The reduction of interest rate on saving deposits by 50 basis points to 4.0 per cent, effective April 1, 2000, lowered the cost of mobilisation of funds for the banking system. The interest rates on term deposits offered by the public sector banks (PSBs) eased from their levels in March 2000 with some time lag in June 2000. On the other hand, the response of lending rates was faster as the PLRs of the PSBs eased from their March 2000 levels in April 2000.

5.66 As the monetary conditions tightened during mid-May to August 2000, the rates for deposits of PSBs with maturities up to 1 year, between 1-3 years and beyond 3 years rose during August, October and September 2000, respectively. The PLRs of the PSBs also hardened in August 2000.

5.67 Surplus liquidity conditions and the easing of monetary conditions during the third phase enabled a softening of interest rates for deposits of PSBs with maturities up to 1 year, between 1-3 years and beyond 3 years in November 2000, March 2001 and December 2000, respectively. The PLR declined with a lag during the third phase i.e., in February-March 2001 Deposit and lending rates declined further during the second quarter of 2001-02 (Table 5.10).

5.68 The aggregate amount of resources raised by the financial institutions¹ by way of term money, CDs, CPs², term deposits and inter-corporate deposits (ICDs) increased from Rs.7,789 crore as on March 24, 2000 to Rs.10,371 crore as on March 23, 2001. Among these instruments, the outstanding amount of ICDs increased from Rs.5,031 crore as on March 24, 2000 to Rs.5,768 crore as on March 23, 2001 and further increased to Rs. 5,937 crore as on July 13, 2001. Similarly, the outstanding amount of term deposits increased from Rs.677 crore as on March 24, 2000 to Rs.999 crore as on March 23, 2001 before declining a little to Rs. 987 crore. The outstanding amount of CDs also increased from Rs.1,689 crore as on March 24, 2000 to Rs.2,289 crore as on March 23, 2001. It, however, declined to Rs. 1,124 crore as on July 13, 2001 on improved liquidity conditions. The outstanding amount of term money borrowings by financial institutions increased substantially from Rs.392 crore as on March 24, 2000 to Rs.1,135 crore as on March 23, 2001 and further to Rs. 1,372 crore as on July 13, 2001. The outstanding amount of CPs, stood at Rs.99 crore as on March 23, 2001. It increased to Rs. 159.25 crore as on April 6, 2001 before declining to a range of Rs. 78-89 crore up to June 15, 2001. Thereafter, it increased to Rs. 217.25 crore as on July 13, 2001.

5.69 Interest rates offered on term money borrowings by financial institutions increased from 10.9 per cent in March 2000 to 11.0 per cent in March 2001 but declined to 10.25 per cent as on July 13, 2001. The interest rates on CDs issued by financial institutions hardened from a range of 9.50-9.65 per cent in March 2000 to 10.00-10.50 per cent in March 2001 but declined to 9.25-10.50 per cent as on July 13, 2001. Interest rates on term deposits moved in the range of 8.00-11.50 per cent during the period. The interest rates on CPs issued by FIs during the period prevailed in the range of 10.13-11.05 per cent during 2000-01 but declined to 8.45-9.20 per cent during the first quarter of 2001-02.

5.70 Aggregate public deposits of non-banking financial companies (NBFCs), in terms of the survey data as reported by 979 NBFCs holding public deposits, stood at Rs. 19,426 crore as on March 31, 2000. Deposits with NBFCs as a proportion to that of commercial banks worked out to 2.4 per cent as at end-March 2000. The interest rate ranged between 12 per cent to 14 per cent for 43 per cent of the deposits, and 14 to 16 per cent for 36 per cent of the deposits mobilised by NBFCS (excluding RNBCs) for the reporting period as at end March 2000. According to the quarterly information pertaining to large NBFCs with a deposit base of Rs. 20 crore and above, the public deposits for 49 companies was Rs. 18,121 crore as at end-December 2000 as against Rs. 17,974 crore far as at end-September 2000. In response to an environment of easing interest rates, the ceiling rate of interest for public deposits held with NBFCs was reduced from 16 per cent to 14 per cent effective from April 1, 2001.

5.71 Housing finance for the purpose of achievement of the stipulated allocation from incremental bank deposits includes direct housing finance to individuals or group of individuals including co-operative societies, indirect housing finance by way of term loans to housing finance intermediaries, State Housing Boards, etc. and investment in bonds and debentures of NHB and HUDCO. For 2001-02, the scheduled commercial banks were advised to compute their respective share of housing finance allocation at 3 per cent of their incremental deposits as on the last reporting Friday of March 2001 over the corresponding figure of the last reporting Friday of March 2000. This would, however, be the minimum housing finance allocation for each bank.

5.72 The capital market, in general, experienced depressed conditions during 2000-01. The primary market remained subdued. While the resource mobilisation from the public issues market declined, that from the private placement market witnessed a lower growth. Resource mobilisation by mutual funds also declined sharply, after a record mobilisation in 1999-2000. Activity in the secondary market remained generally bearish with share prices declining by more than 25 per cent during the year. During the first week of March 2001 the market was affected by considerable uncertainty arising from turbulence in stock exchanges and apprehensions of liquidity/payments problems. Timely measures were undertaken by the SEBI and the Reserve Bank to restore stability in the equity market and to prevent volatility spreading to other market segments. The market sentiment remained subdued in the following months reflecting, inter alia, ban on deferral products in the cash segment by SEBI and ban on sales/ repurchases of US-64 units by UTI and downgrading of India’s rating by some international agencies.

5.73 The primary market witnessed a sharp decline in resource mobilisation in the public issues market, despite a significant increase in the number of floatations. Aggregate resource mobilisation through prospectus and rights issues at Rs.6,421 crore was lower by 16.7 per cent as compared with Rs.7,704 crore mobilised during the previous year. Although resources raised by both public and private sectors declined, the decline was much sharper in the case of the former with PSUs and Government companies remaining absent from the public issues market for the third consecutive year. Resource mobilisation by banks and financial institutions in the public sector declined sharply by 42.3 per cent to Rs.1,472 crore (through 5 issues) from Rs.2,551 crore (through 4 issues) during 1999-2000 (Table 5.11).

5.74 During April-July 2001, resource mobilisation from the public issues market by the private sector at Rs.810 crore declined by 22.4 per cent from Rs.1,044 crore mobilised during April-July 2000. There was no issue from the public sector as was the case during the corresponding period of the previous year. The number of issues declined sharply to three during April-July 2001 from 64 during April-July 2000.

5.75 During 2000-01, resources mobilised by non-Government public limited companies (private sector) at Rs.4,949 crore through 145 issues declined by 4.0 per cent as compared with Rs.5,153 crore mobilised through 79 issues during 1999-2000 (Appendix Table V.8). Although the share of mega issues (Rs.100 crore or above) in total resource mobilisation increased marginally to 69.1 per cent (Rs.3,419 crore from 13 mega-issues) from 66.8 per cent (Rs.3,443 crore from 12 issues) in the previous year, most of the issues during 2000-01 were of Rs.10 crore and less (mostly equity issues from the IT sector) in sharp contrast to the previous year when most of the issues were of Rs.10 crore and above. As a result, the average size of issues by the private sector companies registered a sharp decline to Rs.34 crore from Rs.65 crore in 1999-2000. During 2000-01, there were 80 equity issues by the IT sector accounting for Rs.664 crore or 13.4 per cent of total resource mobilisation as compared with 32 issues aggregating Rs.495 crore (9.6 per cent) during 1999-2000. The public issues market continued to be dominated by equity issues numbering 136 issues out of a total of 145 issues, the remaining being debt issues. However, in terms of resource mobilisation, the share of equity instruments was only 53.9 per cent. The share of premium in the total amount mobilised by equity issues declined sharply to 47.5 per cent from 78.8 per cent.

5.76 The private placement market witnessed a relatively moderate growth during 2000-01 in comparison with the previous four years. Resources mobilised through private placements increased by 10.2 per cent to Rs.67,500 crore as compared with an increase of 23.3 per cent during 1999-2000. The shares of the public and private sectors stood at 63.9 per cent (Rs.43,101 crore) and 36.1 per cent (Rs.24,399 crore), respectively. The major all-India development financial institutions (IDBI, IFCI, ICICI, IIBI) were the largest mobilisers of funds as a group (Rs.14,124 crore) from the private placement market followed by the State level undertakings (Rs.11,972 crore).

5.77 During 2000-01, resource mobilisation by Indian corporates through Euro issues by way of Foreign Currency Convertible Bonds (FCCBs), Global Depository Receipts (GDRs) and American Depository Receipts (ADRs) registered a significant increase. There were, in all, thirteen issues floated for an aggregate amount of Rs.4,197 crore during 2000-01 as compared with six issues aggregating Rs.3,487 crore in the previous year.

5.78 There were three Euro issues during April-July 2001 aggregating Rs.1,437 crore (US $ 305 million) as compared with six issues aggregating Rs.2,625 crore (US $ 593 million) during April-July 2000.

5.79 Net resource mobilisation by mutual funds during 2000-01 declined by 33.1 per cent to Rs.13,339 crore from Rs.19,953 crore during the previous year. Resource mobilisation by the private sector mutual funds declined by 43.1 per cent to Rs.8,481 crore and by 56.0 per cent to Rs.1,999 crore by the Unit Trust of India (UTI). However, resource mobilisation by the public sector mutual funds increased to Rs.2,860 crore as compared with Rs.513 crore during the previous year (Table 5.12).

5.80 According to the estimate made by SEBI, resource mobilisation by mutual funds during April-June 2001 at Rs.6,936 crore increased by 71.7 per cent from Rs.4,041 crore mobilised during the corresponding period of the previous financial year.

5.81 The disinvestment programme of the Government was muted with the actual proceeds from disinvestments falling far below the targeted amount. As against a target of Rs.10,000 crore during 2000-01, proceeds from disinvestments aggregated Rs.1,869 crore. In the Union Budget for 2001-02, the target for disinvestment has been increased to Rs.12,000 crore. The Government has set up a new Department of Disinvestment (Vinivesh Vibhag) after the tenure of the Disinvestment Commission ended in November 1999, to establish a systemic policy approach to disinvestment and to give fresh impetus to this programme which will increasingly emphasise strategic sales of identified PSUs. The Government reconstituted the Disinvestment Commission in July 2001 with Dr. R.H. Patil as its new Chairman.

5.82 The stock market remained generally subdued during 2000-01 reflecting large sell-offs in global equity markets, particularly, in new economy stocks on the Nasdaq, a slowdown in FII inflows, deceleration in industrial production and increase in international oil prices.

5.83 The market began the year on a subdued note in April 2000 and tended to move downwards, in general, as the year progressed. It declined sharply between April-May 2000. However, the equity prices recovered somewhat in June 2000 despite a sharp decline in net FII investment. Market sentiment was considerably influenced by the downturn in international equity markets (Chart V.9). As a consequence, the recovery could not be sustained and equity prices declined sharply in July 2000. The downtrend continued till October 2000 with pressures in other segments of the financial markets dampening the market sentiment. A fragile recovery in November 2000 could not be sustained as the stock prices declined again in the following month. The decline was mainly on account of substantial net sales by the FIIs during the month. The substantial decline in Nasdaq index during the second half of the month and weakness in Asian markets also affected the market sentiment adversely. Share prices registered modest gains in January 2001 mainly due to large FII inflows and expectations of strong earnings growth of the new economy companies in the third quarter.

5.84 The market responded positively to the Union Budget for 2001-02 with the BSE Sensex recording an 11-month peak for a single day. In the first week of March 2001, however, the market was adversely affected by considerable uncertainty leading to problems in certain stock exchanges as well as liquidity/solvency difficulties in some co-operative banks, which in turn, also affected some commercial banks. Timely policy actions were undertaken including banning of naked short sales, raising margin requirements, facilitating orderly settlement in stock exchanges, ensuring adequate liquidity in other market segments and specific measures to minimise the spread of contagion.

5.85 In May 2001, SEBI announced significant changes in the capital market in keeping with the international practices and operations in the securities markets. These measures included: (a) banning of all deferral products in the cash segment including badla, (b) bringing in 414 scrips accounting for 95 per cent of trading volumes within the ambit of rolling settlements system from July 2, 2001, (c) allowing index based and individual stock based options, (d) introduction of uniform Monday-to-Friday settlement cycle across all stock exchanges for all scrips not in the rolling mode, (e) a code of conduct and a preventive framework against insider trading, (f) removal of price bands for all stocks in the rolling mode from July 2, 2001 and for the entire market from January 2, 2002, (g) introduction of a market wide circuit breaker system to be applicable at three stages of the index movements, (h) shifting the margining system from net to gross basis (sales and purchases) with effect from September 3, 2001, (i) introduction of 99 per cent value at risk (VaR)-based margin system for all scrips in the compulsory rolling settlement with effect from July 2, 2001.

5.86 The BSE Sensitive Index (Base: 1978-79=100), which stood at 5001.28 as at end-March 2000 declined to touch a low of 3540.65 as on March 13, 2001. Although the Index recovered to close at 3604.38 as at end-March 2001, it still registered a decline of 1396.90 points (27.93 per cent) over the end-March 2000 level (Table 5.13). The monthly average of BSE Sensitive Index, which stood at 5261.77 in March 2000, declined to touch 3807.64 by March 2001 (Appendix Table V.9), registering a decline of 1454.13 points (27.64 per cent).

5.87 The continued weak trend witnessed in April 2001 was reinforced with the profit-warning for the next year issued by various IT companies. The BSE Sensex touched a low of 3183.77 points on April 12, 2001 in the current financial year. However, the share prices increased in May 2001 particularly on the back of net FII investment, which remained strong despite the reduction in India's weightage in the MSCI Emerging Market Free Index. The BSE Sensex closed the first quarter of 2001-02 at 3456.78 as on June 29, 2001 and declined further to close at 3329.28 on July 31, 2001. The trend in stock market remained subdued in August 2001 so far.

5.88 The volatility in the BSE Sensex, as measured by the co-efficient of variation, declined to 8.8 per cent in 2000-01 from 13.2 per cent in 1999-2000. The dispersion (the range between closing high and closing low) at 2001 points in 2000-01 was also lower than that of 2,689 points recorded during 1999-2000 (Appendix Table V.9).

5.89 The total turnover of BSE at Rs.10,00,031 crore during 2000-01 registered an increase of 46.0 per cent as compared with an increase of 119.6 per cent in the previous year. The market capitalisation of listed scrips at BSE declined sharply by 37.4 per cent to Rs.5,71,553 crore as at end-March 2001 in contrast to an increase of 68.1 per cent during 1999-2000. The average price-earning ratio based on 30 scrips included in the Sensex increased to 23.9 during 2000-01 from 19.8 in the previous year (Table 5.13). The average price-book value ratio based on the 30 Sensex scrips increased to 3.6 from 3.4 in 2000-01. The annualised yield based on the 30 scrips included in the Sensex, increased marginally from 1.2 per cent to 1.3 per cent in 2000-01.

5.90 The total turnover in the capital market segment of the National Stock Exchange (NSE) at Rs.13,39,511 crore registered an increase of 59.6 per cent during 2000-01 as against an increase of 102.4 per cent in the previous year. As at end-March 2001, the number of companies listed at the NSE stood at 785 with market capitalisation of Rs.5,43,575 crore as against 673 listed companies with market capitalisation of Rs.8,50,880 crore as at end-March 2000 (Table 5.14). The National Securities Clearing Corporation Limited (NSCCL), which handles the clearing and settlement operations of NSE, guarantees settlement on behalf of its clearing members through its Settlement Guarantee Fund (SGF).

5.91 The NSE and NSCCL have launched the Mutual Fund Services System (MFSS) to effectively cater to the individual investors buying and redeeming of mutual fund scheme units, which is presently being undertaken manually. NSE commenced trading in Nifty Index Futures from June 12, 2000. The futures contract has a maximum of 3-month expiration cycle.

5.92 Net investment³ by FIIs continued to remain buoyant during 2000-01 at Rs.9,669 crore even as it was marginally lower than that of Rs.9,816 crore during 1999-2000. The monthly net FII investment was positive during January-April, May, August, October and November 2000 and negative during June, July September and December 2000. FII investment was also positive in January, February and March 2001. The monthly net FII investment touched a high of Rs.2,438 crore during April 2000. Cumulative investments by FIIs which stood at Rs.39,133 crore as at end-March 2000 increased to Rs.48,802 crore as at end-March 2001. The number of FIIs registered with SEBI which stood at 527 as at end-March 2001, came down to 505 as at end-July 2001.

5.93 During 2000-01, banks' direct investment in the capital market instruments declined sharply. Accommodation provided by scheduled commercial banks to the commercial sector through investments in bonds/ debentures/preference shares and equity shares (including loans to corporates against shares to meet promoters' contribution) declined to Rs.10,166 crore during 2000-01 from Rs.11,738 crore during the previous year. Banks' investments in bonds/debentures and preference shares at Rs.9,818 crore, formed the major portion of their investment in capital market instruments.

5.94 The guidelines relating to banks' financing of equities and investment in shares issued in November 2000 were revised based on the feedback received from banks and market participants on the recommendations made by the Technical Committee of the Reserve Bank and SEBI. In terms of the revised guidelines issued in May 2001, banks' overall exposure to the capital market in all forms (fund and non-fund based) was stipulated at 5.0 per cent of outstanding advances (including CPs) as on March 31 of the previous year as against the earlier stipulation whereby the ceiling of 5.0 per cent of outstanding credit was applicable only for their investment in shares, convertible debentures and units of MFs (other than debt funds), while there was no quantitative restriction on other forms of exposure.

5.95 In order to expedite the process of dematerialisation, the SEBI introduced an element of compulsion whereby settlement of trade in certain select scrips was required to be effected compulsorily in demat form. SEBI has been expanding the compulsory demat list from time to time and as on June 30, 2001 there were 2,335 scrips which needed to be settled only in the dematerialised form. In order to avoid creation of securities in physical form, it has recently directed that securities issued through initial public offering (IPO) can only be settled in dematerialised form.

5.96 During 2000-01, the number of securities listed on the wholesale debt market (WDM) segment of NSE increased to 937 from 843 in 1999-2000 while the number of active securities listed and available for trading in the segment increased to 1,534 from 1,412 during the same period. The volume of trading increased by 40.9 per cent to Rs.4,28,582 crore in 2000-01 from Rs.3,04,216 crore in 1999-2000, with the highest volume recorded in January 2001 at Rs.66,400 crore. The trend in the trading pattern during 2000-01 remained almost the same as in the previous year with Government Securities and Treasury Bills accounting for the bulk of the trading volume at over 96 per cent of the total trade. However, in the current financial year so far, as a fall-out of the subdued stock market conditions, increased activity by banks, mutual funds and insurance companies was witnessed in the debt segment. The volume of corporate debt traded on the WDM Segment of NSE which was merely Rs. 10.73 crore in April 2001 , increased to 101.46 crore in May and Rs.118.33 crore in June 2001. The growth rate slowed down somewhat in July 2001 as the volume declined to Rs.111.33 crore. The volume of corporate debentures traded increased from Rs.498 crore in 1999-2000 to Rs.689 crore in 2000-01. Banks, brokers and PDs accounted for 96 per cent of the total volume, of which Indian banks accounted for 33 per cent of the trade in 2000-01.

5.97 During 2000-01, financial assistance sanctioned and disbursed by all-India financial institutions (AIFIs) at Rs.1,17,667 crore and Rs.72,528 crore, respectively, registered lower growth of 16.2 per cent and 7.3 per cent, respectively, as compared with 23.6 per cent and 20.1 per cent during 1999-2000 (Appendix Table V.10). During April-June 2001, sanctions and disbursements declined by 23.2 per cent and 0.3 per cent, respectively, as compared with sharp increases of 33.3 per cent and 47.3 per cent, respectively, during April-June 2000.