Annual Report

5.1 The recovery of South-East Asian economies and the onset of cautious optimism in international financial markets had a somewhat favourable impact on domestic financial market conditions. Financial markets in India remained orderly during 1999-2000. In general, rates tended to move down during the year, particularly at the long end of the market spectrum.

5.2 The movements in inter-bank call money rates during the first half of 1999-2000 were influenced by short-term developments in the foreign exchange market, the marked appetite for government securities and increased credit to the commercial sector. With the large capital inflows in the second half of the year, the pressures on call money market eased and the market, in general, recorded heightened activity.

5.3 The inter-bank call rates ruled steady within a narrow range during 1999-2000 except for bouts of volatility during mid-August 1999, mid-October 1999, mid-February 2000 and end-March 2000, which were primarily attributable to the unanticipated demand for reserves by commercial banks (Chart V.1). The daily peak call rates averaged 9.51 per cent, whereas the daily low rates averaged 8.39 per cent. The average daily call rates were higher at 9.09 per cent than 8.13 per cent in the previous year (Table 5.1).

5.4 The average call rates moved within the range of 8.27-8.94 per cent during April to June 1999. The rates, thereafter, edged up progressively and peaked at 11.26 per cent in October 1999, 326 basis points above the Bank Rate (Table 5.2). Following the measures announced in the mid-term review of monetary and credit policy in October 1999, the liquidity conditions eased markedly with call rates showing a sharp decline of 306 basis points to 8.20 per cent during November 1999 and further to 7.89 per cent during December 1999 - dipping below the Bank Rate for the first time during 1999-2000. The Reserve Bank relaxed the norm for CRR calculation and announced a special liquidity enhancing facility for the period December 1, 1999 to January 31, 2000 to enable the market to tide over the unlikely occurrence of the year 2000 related problems.

5.5 After ruling low at 8.03 per cent in January 2000, call rates again shot up during mid-February 2000, primarily due to large positions taken by a few banks while participating in the Reserve Bank's open market sales. The liquidity situation eased from February 21, 2000 after some participants liquidated their positions in the market, following the open market purchases of Treasury Bills and dated securities by the Reserve Bank. Despite the pick-up in credit due to the usual seasonal factors and quarterly advance tax payments, call rates softened to 9.68 per cent in March from 10.63 per cent in February 2000.

5.6 In response to the package of monetary policy measures announced by the Reserve Bank on April 1, 2000, comprising cuts in the CRR, the fixed repo rate and the Bank Rate by one percentage point each, which inter alia, injected liquidity to the tune of Rs.7,200 crore, call rates declined sharply to settle around the Bank Rate of 7 per cent. Easy liquidity conditions prevailed till the middle of May 2000 and the call rates moved broadly in a range between the repo rate and the Bank Rate. Issue of Government securities and fluctuations in the currency market brought some hardening in call rates during the second half of the month and the call rates averaged at 7.64 per cent in May 2000. In June 2000, the call money market generally remained tight except in the first week when liquidity conditions eased following the Reserve Bank accepting devolvement of Government securities (on May 30, 2000) to the tune of Rs.4,886 crore. Increased spot sales of foreign currency and the edging up of the inflation rate also contributed to firming up of call rates in June 2000 to an average of 11.51 per cent.

5.7 The volatility in inter-bank call rates, measured by the co-efficient of variation increased moderately in 1999-2000 after declining sharply in the preceding year. This essentially reflected four brief episodes of market pressure, with volatility keeping below 1998-99 levels over the rest of the year (ChartV.1).

5.8 During the first instance between July 31-August 6, 1999, banks aggressively subscribed to the Reserve Bank's OMO, reflecting the market expectation of an interest rate / CRR cut. As banks generally postponed the coverage of CRR requirements for the fortnight July 31 - August 13 to the second week (August 7-13), and failed to anticipate developments such as the auction of government dated securities (Rs.3,000 crore) on August 5 as also the Reserve Bank's OMO / operations in the forex market, the demand for reserves exceeded the supply across all bank groups. Call rates moved up to 25.0 per cent on August 12, 1999 and touched the peak of 35.0 per cent on August 13 (reporting Friday). The spurt in call rates during this period was more on account of miscalculations in reserve requirements and liquidity management.

5.9 The second instance of volatility was noticed during October 14-16, 1999 when the call rate peaked at 23.0 per cent on October 16, 1999. This was again because of the miscalculation of CRR requirements by some banks and a low level of lending by major lenders in the call market. Consequently, the Reserve Bank resorted to open market purchases for the first time after 1997-98, and restored normalcy to the money market. To improve cash management by banks and thereby to check sporadic volatility in money market rates, a 2-week lag in the maintenance of stipulated CRR by banks was introduced, effective November 6, 1999.

5.10 The third instance of volatility occurred in February 2000. Call rates spurted during mid-February 2000, with the weighted average call rate reaching the February peak of 20.35 per cent on February 16, 2000. The main factor behind the call rate rise was the use of short-term funds to buy Government securities. With a view to cooling the markets the Reserve Bank conducted successive OMO sales on February 15 and 16 and this led to correction in security prices. Subsequently, the Reserve Bank's OMO purchase on February 17 and 18, 2000 in 364-day Treasury Bills and dated securities eased the pressure on call money rates.

5.11 The fourth instance of volatility during 1999-2000 was towards the end of the financial year, and was associated with the seasonal spurt in credit off-take and advance tax payments, the latter exceeding Rs.10,000 crore. The call rates shot up to 16.52 per cent at end-March 2000, with the turnover in the call money market declining sharply from Rs.35,287 crore on March 30, 2000 to Rs.22,110 crore on the following day. Banks and FIs abstained from lending in the money market on the balance sheet date (March 31, 2000) in order to avoid 100 per cent risk weight on call lendings for capital adequacy purposes. The banks instead parked their surplus resources with the Reserve Bank.

5.12 During the first quarter of 2000-01, the call rates reached an intra- quarter high of 28.0 per cent on June 16, 2000. Non-acceptance of any reverse repo bids by the Reserve Bank resulted in a spike in call rates. Subsequently, the Reserve Bank injected liquidity in the call market through series of reverse repo auctions along with acceptance of devolvements in Treasury Bills to bring the rates to around 7 per cent by the end of June 2000.

5.13 Following the introduction of an Interim Liquidity Adjustment Facility (ILAF) in April 1999, call rates tended to move generally above the Bank Rate on most occasions since the accommodation available from the Reserve Bank was at the Bank Rate. Besides, as the Tier II refinance to banks from the Reserve Bank was available at two hundred basis points above the Bank Rate, an informal corridor seemed to have emerged between the Bank Rate and Tier II refinance rate.

5.14 Call rates, however, ruled within 6-8 per cent during December 1999 and January 2000 and breached briefly the ceiling of the informal corridor in October 1999 and February 2000. Fixed rate repos thus received lukewarm response during 1999-2000 with the average daily outstanding repos declining sharply to Rs.216 crore from Rs.3,713 crore during the previous year. Mirroring the liquidity conditions, repos did not receive any response during six months of the year and exceeded Rs.100 crore in April 1999, December 1999 and January 2000. The liquidity enhancing measures through CRR cuts, refinance to banks and PDs and reverse repo operations with PDs, along with open market purchases at times of spurt in call rates during the year, brought about stability in the market. While CRR cuts injected primary liquidity to the tune of about Rs.11,300 crore, the fortnightly average utilisation of CLF/ACLF and export credit refinance by banks ranged between Rs.3,180 crore and Rs.10,122 crore during April 1999 to May 2000. The drawals from the ACLF were moderate to heavy during August to October 1999 when the call rates ruled high. The weekly average outstanding credit availed by PDs from the Reserve Bank amounted to Rs.3,523 crore during 1999-2000. On the other hand, it was of the order of Rs.687 crore in the preceding year (Chart V.2).

5.15 Under tight liquidity conditions, banks could draw upon their CLF and could resort to additional borrowings through ACLF, in case call rates move above the rate at which such facility is available.

5.16 The Reserve Bank, in its April 2000 monetary and credit policy statement, announced the introduction of the Liquidity Adjustment Facility (LAF) effective June 5, 2000. The ACLF to banks and Level II support to PDs were, as a result, replaced by variable reverse repo auctions. Unlike in the ILAF, where rate of interest and amount were fixed, in the LAF both are varied to respond to day-to-day liquidity conditions in the system. The LAF, thus, would not be for purposes of funding financing requirements of eligible institutions. The LAF would impart a greater degree of stability to the short-term money market rates and facilitate the emergence of a short-term rupee yield curve. The refinance rate, i.e., the Bank Rate at which export credit refinance and liquidity support to primary dealers are available, would also help explain the movements in call rates.

5.17 Following the introduction of Liquidity Adjustment Facility (LAF), the call money market firmed up, reflecting liquidity conditions in the money and the foreign exchange markets. The Reserve Bank injected liquidity through a series of reverse repo auctions in June with rates ranging from 9 to 14 per cent. For the first three weeks of the month, reverse repo cut-off rates were kept high in order to dampen speculative arbitrage stemming from the foreign exchange market. The call rates reached an intra-quarter high of 28.0 per cent on June 16, 2000. During the month, the call money rate remained above the reverse repo rate, reflecting unfulfilled market expectations of a lower cut-off to enable the transition from ILAF to LAF. In the second half of the month the call rates moved below the reverse repo cut-off rate (Chart V.3).

5.18 The average daily turnover in the call money market at Rs.33,882 crore during 1999-2000 was higher than that of Rs.25,956 crore in the previous year reflecting an acceleration in bank credit to the commercial sector and an increase in bank's investment portfolios.

5.19 During 1999-2000, three mutual funds, viz., Dundee Mutual Fund, ING Savings Trust and Cholamandalam Cazenove Mutual Fund were permitted to participate as lenders in the call/notice money market. Besides, 9 primary dealers were permitted to both borrow and lend in call / notice money market.

5.20 The foreign exchange market generally exhibited stability during 1999-2000 enabled by a turnaround in export growth, an increase in portfolio investment inflows and the continuing restrictions on rebooking of cancelled forward contracts for imports and splitting of forward and spot legs of a committment. The average monthly turnover in the inter-bank foreign exchange market declined from US $ 88 billion during 1998-99 to US $ 75 billion during 1999-2000 (Chart V.4). The average monthly total turnover (inter-bank plus merchant) fell from US $ 109 billion in 1998-99 to US $ 95 billion in 1999-2000 although the average monthly merchant turnover at US $ 20 billion was broadly the same as in the previous year. Spot transactions formed the largest chunk (around 55 per cent) of the merchant turnover while the forward segment dominated the inter-bank market accounting for 40 per cent of total inter-bank turnover.

5.21 The average 3-month forward premia ruled sharply lower at around 4.5 per cent than 7.2 per cent during 1998-99. With the spot segment characterised predominantly by excess supply conditions, the forward premia exhibited a decline particularly during the second half of 1999-2000. While call rates oscillated around the mean of 8.7 per cent during June 1998 to March 2000, the forward premia exhibited a downward drift from 10.2 per cent in June 1998 to 7.0 per cent in March 1999 and further to 3.8 per cent in March 2000.

5.22 During the first quarter of 1999-2000, with call rates ruling above the Bank rate, borrowings from the Reserve Bank were substantial. Market participants appeared to have arbitraged between borrowing from the money market and the Reserve Bank to fund their purchases of dated securities through auctions and the open market window. The secondary market yield curve flattened, with declining medium and longer-term rates signalling subdued expectations. The Reserve Bank injected liquidity through a cut in CRR by 0.5 percentage point (Rs.3,250 crore), reverse repos and foreign currency purchases. The pressure on the market eased also because of private placement of dated securities (Rs.21,000 crore) with the Reserve Bank (Table 5.3). The forward premia declined during this period reflecting the easing of domestic interest rates.

5.23 The excess demand conditions which characterised the foreign exchange market in June 1999 continued through the second quarter on account of persisting uncertainty in the market. The monthly average exchange rate depreciated to Rs.43.53 in September 1999. To assuage market pressure, the Reserve Bank resorted to net sales amounting to US $ 1,131 million during the quarter. Additionally, the Reserve Bank drained liquidity to the tune of Rs.3,536 crore, as private placement of dated securities (Rs.2,500 crore) with the Reserve Bank was lower than net open market sales (Rs.6,036 crore). The hardening of liquidity conditions was reflected in the rise in call rates and the forward premia to 9.90 per cent and 5.22 per cent, respectively, in September 1999 from 8.27 and 4.99 per cent in June 1999. The turnover in the inter-bank call and forex markets also declined substantially in September while fixed rate repos received no response. The turnover in government dated securities market which exhibited an uptrend up to August 1999, declined substantially during September 1999. The isolated uptrend in the stock market since May continued in the second quarter, facilitated mainly by large FII inflows.

5.24 The forex market returned to stability during the third quarter. As excess supply conditions characterised the foreign exchange market from November 1999, the Reserve Bank activated purchase operations, injecting liquidity to the domestic money market. The forward premia declined substantially to 3.88 per cent in December 1999 from 5.22 per cent in September 1999. Boosted by FII inflows and the improvement in outlook on India by international credit rating agencies, the BSE-Sensex exhibited a rise. The call rates declined substantially during November and December following the reduction in CRR. The comfortable liquidity situation also enabled a spurt in the turnover in the inter-bank call market; the turnover in the Government dated securities market too recovered to the pre-September level.

5.25 Excess supply conditions in the foreign exchange market continued through the fourth quarter boosted, inter alia, by FIIs inflows, which also pushed up the BSE Sensex during January-February 2000 to its peak level. The average daily turnover in the inter-bank foreign exchange market increased to a high of US $ 4,460 million in February 2000 while the forward premia reached the low of 3.04 per cent in February 2000 (Table 5.3). The secondary Government dated securities market, on the other hand, was characterised by excess demand conditions during the fourth quarter. Consequently, inter-bank call rates, borrowings from the Reserve Bank and turnover in Central Government dated securities exhibited a marked rise during February. The Reserve Bank resorted to aggressive sales of dated securities and followed it up subsequently with Treasury Bill purchases to mitigate the pressure on call rates. Call rates declined in March, despite the seasonal (quarterly) advance tax payments and (year-end) spurt in credit off-take.

5.26 During the first quarter of 2000-01, the capital market exhibited bearish sentiment and the BSE Sensex touched an 11-month low of 3831.86 on May 23, 2000 following slowdown of FII investment and decline in international stock markets. The excess demand conditions dominated both the spot and forward segments of foreign exchange market during May and June 2000. With the rupee depreciating from Rs.43.64 per US dollar during April 2000 to Rs.44.28 on May 25, 2000, the Reserve Bank undertook a number of measures including net sales of US $ 1,948 million during May-June 2000 to stabilise the foreign exchange market. The call rates hardened since the middle of May 2000, after ruling easy throughout April 2000. In order to mitigate liquidity mismatches, the Reserve Bank injected liquidity in the call money market through reverse repo auctions.

5.27 The volume of transactions in the term money market has picked up substantially in response to policy measures to develop the market segments. During the month of March 2000, the daily turnover of term money transactions ranged between Rs.951 - 1,489 crore as compared with that of Rs.23 - 967 crore in March 1999.

5.28 There has been some improvement in activity in the market for bill rediscounting during 1999-2000. The outstanding amount of commercial bills rediscounted by commercial banks with various FIs at Rs.758 crore at the end of December 1999 was higher than that of Rs.595 crore during the corresponding period of the previous year. After recording a decline in January 2000, the outstanding amount of bills rediscounted by banks with FIs increased to a level of Rs.735 crore at the end of February 2000 (Rs.515 crore as at end-February 1999). The outstanding amount of commercial bills rediscounted by the commercial banks with FIs subsequently registered a progressive decline and as at the end of May 2000 it amounted to Rs.235 crore as against Rs.629 crore as at end-May 1999.

5.29 The underlying easy liquidity conditions led to decline in mobilisation of resources through the issuance of certificates of deposit (CDs) during 1999-2000. The outstanding amount of CDs which stood at Rs.14,584 crore as on April 10, 1998 reached the historical low of Rs.872 crore as on May 5, 2000 (Appendix Table V.1). The typical discount rate on CDs with a maturity of 3 months declined from 10.0 per cent in March 1999 to 9.0 per cent in March 2000. Similarly, the typical discount rate on CDs with a maturity of one year also came down from 11.75 per cent to 10.00 per cent. The issuance of CDs in 1999-2000 was largely at the lower end of the permitted maturity period (of 3 months). Improved liquidity conditions also facilitated interest rate deregulation on term deposits (other than CDs), a move which helped banks to undertake short-term liability management at a lower cost. To bring it on par with other instruments such as CPs and term deposits, the minimum maturity of the CDs was reduced to 15 days in April 2000 from 3 months earlier.

5.30 The amount of primary issues of CPs increased substantially during 1999-2000, due to the relatively low discount rates during most part of the year and the turnaround in manufacturing activity. The outstanding amount of CPs which stood at Rs.4,770 crore as on March 31, 1999 increased to touch a record high of Rs.7,814 crore as on January 31, 2000 (Appendix Table V.2). Following some hardening of liquidity conditions, the outstanding amount of CPs declined to Rs.5,663 crore as on March 31, 2000. The cumulative amount of primary issues of CPs during 1999-2000 was Rs.31,126 crore as compared with Rs.24,721 crore in 1998-99. Accordingly, the fortnightly average outstanding amount of CPs during 1999-2000 was much higher at Rs.5,663 crore as compared with Rs.4,770 crore in the preceding year. Manufacturing companies continued to account for bulk of the CP issues.

5.31 Reflecting the liquidity conditions and the declining trend in interest rates in other segments of the money market, discount rates on CPs fell during the first half of the financial year 1999-2000. The weighted average discount rate on CPs declined from 10.58 per cent in the fortnight ended March 31, 1999 to 10.39 per cent in the fortnight ended September 15, 1999. However, following the firming up of call rates, the discount rate rose to 10.96 per cent during the fortnight ended October 31, 1999. Subsequently, with the easing of liquidity conditions, discount rates declined again to reach 10.0 per cent in the first fortnight of February 2000. Discount rates again started rising and were in the range of 10.62 - 10.68 per cent in March 2000. Most of the CP issues, however, were at rates lower than the PLRs of 12.0-13.5 per cent of public sector banks during 1999-2000 facilitating top rated corporate entities to raise funds at rates lower than the PLRs. The market rates for wholesale deposits by way of CDs generally moved in line with the market conditions.

5.32 The interest rate differential between the risk-free yields on Treasury Bills and average effective rate of discount on CPs provides an indicator of the risk premium on CDs. Chart V.5 shows that the differential between the 91-day Treasury Bill rate and the 3-month CP rate declined substantially from an average of 2.6 percentage points during 1998-99 to 1.3 percentage points during 1999-2000 (Box V.1).

5.33 The aggregate amount of resources raised by the financial institutions¹ by way of term money, CDs, term deposits and inter-corporate deposits (ICDs) increased from Rs.6,828 crore as on March 26, 1999 to Rs.7,789 crore as on March 24, 2000 and further to Rs.9,532.5 crore as on May 19, 2000. Instrument-wise patterns indicate that financial institutions preferred ICDs, followed by term deposits, CDs and term money. The outstanding amount of ICDs increased sharply from Rs.3,450 crore as on March 26, 1999 to Rs.5,031 crore as on March 24, 2000. During the first quarter of 2000-01 the outstanding amount of ICDs declined to Rs.4,423 crore (as on May 19, 2000). Similarly, the outstanding amount of term deposits increased from Rs.573 crore as on March 26, 1999 to Rs.677 crore as on March 24, 2000 but declined marginally to Rs.671 crore as on May 19, 2000. The outstanding amount of CDs declined gradually from Rs.1,863 crore as on March 26, 1999 to Rs.1,689 crore as on March 24, 2000. Subsequently, it increased to Rs.2,994 crore as on May 19, 2000. The outstanding amount of term money borrowings by financial institutions decreased from Rs.943 crore as on March 26, 1999 to Rs.392 crore as on March 24, 2000 before increasing to Rs.787 crore as on May 19, 2000.

5.34 Interest rates offered on term money borrowings by financial institutions declined from 12.0 per cent in March 1999 to 10.95 per cent in March 2000 and further to 10.75 per cent in June 2000. The interest rates on CDs issued by financial institutions declined from the range of 12.10 - 13.00 per cent in March 1999 to 9.50 - 9.65 per cent in March 2000 but increased to 10.30-10.50 per cent in June 2000. Interest rates on term deposits moved in the range of 9.00 - 12.00 per cent between March 1999 and March 2000 and in the range of 8.00-10.50 per cent during the first quarter of 2000-01.

5.35 The guidelines on FRAs/IRSs were issued on July 7, 1999. The outstanding notional principal of FRAs/IRSs contracts amounted to Rs.4,243 crore as on March 10, 2000 which rose to Rs.5,831 crore as on June 30, 2000. The tenor of deals generally ranged up to 1 year and majority of the contracts used Mumbai Inter-Bank Offer Rate (MIBOR) - as announced by NSE/Reuters - as the benchmark rate. Participants included commercial banks, PDs, FIs and corporates. The activity in this segment of the market has, however, been limited on account of lack of benchmark rates for longer maturities and large spreads in bid - offer rates. Further, the majority of the prospective participants are in the process of putting in place adequate internal control systems for undertaking FRAs/IRSs and asset-liability management systems which would facilitate identification of mismatches. Effective April 27, 2000, the use of interest rates implied in the foreign exchange forward market as a benchmark has been permitted in addition to the existing domestic money and debt market rates.

5.36 Aggregate public deposits of NBFCs, in terms of the survey data as reported by 1,547 NBFCs holding public deposits, stood at Rs. 20,428.93 crore as on March 31, 1999. Deposits with NBFCs as a proportion to those with commercial banks worked out to 2.9 per cent as at end-March 1999.

5.37 Prior to October 1999, indirect housing loans sanctioned by banks to intermediary housing agencies against the direct loan sanctioned / proposed to be sanctioned by the latter were reckoned as part of their housing finance allocation, provided the loan per borrower extended by such intermediary agencies did not exceed Rs.5 lakh and Rs.10 lakh in rural/semi-urban and urban / metropolitan areas, respectively. In order to enhance the flow of resources to the housing sector, effective October 29,1999, banks were advised that housing finance sanctioned by them to the housing finance intermediary agencies would be reckoned for the purpose of achievement of their housing finance allocations, irrespective of the per-borrower size of the loans extended by these agencies. There were a large number of successful new capital issues in the primary market although the private placement market continued to dominate in terms of resource mobilisation. Responding to the fiscal concessions announced in the Union Budget for 1999-2000, resource mobilisation by mutual funds, particularly by private sector funds, exhibited a turnaround. Activity in the secondary market remained bullish for most part of the year with the BSE Sensex crossing the 6000 mark for the first time in February 2000 and market capitalisation surging to a historical peak.

5.38 All segments of the capital market witnessed renewed activity during 1999-2000.

5.39 During 1999-2000, the primary market showed signs of improvement with a significant increase in the number of new capital issues (Table 5.4). While aggregate resource mobilisation through prospectus and right issues at Rs.7,704 crore was lower than Rs.9,365 crore mobilised during the previous year, this was mainly due to a lower order of primary issues by banks and financial institutions in the public sector. There was a substantial fall in the amount mobilised through 'mega issues' (Rs.100 crore or above) to Rs.5,994 crore through 16 issues during 1999-2000 from Rs.8,546 crore through 12 issues during 1998-99. For the second consecutive year, non-financial PSUs and Government companies remained absent from the public issues market.

5.40 During 1999-2000, resources mobilised by non-Government public limited companies (private sector) at Rs.5,153 crore through 79 issues registered an increase of 2.8 per cent as compared with Rs.5,013 crore mobilised through 48 issues during 1998-99. The average size of issue by these companies registered a sharp decline to Rs.65 crore from Rs.104 crore in 1998-99. Equity was the most favoured instrument in this category of issues accounting for 69 issues during 1999-2000 as against 33 issues in the previous year. In terms of resource mobilisation, equity issues accounted for Rs.2,753 crore (53.4 per cent) during 1999-2000 as compared with Rs.2,563 crore (51.1 per cent) in the previous year. The share of premium in the total amount mobilised by equity issues increased to 78.8 per cent from 51.7 per cent (Appendix Table V.3) reflecting mainly the successful initial public offerings (IPOs) of companies in the information technology (IT) sector. During 1999-2000, there were 32 equity issues by IT sector accounting for Rs.495 crore or 9.6 per cent of total resource mobilisation by the private sector as compared with Rs.39 crore (0.8 per cent) through 4 issues during 1998-99. Resource mobilisation by banks and financial institutions in the public sector, however, registered a decline of 41.4 per cent to Rs.2,551 crore from Rs.4,352 crore mobilised during 1998-99.

5.41 The growth of the private placement market further strengthened during 1999-2000 with PSUs relying entirely on this market. The State level undertakings as a group emerged as the largest mobiliser of funds through this route, ahead of all-India development financial institutions. During 1999-2000, resources mobilised by banks, financial institutions and public and private sector companies through private placements increased by 23.3 per cent to Rs.61,259 crore (as against an increase of 65.1 per cent during 1998-99), with the public and the private sectors accounting for 68.3 per cent (Rs.41,856 crore) and 31.7 per cent (Rs.19,404 crore), respectively. Financial intermediaries (both in the public and private sector) accounted for 47.1 per cent (Rs.28,857 crore) of the total resources mobilised through private placement, while non-financial corporate entities accounted for 52.9 per cent (Rs.32,402 crore). The public sector companies raised resources at interest rates varying between 8.5 per cent (for issues of one-year maturity) and 14.75 per cent (for issues of seven year maturity), while the interest rate for the private sector debt ruled between 9.5 per cent (for issues of nine-month maturity) and 15.25 per cent (for issues of five to seven years maturity).

5.42 Resource mobilisation by mutual funds witnessed a sharp turnaround during 1999-2000 after two consecutive years of subdued performance. As against Rs.3,611 crore mobilised during 1998-99, net resource mobilisation by all mutual funds increased more than six-fold to reach a peak of Rs.21,971 crore; the previous peak was Rs.13,021 crore during 1992-93. The spurt in resource mobilisation during 1999-2000 was led by private sector funds which witnessed an inflow of the order of Rs.17,171 crore as against Rs.2,519 crore during the previous year. The Unit Trust of India (UTI) mobilised a net amount of Rs.4,548 crore as against Rs.170 crore during 1998-99. Public sector mutual funds witnessed a net inflow of Rs.253 crore as against Rs.922 crore during the previous year (Table 5.5). Improvement in resource mobilisation by mutual funds was brought about by two significant developments: (i) tax benefits announced in the Union Budget for 1999-2000, particularly those relating to equity oriented schemes and (ii) bullish trends in the secondary market. Attractive returns on the units of mutual funds together with greater flexibility in meeting specific investment objectives have made the mutual funds industry an important institution in the process of financial intermediation in India.

5.43 The disinvestment programme of the Government was muted, with the actual proceeds from disinvestments falling far below the targeted amount. PSU equities remained depressed in the secondary market segment, even though the overall market sentiment improved during 1999-2000. As against a target of Rs.10,000 crore during 1999-2000, proceeds from disinvestments fell to Rs.1,647 crore (revised estimates). In the Union budget for 2000-01, the target for disinvestment has been kept unchanged at Rs.10,000 crore. The Disinvestment Commission submitted twelve reports and gave its recommendations for disinvestment for fifty-eight PSUs out of the seventy-one PSUs referred to it. The tenure of the Disinvestment Commission ended in November 1999 and the Government subsequently created a new Department of Disinvestment (Vinivesh Vibhag) 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.

5.44 During 1999-2000, 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-six issues aggregating Rs.3,487 crore were floated as against three issues aggregating Rs.1,148 crore during 1998-99.

5.45 During 1999-2000, stock markets witnessed generally buoyant conditions. The year began on a somewhat subdued note mainly due to domestic uncertainties. However, in the first week of May 1999 an uptrend set in and share prices ruled firm until September 1999, driven mainly by large FII inflows. Signs of industrial recovery, improved corporate sector performance and sound macro economic fundamentals also strengthened the market sentiment. After a brief spell of downtrend in September 1999, the stock markets started looking up again in the first week of October 1999 following the formation of a new Government at the Centre and upgrading of India's international credit ratings from 'stable' to 'positive' by the international credit-rating agencies. The BSE Sensex breached the 5000-mark on October 8, 1999.

5.46 The stock markets remained range bound till December 3, 1999 but showed a distinct rise thereafter to close the calendar year above the 5000-mark mainly due to fresh FII buying. The uptrend continued during January-February 2000 with the BSE Sensex crossing the 6000-mark for the first time during intra-day trading on February 11, 2000, enabled, inter alia, by the smooth changeover to the year 2000, increased buying by FIIs and passage of important economic reform bills like the Insurance Regulatory Authority (IRA) Bill, the Foreign Exchange Management Act (FEMA) and the Securities Laws (Amendment) Bill 1999. The rally in share prices was broad-based and was particularly driven by a sharp rise in the prices of infotech stocks. The CNX IT Index (Base: January 1, 1996=1,000) consisting of 20 major information technology scrips registered a phenomenal growth of 363.3 per cent during the year 1999-2000 on top of the sharp rise of 311.5 per cent in the preceding year, thereby driving up the P/E multiple of this sector. Although in the recent period (since April 1, 2000) there has been some decline in the P/E multiple of infotech stocks, it still continues to be high. The high P/E multiples in respect of technology stocks are attributed to their large earnings and/or high growth potential.

5.47 The steep decline in the prices of some major infotech scrips in the recent period (the CNX IT Index declined sharply by 47.0 per cent between end-March 2000 and end-July 2000) has raised questions regarding the sustainability of their P/E multiples at high levels in the future. The market remained generally subdued since March 2000 on account of several factors, such as, the slowdown of FII investment, volatility in the foreign exchange market, uncertainty about international oil prices and the bearishness in the international stock markets (especially the NASDAQ) following the hike in interest rate by the US Fed (Chart V.6). The BSE Sensex touched an 11-month low of 3831.86 on May 23, 2000 during intra-day trading. However, it recovered since then and closed at 4279.86 on July 31, 2000 (Tables 5.6 and 5.7).

5.48 The volatility in the BSE Sensex as measured by the co-efficient of variation increased to 13.2 per cent in 1999-2000 from 11.8 per cent in 1998-99. The dispersion (the range between closing high and closing low) at 2689 was significantly higher than that of 1517 recorded during 1998-99 (Appendix Table V.4).

5.49 The total turnover in BSE at Rs.6,85,028 crore during 1999-2000 registered a sharp increase of 119.6 per cent on top of an increase of 50.1 per cent in the previous year. As against a decline of 3.1 per cent during 1998-99, the market capitalisation of listed scrips at BSE, which is a measure of shareholders' wealth, increased sharply by 68.1 per cent to Rs.9,12,842 crore (Chart V.7). The average price-earning ratio increased to 19.8 during 1999-2000 from 12.9 in the previous year (Table 5.6). The average price-book value ratio based on the 30 scrips (comprising BSE Sensex) increased to 3.40 from 2.26 in 1998-99. The annualised yield based on these 30 scrips, however, declined to 1.23 per cent in 1999-2000 from 1.82 per cent in the previous year.

5.50 The total turnover in the capital market segment of NSE at Rs.8,39,051 crore registered a sharp increase of 102.4 per cent during 1999-2000 as against 12.0 per cent in the previous year. As at end-March 2000, the number of companies listed at NSE stood at 673 with market capitalisation of Rs.8,50,880 crore as against 645 listed companies with market capitalisation of Rs.3,35,209 crore as at end-March 1999 (Table 5.7).

5.51 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). The size of the SGF increased to around Rs.1,400 crore as on March 31, 2000 as compared with Rs.580 crore as on March 31, 1999. NSE and NSCCL commenced an Automated Lending and Borrowing Mechanism (ALBM) for borrowing and lending of securities in February 1999. NSCCL successfully completed 56 settlements for 11.30 lakh shares amounting to Rs.87.40 crore by end of March 2000.

5.52 The NSE was the first exchange to grant permission to brokers to commence internet based trading services and as on March 31, 2000, 4 members were granted permission to commence internet trading. The NSE incorporated a separate company i.e. NSE.IT Ltd. in October 1999 which would service the securities industry in addition to management of IT requirements of NSE. It developed a system of managing the primary issues through a screen based automated trading system.

5.53 Net investments by FIIs turned buoyant during 1999-2000 after remaining generally depressed during 1998-99. The increased FII activity during 1999-2000 resulted in a large net inflow of Rs.9,954 crore as against a net disinvestment of Rs.806 crore during 1998-99. The monthly net FII investment was positive during 1999-2000 (barring September-October 1999) and touched a high of Rs.2,835 crore during February 2000. During April-June 2000-01, net investment by FIIs was Rs.1,564 crore. Cumulative investments by FIIs which stood at Rs.39,226 crore as at end-March 2000 increased to Rs.40,790 crore as at end-June 2000 despite net sales in the month of June. The sharp increase in FII investments during 1999-2000 is reflective of FIIs' positive outlook on the Indian economy. The number of FIIs registered with SEBI stood at 526 as at end-June 2000.

5.54 During 1999-2000, banks' direct investment in the capital market instruments declined sharply. Accommodation provided by the 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.11,513 crore during 1999-2000 from Rs.14,378 crore during the previous year. Banks' investments in bonds/debentures and preference shares at Rs.11,071 crore, formed the major portion of investment in capital market instruments.

5.55 The dematerialisation process showed an impressive progress during 1999-2000. The SEBI initially added 96 scrips in two phases to the existing list of 104 scrips for compulsory demat trading by all categories of investors bringing the total number of such scrips to 200, which covered the entire 'A' group securities, as on January 17, 2000. This list was expanded further to 579 by June 26, 2000 and another 632 scrips are being added in two phases to bring the total of scrips in the compulsory demat trading list to 1210 by August 28, 2000. The SEBI also added 140 scrips in two phases to the existing list of 360 scrips for compulsory dematerialised trading by institutional investors bringing the total number of such scrips to 500 with effect from January 17, 2000. This list was expanded further to 978 with effect from June 26, 2000. Effective February 9, 2000, the securities of any company coming out with a public issue are required to be traded compulsorily in dematerialised form for all categories of investors.

5.56 The National Securities Depository Limited (NSDL) made further progress in expanding its coverage of dematerialised trading during 1999-2000. This is reflected in the substantial increase in the number of companies and depository participants (DPs) during the year. The market value of the dematerialised securities as at end-March 2000 increased sharply to Rs.4,63,385 crore from Rs.1,14,255 crore as at end-March 1999. Ten stock exchanges established connectivity with NSDL for offering trade in demat securities as at end-March 2000. The number of companies which signed up with NSDL to get their securities admitted for dematerialisation reached 918 by end-March 2000 as compared with 375, a year ago. The market capitalisation of these companies at Rs.7,65,875 crore as at end-March 2000 constituted 84 per cent of the total market capitalisation. So far, 821 companies have made available their shares for dematerialisation as compared with 365 in the previous year. The number of DPs operational as at end-March 2000 stood at 124 as against 84 as at end-March 1999, which included all custodians providing services to local and foreign institutions. At present these DPs cater to investors from about 1,425 locations across the country. The number of beneficial owners - institutional and retail -who had opened accounts with DPs, increased sharply to 24,14,306 as on March 31, 2000 from 4,35,960 a year ago.

5.57 Central Depository Services (India) Limited (CDSL) is the second depository to be set up in the country by BSE and co-sponsored by State Bank of India, Bank of India, Bank of Baroda and HDFC Bank. It commenced operations on March 22, 1999. As at end-March 2000, the market value of dematerialised securities amounted to Rs.8,188 crore. Five stock exchanges established connectivity with CDSL for offering trade in demat securities as at end-March 2000 and 765 companies signed up with CDSL to get their securities admitted for dematerialisation. The market capitalisation of these companies stood at around Rs.7,00,000 crore. As at end-March 2000, 680 companies made available their shares for dematerialisation. The number of DPs operational as at end-March 2000 stood at 61. The number of beneficial owners having accounts with DPs of CDSL stood at 28,545 as at end-March 2000.

5.58 During the year 1999-2000, the number of securities listed on wholesale debt market (WDM) segment increased to 843 from 679 in 1998-99, while the number of active securities listed and available for trading in the segment increased to 1412 from 1147 during the same period. The volume of trading nearly trebled to Rs.3,04,216 crore in 1999-2000 from Rs.1,05,469 crore in 1998-99, with the highest volume recorded in February 2000 at Rs.43,186 crore, mainly reflecting the keen interest by market participants in the Government securities market. The average daily traded value increased sharply to Rs.1,035 crore in 1999-2000 from Rs.365 crore in 1998-99. The trend in the trading pattern during 1999-2000 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. The declining trend in the traded volume of corporate debentures continued in 1999-2000, with amounts traded falling to Rs.498 crore from Rs.971 crore in 1998-99. Banks, brokers and PDs accounted for 95 per cent of the total volume. Indian banks accounted for 42 per cent of the trade in 1999-2000.

5.59 During 1999-2000, financial assistance sanctioned and disbursed by all-India financial institutions (AIFIs) at Rs.1,03,567 crore and Rs.67,066 crore, respectively, registered increases of 26.3 per cent and 19.1 per cent, as compared with 8.6 per cent and 8.5 per cent during 1998-99. The substantially higher growth in both sanctions and disbursements during 1999-2000 was an indicator of improved investment activity. Financial assistance sanctioned by all-India development banks (AIDBs), which accounted for the bulk of the sanctions (84.6 per cent of total sanctions of AIFIs) grew by 22.2 per cent, while their disbursements grew by 16.5 per cent. During 1999-2000, specialised financial institutions increased their disbursements by 61.6 per cent. Many of them are entering into venture capital activity (Box V.2). Investment institutions also recorded a growth of 31.1 per cent in their disbursements (Appendix Table V.5).

5.60 The gross market borrowing of the Central Government amounted to Rs.99,630 crore during 1999-2000. Private placement of government debt with the Reserve Bank combined with open market operations was continued as a strategy for debt and liquidity management. The strategy helped in containing the volatility in interest rates and enabled the Government to raise the required resources. The medium and long-term yields eased steadily during the year from 12.05 per cent in March 1999 (for 10 year bond) to 10.85 per cent in March 2000. The weighted average yield at cut-off price also declined from 11.86 per cent in 1998-99 to 11.77 per cent in 1999-2000.

5.61 The Reserve Bank's initial subscriptions to market borrowing amounted to Rs.29,267 crore, with private placement in dated securities and devolvement of 364-day Treasury Bills placed at Rs.27,000 crore and Rs.2,267 crore, respectively. The Reserve Bank's net open market sales of Government dated securities amounted to Rs.35,369 crore, which was somewhat offset by net purchase operations of Rs.4,508 crore in 364-day Treasury Bills. The total amount of dated securities absorbed by the market, including net OMO sales by the Reserve Bank, amounted to Rs.94,999 crore during 1999-2000. Reflecting the increasing depth, the aggregate volume of transactions, outright as well as repos, in Government securities amounted to Rs.5,35,777 crore in 1999-2000 compared with Rs.2,27,228 crore in 1998-99.

5.62 Dated securities aggregating Rs.86,630 crore were issued during fiscal 1999-2000 as against Rs.83,753 crore in 1998-99 (Appendix Table No. V.6). The Central Government entered the market on 21 occasions (including private placements with the Reserve Bank on 8 occasions) in 1999-2000 as against 24 occasions (with private placements on 8 occasions) in the previous year (Appendix Table V.7). The shift from an yield-based to the price-based auction resulted in finer bidding. Out of the 30 loans floated by the Government, only four were fresh issues whereas others were reissues. The Reserve Bank's subscription to total primary issues (including private placement) amounted to Rs.27,000 crore (31 per cent) as against Rs.38,205 crore (46 per cent) during 1998-99. During 1999-2000, there was no direct devolvement on the Reserve Bank in view of the overwhelming response to auctions, particularly during the second half, when bids received exceeded 200 per cent of the notified amount. About 65 per cent (Rs.56,630 crore) of the total primary issues was raised through securities of above 10-year maturity as against 14 per cent (Rs.11,324 crore) in 1998-99 resulting in the lengthening of the weighted average maturities of outstanding marketable debt to 7.75 years from 7.30 years in 1998-99.

5.63 During 1999-2000, the long-term rates declined notwithstanding a moderate firming up of the interest rates in short-term Government papers such as Treasury Bills. Banks generally exhausted their short-term resources to fund investment in long-term Government securities, which drove down the long-term interest rates. Given the underlying low inflationary expectations and stable call money market conditions and the improvements in liquidity due to consolidation of issues through reissuance, the market participants found the long-term paper to be attractive. As a consequence, the yield curve flattened considerably with the term spread between the 1-year and 10-year security falling from nearly 200 basis points in March 1999 to 92 basis points in March 2000.

5.64 The cut-off yield on the Central Government 7-year bond declined from 11.68 per cent in April 1999 to 11.35 per cent in October 1999 (7 years and 6 months). While the cut-off yield on 10-year bond declined from 12.25 per cent in December 1998 to 11.99 per cent in April 1999 and to 11.59 per cent in August 1999, that on 15-year fell steadily from 12.24 per cent in April 1999 (14 years and 4 months) to 12.14 per cent (14 years and 2 months) and 11.51 per cent (14 years and 10 months) in June 1999 and January 2000, respectively, and further to 10.77 per cent (14 years and 9 months) in February 2000. The yield on the longest maturity bond of 20 years declined from 12.60 per cent in January 1999 to 12.42 per cent in May 1999 (19 years and 5 months) and to 12.05 per cent in October 1999 (19 years and 1 month) (Appendix Table V.7).

5.65 The aggregate volume of transactions in Central Government dated securities and Treasury Bills (outright as well as repos) more than doubled to Rs.5,35,602 crore in 1999-2000, from Rs.2,25,674 crore in 1998-99 reflecting the substantial improvement in demand conditions in the Government securities market. As much as 85 per cent (Rs.4,52,861 crore) of the transactions were on outright basis with the balance by way of repos. Most of the secondary market transactions took place in Central Government securities (Appendix Table V.9). Transactions in State Government securities amounted to only Rs.3,632 crore. The turnover in Central Government securities during 1999-2000 amounted to Rs.12,36,678 crore as against Rs.5,30,742 crore in 1998-99 (counting twice the volume of transactions in the case of outright transactions and four times in the case of repos). The outright turnover aggregated Rs.9,05,722 crore as compared with Rs.3,71,954 crore in 1998-99. Thus, the average monthly turnover in Central Government securities aggregated Rs.1,03,056 crore in 1999-2000 as compared with Rs.44,228 crore in 1998-99. The average monthly turnover of outright transactions amounted to Rs.75,477 crore during 1999-2000 as against Rs.30,996 crore in 1998-99. The average daily turnover increased to Rs.3,388 crore from Rs.1,454 crore in 1998-99. The turnover ratio in dated securities (defined as the ratio of total turnover to total outstanding securities) thus increased to 3.2 as on March 31, 2000 from 1.7 as on March 31, 1999. In order to deal with the sharply increasing volume of transactions in the securities market without systemic risks, the Reserve Bank has been operating a system akin to delivery versus payment (DvP) in Government securities (Box V.3).

5.66 The Reserve Bank used OMO as a part of liquidity management. Open market sales were activated to drain excess liquidity in conjunction with private placement / devolvement operations. The Reserve Bank also resorted to open market purchases of Treasury Bills of varying maturities from PDs to inject liquidity into the market with a view to fine-tuning temporary asset-liability mismatches and stabilising money market rates at the desired level.

5.67 Between early and mid-February 2000, the rally in the prices of Government securities sharply drove down the yields in the range of 47 basis points to 110 basis points across the yield curve. The turnover in the secondary market also shot up in February 2000 and was substantially higher than the monthly average during the previous months. In order to arrest the sharp rise in prices, the Reserve Bank undertook a series of open market sales of securities amounting to Rs.3,367 crore on February 15 and 16, 2000. As a consequence, call rates tightened. Since the intention was not to squeeze out liquidity, the Reserve Bank undertook OMO purchases of dated securities and Treasury Bills, which stabilised the long-term yields. Normalcy in the call market was restored by February 21, 2000. In March, however, yields rose as mutual funds and a few banks started booking profits towards the year-end. The yield on 10-year paper rose by 65 basis points from the low of 10.20 per cent reached around February 14 to 10.85 per cent by end-March 2000. The net sales of Government dated securities during 1999-2000 amounted to Rs.35,369 crore as against Rs.26,348 crore in 1998-99. Following easy liquidity conditions prevailing in the months of April and May 2000, the Reserve Bank undertook OMO sales operations of Government dated securities. With no OMO purchases, the sales of Government dated securities during the first quarter 2000-01 amounted to Rs.1,528 crore (Table 5.8).

5.68 An important aspect of open market operations since fiscal 1998-99 has been the inclusion of Treasury Bills of varying maturities. In order to provide a safety net or exit route for PDs so that they can actively make markets in Treasury Bills, the Reserve Bank commenced purchase of Treasury Bills through OMO with exclusive access to PDs from February 2000. During 1999-2000, there was net purchase of Treasury Bills amounting to Rs.4,509 crore as against the net sales of Rs.3,321 crore in 1998-99. Thus, net aggregate sales through OMO amounted to Rs. 30,861 crore as compared with Rs. 29,669 crore in 1998-99.

5.69 At the shortest end, the average cut-off yield on 14-day Treasury Bills rose to 8.23 per cent in 1999-2000 from 7.79 per cent in 1998-99, representing an increase of 44 basis points over the previous year. Similar trends were also observed in respect of the 91-day and 364-day Treasury Bill rates as the average cut-off yields rose by 47 basis points to 9.03 per cent and by 58 basis points to 10.09 per cent, respectively, in 1999-2000. However, the implicit cut-off yields of 14-day, 91-day and 364-day Treasury Bills up to end-June 2000, declined on an average basis to 7.54, 8.46 and 9.21 per cent, respectively.

5.70 Following the decision to discontinue 91-day tap Treasury Bills with effect from April 1, 1997, the Government introduced a scheme of 14-day Intermediate Treasury Bills to enable State Governments, foreign central banks and other specified bodies with whom the Reserve Bank has an arrangement to invest their temporary surplus funds. The total bills outstanding as at end- March 2000 was Rs.2,383 crore, of which the share of State Governments was 96.18 per cent.

5.71 The total issues of 14-day auction Treasury Bills during 1999-2000 amounted to Rs.16,453 crore, of which non-competitive bids aggregated Rs.11,253 crore, representing 68 per cent of the total issues (Appendix Table V.6). The notified amount was Rs.100 crore per auction. The subscriptions of the Reserve Bank aggregated Rs.1,134 crore. The outstanding at the year-end amounted to Rs.325 crore. During fiscal 2000-01, the total issues so far (up to August 7, 2000) aggregated Rs.3,200 crore with the Reserve Bank subscribing to nearly 13.65 per cent of the issues.

5.72 A gross amount of Rs.8,155 crore was raised during fiscal 1999-2000 in respect of 91-day Treasury Bills as against Rs.16,697 crore in the previous year. Out of the total gross amount, non-competitive bids aggregated to Rs.2,955 crore accounting for about 36 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.1,520 crore. At times of temporary tight money market conditions, the Reserve Bank, by accepting devolvement in primary auctions ensured that the cut-off yields did not become too volatile. On an average, the cut-off yields on 91-day Treasury Bills were lower than the average call rates by 6 basis points during 1999-2000. During the first quarter of 2000, the implicit cut-off yield of 91-day Treasury Bills on an average basis declined to 8.46 per cent reflecting the policy stance. The Reserve Bank's subscription to these bills accounted for 18.7 per cent (Rs.1,523 crore) of the total issues during 1999-2000 as against 18.1 per cent (Rs.3,014 crore) during the previous year. Reflecting devolvement and net open market purchases, the year-end Reserve Bank's holdings amounted to Rs.288 crore or 19 per cent of the total outstanding bills (Rs.1,520 crore). As against this, in 1998-99, the year-end holdings at Rs.224 crore accounted for about 15 per cent of the outstanding bills (Rs.1,500 crore). During 2000-01 (up to end-June 2000), the total issues of 91-day Treasury Bills amounted to Rs.1,680 crore.

5.73 Between May 1999 (since its reintroduction) and August 1999, the cut-off yield on 182-day Treasury Bills varied within the range of 9.31-9.97 per cent. With the relative hardening of cut-off yields, the Reserve Bank accepted devolvement of 182-day Treasury Bills during September and October 1999 which stabilised the rate at around 9.89 per cent. The cut-off yield declined to lower levels since November 1999. In the last auction of February 2000, the Reserve Bank absorbed a large part of the notified amount under its portfolio in the wake of some tightening of money market conditions. Between end-May 1999 and end-March 2000, the cut-off yield on 182-day Treasury Bills declined by 24 basis points. In the first auction in 2000-01 which was held on April 11, 2000, the cut-off yield was lower at 8.53 per cent than the yield of 9.47 per cent in the previous auction on March 29, 2000. The implicit cut-off yield subsequently increased to 9.23 per cent by end-June 2000.

5.74 With a notified amount of Rs.500 crore per auction during fiscal 1999-2000, gross mobilisation through issuance of 364- day Treasury Bills was Rs.13,000 crore as against Rs.10,200 crore in 1998-99. Accordingly, the net issues were positive at Rs.2,800 crore as compared with a negative net issue of Rs.6,047 crore in 1998-99. The subscription by the Reserve Bank was Rs.2,267 crore or 17.44 per cent of the value of the total issues.

5.75 The 364-day Treasury Bill market, more or less, reflected the trends seen in the dated securities market, particularly during the second half of 1999-2000. The cut-off yield which opened at 9.97 per cent in the first auction of April 1999 exceeded the 10 per cent mark in May 1999, with the hardening of money market conditions. The Reserve Bank's substantial devolvement during June to October 1999 (excluding August) stemmed the pressure on the 364-day Treasury Bill rates. The cut-off yield ruled around 10.33 per cent during these months. With the easing of money market conditions and with improvement in demand, the cut-off yield showed a gradual decline to 9.31 per cent in the first auction of February 2000, although it steadily rose to 9.93 per cent in the last auction of 1999-2000. Reacting to the liquidity enhancing measures of April 1, 2000, the cut-off yield declined sharply by 64 basis points to 9.29 per cent in the first auction of fiscal 2000-01 and further to 9.09 per cent in the auction of May 7, 2000. The cut-off yield, subsequently, increased to 9.24 per cent in auction of May 31, 2000 and remained constant at this level till the end-June 2000.

5.76 The number of PDs during fiscal 1999-2000 increased to 15 as on March 31, 2000. In the primary market, 15 PDs together had given a bidding commitment of Rs.22,110 crore in Treasury Bills and Rs.35,034 crore in Central Government dated securities during 1999-2000. However, the bids tendered were higher at Rs.42,317 crore and Rs.71,850 crore, respectively, for Treasury Bills and Government of India dated securities. Of these, the bids accepted were Rs.18,662 crore for Treasury Bills and Rs.32,164 crore for Government of India dated securities, respectively, indicating a success ratio of 43.85 per cent and 42.82 per cent, respectively. As against Rs.97,699 crore offered for underwriting, Rs.50,173 crore were accepted by the Reserve Bank. Total primary purchases including devolvements were Rs.18,786 crore (46 per cent of total) in case of Treasury Bills and Rs.35,011 crore (40 per cent of total) in Central Government dated securities. The devolvement on PDs in total issues amounted to Rs.2,971 crore, of which Rs.2,847 crore were in dated securities, Rs.57 crore in 91-day Treasury Bills and Rs.67 crore in 14-day Treasury Bills. PDs purchased securities in the primary market (excluding devolvement) to the extent of 37.1 per cent of the total issues in Central Government dated securities and 46 per cent of total issues of auction Treasury Bills. In the secondary market PDs achieved a turnover (outright plus repos) of Rs.3,34,471 crore in Treasury Bills and dated securities (representing 31.0 per cent of market turnover), out of which transactions on outright basis amounted to Rs.2,58,074 crore. The average daily net call money borrowings of the PDs aggregated Rs.4,541 crore. A total commission/underwriting fee of Rs.63.49 crore was paid to the PDs during fiscal 1999-2000, as against Rs.80.63 crore in the previous year.

5.77 The yield in the secondary market for 10-year paper which was 12.05 per cent as on March 31, 1999, declined through the year to 10.42 per cent at end-February 2000. The yield hardened somewhat in March 2000 and settled at 10.85 per cent on March 31, 2000 (Chart V.8). On a point-to-point basis, the yield for 10-year security declined by 120 basis points between end-March 1999 and end-March 2000. Similarly, at the longest end, the yield on 18-year security (residual maturity) declined to 10.72 per cent at end-February 2000 from 12.44 per cent at end-March 1999 before edging up to 11.12 per cent at end-March 2000. At the short to medium end, 1-year, 3-year and 5-year security rates declined from 10.07 per cent, 11.00 per cent and 11.17 per cent respectively at end-March 1999 to 9.93 per cent, 10.27 per cent and 10.35 per cent at end-March 2000.

5.78 The yield curve moved successively downwards during the year up to mid-February 2000 with the slope rising gently on the maturity axis. After moving up in March 2000, the yield curve once again moved down following the monetary policy changes announced effective April 1, 2000. The yield in the secondary market for 10-year paper declined from 10.85 per cent as at end-March 2000 to 10.27 per cent as on April 11, 2000. Similarly, the yield on 18-year maturity declined from 11.12 per cent as at end-March 2000 to 10.68 per cent as on April 11, 2000. At the short to medium-end 1-year and 5-year security rates declined from 9.93 per cent and 10.51 per cent as at end-March 2000 to 9.29 per cent and 9.90 per cent, respectively, as on April 11, 2000.

5.79 The growing inter-linkages among the various segments of the financial sector and their increasing depth and size have implications for the real economy in terms of enhancement of growth and productivity of the economy. In the past few years, a visible change in the role of the financial system has taken place in the Indian economy. The transformation of the financial sector in terms of coverage, product range and efficiency has been necessitated by the changing competitive environment in which the production system is organised and the growing openness of the economy. The success of financial sector reforms, therefore, needs to be evaluated against how the development of financial markets has contributed to an improvement in the investment and growth prospects of the economy (Box V.4).