The sovereign debt overhang continued to cause strains in global financial markets. Significant
monetary easing measures in the advanced economies ameliorated conditions temporarily, but
credit and liquidity risks are still high. On the domestic front, the recently announced policy
reform measures have induced investor optimism and led to enhanced market activity. The rupee
witnessed a short spell of appreciation following the policy initiatives, though it somewhat
weakened in recent weeks. However, the primary capital market, which still remains subdued,
is unable to provide capital-raising options, and bring down the leverage ratios for firms to
revive investments.
Central banks’ actions revive sentiments, but
risks remain
V.1 Global financial markets, which had
undergone renewed turmoil for most part of Q1
of 2012-13, witnessed reduced stress since end-
July. This followed the ECB President’s
statement on July 26, 2012 - that within its
mandate, the ECB is ready to do whatever it
takes to preserve the euro. Later, equity markets
rallied in the financial markets following the
September 2012 announcements of “sterilised”
outright monetary transactions (OMT) by the
ECB and an “open-ended” quantitative easing
(QE-3) by the Fed (Chart V.1). The €500 billion
permanent bailout fund, the European Stability
Mechanism (ESM), launched on October 8,
2012, further boosted market sentiments.
V.2 Global risk-aversion among investors
appeared to have eased since September with
the credit default swap (CDS) spreads declining
after the announcement of the policy measures
(Chart V.2). Borrowing costs for euro area countries, especially Spain and Italy, have also
fallen.
V.3 Even after improvements in financial
market conditions, elevated bond yields in the
euro area periphery compared to core euro area
yields, signal continued concerns about risks in
the euro area.
Domestic money market rates eased
reflecting improved liquidity conditions
V.4 In India, the financial market witnessed
some stress during Q1 of 2012-13 with the
equity markets underperforming and the rupee
depreciating amid moderation in capital inflows.
However, financial market conditions improved
Significantly during Q2. Amidst comfortable
liquidity conditions, the call money rate
remained in line with the policy repo rate, even
during the period of advance tax collections in
September (see Chart IV.3).
V.5 The rates in the collateralised segments
(i.e., CBLO and market repo) moved in tandem
with the call rate, but generally remained below
it during Q2 of 2012-13. There was a shift in
market volume in favour of CBLO and away
from the call money in the overnight money
market during Q2 (Table V.1).
Table V.1: Average Daily Volume in Domestic Financial Markets |
(` billion) |
|
Money Market |
Bond Market |
Forex
Market
inter-bank
(US$ mn) |
Stock
Market
## |
LAF |
Call Money |
Market Repo |
CBLO |
Commercial Paper* |
Certificates
of
Deposits* |
G-Sec** |
Corporate Bond# |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
Mar-12 |
-1574.3 |
175.1 |
111.8 |
379.8 |
911.9 |
4195.3 |
98.6 |
26.1 |
20.6 |
152.3 |
Jun-12 |
-913.0 |
151.8 |
180.4 |
375.9 |
1258.1 |
4251.7 |
257.6 |
29.5 |
18.4 |
117.3 |
Jul-12 |
-481.1 |
146.4 |
173.3 |
381.9 |
1732.3 |
4155.3 |
220.1 |
28.2 |
18.9 |
115.8 |
Aug-12 |
-462.2 |
129.5 |
183.3 |
459.4 |
1878.9 |
4029.8 |
178.4 |
27.8 |
19.0 |
117.9 |
Sep-12 |
-517.1 |
142.8 |
185.1 |
502.4 |
1705.8 |
3571.9 |
260.1 |
36.4 |
20.2 |
142.8 |
*: Outstanding position. **: Average daily outright volume traded in central government dated securities.
#: Average daily trading in corporate bonds. ##: Average daily turnover in BSE and NSE.
Note: In column 2, (-) sign indicates injection of liquidity. |
V.6 Banks and primary dealers continued to
be the major borrowers in the collateralised segment during Q2. While mutual funds (MFs)
continued to be the major lenders in the CBLO
segment, their share in total lending declined in
the market repo segment. Nationalised banks
emerging as the major lenders in the latter
segment during the quarter.
V.7 With lower demand for funds amidst
credit slowdown, there has been a near 55 per
cent q-o-q decline in the average fortnightly
issuance of certificates of deposits (CDs) to
around `185 billion in Q2, and the weighted
average effective interest rate (WAEIR) on CDs
declined to 8.4 per cent in September 2012 from
9.3 per cent in June 2012.
V.8 The corporate sector increased its average
fortnightly issuance of commercial papers (CPs)
by around 22 per cent (q-o-q) to `330 billion
during Q2. The weighted average discount rate
(WADR) on CPs declined to 9.0 per cent in
September 2012 from 10.1 per cent in June
2012. ‘Leasing and finance’ and ‘manufacturing
companies’ remained the major issuers of CPs.
The yields on auction Treasury Bills (TBs)
eased till October 23, 2012 in line with the
declining short-term interest rates.
G-sec yields decline marginally reflecting
improved liquidity conditions
V.9 Yield movements during Q2 of 2012-13
were range bound, though with a softer bias. Yields softened significantly in July 2012
mainly due to improved liquidity conditions and
expectations that the monetary policy may be
eased following market perceptions of abating
inflationary pressures on the domestic front, and
global cues of further slowdown in world
economy. However, yields rose sharply on July
31, 2012, reacting to the Reserve Bank’s policy
announcement of a one percentage point cut in
the SLR to 23 per cent while leaving the policy
rate unchanged (Chart V.3).
V.10 After some intermittent softening, the
yields again hardened in mid-August following
worse-than-expected inflation outcome, but the
movement was checked by expectations of weak
growth numbers for Q1 of 2012-13. Better-than-expected
growth numbers, however, caused
yields to temporarily firm up, but adherence to
the budgetary numbers in the auction calendar
for H2 of 2012-13 softened opening yields on
September 28, 2012. However, profit booking
eroded the gains. Concerns about fiscal slippage
have kept yields largely flat during October 2012.
V.11 Around 72 per cent of the budgeted
borrowing programme of the central government
through dated securities amounting to `4,090
billion has been accomplished so far. The
weighted average maturity of dated securities
issued up to October 23, 2012, increased to 13.6 years. There has been a general downward
movement in the primary market yield during
the financial year so far. The weighted average
yield of primary auctions stood at 8.43 per cent
(Table V.2). Investor sentiment, however, was
largely sustained. The bid-cover ratio stood in
the range of 1.4 to 4.1.
V.12 During 2012-13 so far, 25 states have
raised `905.3 billion on a gross basis. The
weighted average yield firmed up to 8.94 per
cent as the yield spreads for 10-year state
development loans issuances over the
corresponding Government of India security,
increased to 42-84 bps compared to a spread of
25-42 bps for the corresponding period of the
previous year.
Deposit and lending rates exhibit stickiness
V.13 Following the reduction in the CRR in
two steps by 125 bps during January-March
2012 and the reduction in the repo rate by 50
bps effective April 17, 2012, the modal deposit
rate for scheduled commercial banks (SCBs)
declined by 11 bps to 7.29 per cent during Q2
of 2012-13 while the modal base rate of SCBs
continued to remain at 10.50 per cent
(Table V.3).
Table V.2 : Issuances of Central and State Government Dated Securities |
Item |
2011-12 |
2012-13* |
1 |
2 |
3 |
Central government |
|
|
Gross amount raised (` billion) |
5,100.0 |
4,090.0 |
Devolvement on primary dealers (` billion) |
121.1 |
18.3 |
Bid-cover ratio (range) |
1.4-5.1 |
1.4-4.1 |
Weighted average maturity (years) |
12.7 |
13.6 |
Weighted average yield (per cent) |
8.5 |
8.4 |
State government |
|
|
Gross amount raised (` billion) |
1,586.3 |
905.3 |
Cut-off yield range (per cent) |
8.4-9.5 |
8.7-9.3 |
Weighted average yield (per cent) |
8.8 |
8.9 |
* Up to October 23, 2012. |
Table V.3: Deposit and Lending Rates of Banks |
(Per cent) |
Items |
Jun-11 |
Sep-11 |
Dec-11 |
Mar-12 |
Jun-12 |
Sept-12 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Domestic Deposit Rate (1 - 3 year tenor) |
|
|
|
|
|
|
i) Public Sector Banks |
8.25-9.75 |
8.55-9.75 |
8.55-9.75 |
9.00-9.75 |
8.75-9.50 |
8.50-9.30 |
ii) Private Sector Banks |
8.00-10.50 |
8.00-10.50 |
8.00-10.50 |
8.00-10.50 |
8.00-10.00 |
8.00-9.75 |
iii) Foreign Banks |
3.50-10.00 |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
3.50-9.75 |
Modal Deposit Rate (all tenors) |
7.08 |
7.44 |
7.46 |
7.42 |
7.40 |
7.29 |
2. Base Rate |
|
|
|
|
|
|
i) Public Sector Banks |
9.25-10.00 |
10.00-10.75 |
10.00-10.75 |
10.00-10.75 |
10.00-10.50 |
9.75-10.50 |
ii) Private Sector Banks |
8.50-10.50 |
9.70-11.00 |
10.00-11.25 |
10.00-11.25 |
9.75-11.25 |
9.75-11.25 |
iii) Foreign Banks |
6.25-9.50 |
6.25-10.75 |
6.25-10.75 |
7.38-11.85 |
7.38-11.85 |
7.25-11.75 |
Modal Base Rate |
10.00 |
10.75 |
10.75 |
10.75 |
10.50 |
10.50 |
3. Median Lending Rate* |
|
|
|
|
|
|
i) Public Sector Banks |
9.50-14.50 |
10.50-15.25 |
10.25-15.25 |
10.60-15.35 |
10.50-15.50 |
- |
ii) Private Sector Banks |
9.25-15.00 |
9.00-15.25 |
10.00-15.50 |
10.50-15.50 |
10.63-15.38 |
- |
iii) Foreign Banks |
7.70-14.50 |
9.13-14.75 |
9.50-14.38 |
10.00-14.50 |
10.00-14.50 |
- |
*: Median range of interest rate on advances at which at least 60 per cent business has been contracted.
‘-’: Not available. |
V.14 In general, there has been a convergence
in average deposit and lending rates across
public and private sector banks. The reduction in the CRR by 25 bps with effect from
September 22, 2012, may also help in softening
deposit and lending rates further. A few banks,
mostly public sector banks, have already
reduced their base rates.
Reform measures announced by the
government boost investor sentiments and
lead to appreciation of the Rupee
V.15 The rupee appreciated by 6.9 per cent in
Q2 of 2012-13 (5.2 per cent in the month of
September 2012 alone), driven by both global
developments and domestic policy measures
(See Table VII.1 and Chart V.4). However, since
the second week of October 2012 the rupee has
weakened. It stood at 53.63 on October 25,
2012.
V.16 The Reserve Bank also undertook
additional policy measures in September 2012
to facilitate capital inflows. These include
enhancing the maximum permissible ECB for
repayment of rupee loans and fresh rupee capital
expenditure under the US$ 10 billion scheme
from 50 to 75 per cent of average foreign
exchange earnings realised during the previous
three years; permitting infrastructure companies
to avail of trade credit up to a maximum period of five years for import of capital goods; and
rationalising overseas direct investment by
Indian entities in respect of annual performance
returns.
Secondary equity markets improved with
reform measures and FII inflows
V.17 In the recent period (up to October 25,
2012), the Indian equity market witnessed gains
on a y-o-y basis. At a level of 18,758, the BSE
Sensex is 8.7 per cent higher than it was at the
same time last year. Market sentiments, turned
positive due to improved global liquidity
conditions, FII inflows and the recent policy
measures announced by the government.
However, governance issues and mixed Q2
results of some major companies pared some of
the gains recorded earlier. During 2012-13 so
far (up to October 23, 2012), FIIs made net
investments of about `497 billion in the Indian
equity market (Chart V.5).
IPO market continued to be sluggish
V.18 The primary market, on the other hand,
showed mixed trends. Private placement and
MFs witnessed substantial pick up during 2012-
13 so far, while the IPO market remained
sluggish. During April-August 2012, the total
resources mobilised through private placement
grew by about 73 per cent (y-o-y), while the net
inflow of funds into MFs schemes grew by
around 41 per cent on account of the base effect.
The MF inflows to the liquid and income
schemes were higher, on the back of improved
liquidity conditions while they were net sellers
in the equity segment.
V.19 Both the number of issues and the amount
raised through IPO issues are very low in
comparison to the peak resource mobilisation
achieved in 2007-08 (Chart V.6). Even the offer
document i.e., Draft Red Herring Prospectus,
filed with SEBI during April-September 2012
declined by 90 per cent over the corresponding
period in 2011-12. Many companies which had
filed their offer document to raise funds have withdrawn their proposals and two IPOs have
not been fully subscribed in 2012-13 so far.
|
V.20 The IPO market remained subdued due
to weak investment demand arising from the
slowdown in overall economic growth,
persistent inflation and high fiscal and current
account deficits. The IPO activity mirrored the
trends in the secondary market, in line with
cautious investor sentiments in the recent past.
Second, many of the IPOs listed during 2011-12
are currently trading below their issue price. As
on October 25, 2012, of the 34 IPOs listed in
the equity market in 2011-12, 20 were trading
below their issue price. Negative returns on IPO
investments have adversely affected investor
sentiments. Third, global IPO activities have
also been subdued since 2011. During Q2 of
2012-13, the resources raised through global
IPO markets were 48 per cent lower than in the
previous quarter, even though the secondary
equity market posted huge gains during this
period.
Policy changes contemplated to support
the capital market
V.21 Apart from the policy reform measures
mentioned earlier, the Kelkar Committee on
‘Roadmap for Fiscal Consolidation’ has made
suggestions to revive the disinvestment
programme. The Deepak Parekh Committee has suggested setting up infrastructure debt funds
to boost infrastructure financing.
|
Table V.4: House Price and Transactions Volume Indices (Base Q4:2008-09 = 100) |
Quarter |
Mumbai |
Delhi |
Bengaluru |
Ahmedabad |
Lucknow |
Kolkata |
Chennai* |
Jaipur |
Kanpur |
All India |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
House Price Index |
Q1:2011-12 |
191.6 |
152.8 |
116.9 |
152.3 |
149.3 |
157.0 |
106.3 |
161.1 |
135.4 |
152.0 |
Q2:2011-12 |
206.1 |
153.0 |
116.0 |
162.8 |
159.2 |
159.0 |
113.9 |
165.1 |
138.3 |
157.8 |
Q3:2011-12 |
191.7 |
168.6 |
146.1 |
171.8 |
172.3 |
155.0 |
120.3 |
163.5 |
140.0 |
164.1 |
Q4:2011-12 |
224.7 |
195.3 |
140.6 |
177.2 |
169.7 |
158.4 |
117.0 |
164.4 |
148.7 |
176.9 |
Q1:2012-13 |
231.8 |
217.3 |
140.2 |
176.6 |
179.4 |
204.2 |
133.9 |
171.9 |
144.9 |
188.6 |
Growth in per cent |
|
|
|
|
|
|
|
|
|
|
Y-o-Y |
21.0 |
42.2 |
19.9 |
15.9 |
20.2 |
30.1 |
25.9 |
6.7 |
7.1 |
24.1 |
Q-o-Q |
3.1 |
11.3 |
-0.3 |
-0.3 |
5.7 |
28.9 |
14.5 |
4.6 |
-2.5 |
6.7 |
House Transactions Volume Index |
Q1:2011-12 |
89.5 |
149.4 |
100.8 |
134.3 |
93.9 |
107.9 |
80.3 |
243.1 |
208.4 |
123.2 |
Q2:2011-12 |
79.0 |
165.5 |
123.5 |
154.1 |
106.7 |
139.2 |
85.5 |
239.1 |
131.1 |
129.1 |
Q3:2011-12 |
75.9 |
195.9 |
84.6 |
131.2 |
165.1 |
108.9 |
130.9 |
222.0 |
120.6 |
128.9 |
Q4:2011-12 |
108.6 |
149.8 |
70.8 |
122.2 |
153.0 |
128.5 |
99.0 |
247.5 |
172.1 |
126.5 |
Q1:2012-13 |
153.2 |
133.6 |
81.6 |
140.1 |
151.9 |
98.2 |
80.9 |
296.7 |
154.9 |
134.6 |
Growth in per cent |
|
|
|
|
|
|
|
|
|
|
Y-o-Y |
71.2 |
-10.6 |
-19.0 |
4.3 |
61.8 |
-9.0 |
0.7 |
22.0 |
-25.7 |
9.3 |
Q-o-Q |
41.1 |
-10.8 |
15.3 |
14.6 |
-0.7 |
-23.6 |
-18.3 |
19.9 |
-10.0 |
6.4 |
Note: * Chennai index is based on both residential and commercial properties.
All India index is a weighted average of city indices, weights based on population proportion. |
V.22 The SEBI has also taken various measures
to revive mutual fund investments and IPO
activity. MF companies will now have to shift
to the ‘one plan per scheme’ model. Also, a
proposal has been made for a mandatory ‘safety
net’ to protect the interests of small investors.
Further, substantial QE programmes of AEs
along with low interest rates will boost global
liquidity and revive FII inflows to the IPO
market. FII inflows and reform measures that
are fuelling the uptrend in the secondary market,
may also have a positive impact on the IPO
market.
Housing prices remain firm with rising
volumes
V.23 The Reserve Bank’s quarterly House
Price Index, based on data for 9 cities, indicates
a q-o-q increase of 6.7 per cent at the all-India
level. The annual increase in house prices show
a marginal moderation in Q1, while the transaction volume grew by 9.3 per cent
(Table V.4).
Investor confidence picks up, but further
macro-financial improvement is necessary
V.24 With the continued slowdown in global
growth, global investor sentiments remain
muted, despite the recent bout of activity aided
by policy measures, both global and domestic.
Pending long-term solutions for the euro area
crisis, global uncertainties continue to dominate.
Nevertheless, the excess global liquidity in the
wake of monetary easing measures by AEs, is
expected to flow into emerging and developing
economies (EDEs) in search of higher returns.
V.25 By pushing through a series of much
awaited reform measures, the government has
signalled a break in policy stasis. With the
promise of more measures to follow, investor
scepticism seems to have abated. However,
further improvement in macro-financial
conditions would be necessary.
|