MONEY MARKET REVIEWEconomic & Political Weekly january 26, 200823Piyusha Hukeri drafted the initial note and V P Prasanth compiled the accompanying tables and graphs.Towards Global Norms in Payment and Settlement SystemsEPW Research FoundationThe Indian financial system now encompasses a vast set of payment, settlement and clearance systems. Two recent legislative changes, the enactment and notification of the Government Securities Act 2006 and the passage of the Payment and Settlement Systems Bill 2006 promise to make major improvements in the processing of financial instruments. However, one proposal to shift the entire cheque clearance arrangement to a new corporation is facing hurdles.Significant changes have been made in the payment, settlement and clearance arrangements for finan-cial instruments, including in the form of legislative changes, all of which take standards to near global norms. 1 Payment and Settlement Systems The Indian financial system, and within it the system of security transactions as well as payment, settlement and clear-ance arrangements for financial instru-ments, are undergoing metamorphic changes. The institutional edifice already constructed and promoted by the Reserve Bank of India(RBI) will now be greatly strengthenedwith the passage of two legis-lativemeasures. They are the Government Securities Act 2006 and Payment and Settlement Systems Bill 2006. As per the recent notification, the first legislation along with the associated Government Securities Regulations 2007, has come into force with effect from December 1, 2007. The second has apparently just received the president’s assent, and its notification, as also the relevant regula-tions, is awaited.Unlike the Government Securities Act, which has a simple objective of amending all the laws relating to government securi-ties and consolidating them along with instituting enabling provisions for stripping (or truncating) existing securities and pledging or hypothecating so as to encour-age retail holdings, the extent of issues covered in the Payment and Settlement Systems Act are far wide-ranging and the institutional, organisational and infra-structural framework to be put in place for addressing them are, for a country of India’s size and structural complexity, truly mind-boggling. The Indian financial system even now encompasses vast sets of payment, settlement and clearance systems. Apart from manual clearing of cheques, MICR clearing and electronicfundstransfer systems,thereare clearing and settlement arrangements for government securities and transactions in money and forex markets. These are administered by a wide variety of institutional arrangements. These include the real time gross settlement system (RTGS) operated by theRBI which is expected to be mandated to cover all inter-bank transactions for settlement during 2007-08; clearing and settlement of government securities reported on negoti-ated dealing system (NDS) currently run by theRBI and the NDS – order matching (OM) using more transparent screen-based system run by the Clearing Corporation of India (CCIL). The other arrangements include inter-bank clearing for foreign exchange transactions organised by the CCIL; multilateral netting arrangements, both for instruments and funds, similarly organised by the CCIL; clearing houses for cheques managed byRBI and various public sector banks; and the automated teller machines (ATMs) and other card-based transactions by the individual banks that issue these cards. OnATMs, theRBI has even proposed the creation of inter-bank ATM networks so that the cards issued by one bank could be used at the ATM network of another bank for basic services like cash withdrawal and account balance enquiry. It speaks of the ingenuity of the Indian financial system to have taken advantage of the advances made in information techno-logy to introduce almost all aspects of the fresh provisions brought together and consolidated under the new Payment and Settlement Systems Act 2006 – akin to the world’s best standards. The new law seeks to empower RBI to regulate and oversee payments and settlement systems; it authorises theRBI to permit both gross and net settlement procedures. The innovative aspect of the proposed system is the concept of multilateral netting which the CCIL has already been operating now for over three years. Hitherto, these have been achieved by stretching the existing legal provisions and allowing them to be undertaken under contractual dispensation. With the enactment of the law, all these new 8.50 16000
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MONEY MARKET REVIEWEconomic & Political Weekly january 26, 200825Table 2: Money Market Operations (RBI’s Daily Data) Average December 2007 Average November 2007 Items for Four Weeks 28 20 14 7 (RF)* for Five Weeks 30 23 (RF)* 16 9 2No of working days 22 5 5 6 6 28 5 6 6 5 6CallMoney Weighted average of call rates: per cent (weekly range) per annum 4.52-7.95 7.25-7.95 7.35-7.61 7.45-7.90 4.52-7.64 5.67-7.97 7.17-7.80 6.02-7.78 6.47-7.97 5.67-6.36 5.56-6.10 (6.02) Daily averages (Rupees crore) 7,615 7,528 8,040 8,350 6,599 9,206 7,589 10,302 8,574 92,173 10,079 Total call market borrowings (208) (11,385) NoticeMoney Weighted average of notice money rates: per cent (weekly range) per annum 5.74-7.90 6.00-7.78 6.00-7.76 6.29-7.83 5.74-7.90 5.53-7.94 6.25-7.70 6.06-7.40 7.62-7.94 5.60-7.06 5.53-6.08 (6.0)(6.1) Daily averages (Rupees crore) 1,991 2,813 8,688 1,677 1,831 53,521 2,154 160 1,784 2,891 2,773 Total notice market borrowings (9,503) Turnover in term money market 299 256 415 268 268 66 55 45 3 70 154 (borrowings)$$ (250) (10) *Data for reporting Fridays are given within brackets and they are also included in the weekly range/daily averages. $$ No of reporting/traded days is fewer than given above. investment inflows in anticipation of aUS Fed rate cut, the expected rate cut was already factored in and it had a marginal impact on the market sentiments. In the corporate bonds market, the Securities and Exchange Board of India (SEBI) and the finance ministry are proposing to amend the Companies Act, 1956 so that private limited companies could issue corporate bonds through preferential allotment or qualified institutional place-ments, which is expected to widen and deepen the corporate bonds market. Further, in a significant development, RBIhasallowed banks to invest in unrated infrastructure bonds. 2.1 Call Money Market Though there was pressure on liquidity, the weighted averages of call rates ruled around the repo rate of 7.75 per cent except for a few days in the last week of the month when the rate overshot the said benchmark rate (Table 2). Also, the simple average of call rates was higher at 7.11 per cent in December as against 6.91 per cent in November. The standard deviation, a measure of volatility, for call rates, was higher in December than that in the previous month (Table 3). Due to the improved liquidity situation on account of increased government spending, the weighted averages of call rates eased from 7.60 per cent on Decem-ber 1 to 6.88 per cent on December 6 and dipped further to 4.52 per cent on Decem-ber 7, the first reporting Friday of the month, as banks had already covered their positions. The overnight rate jumped to 7.90 per cent on December 8 and then dipped to 7.48 per cent. Ahead of the dated securities auction and advance tax outflows, the rate again rose to 7.90 per cent on December 13. Thereafter until December 20, the overnight rate ruled in a range of 7.35 per cent to 7.61 per cent, as the liquidity situation improved due to redemption inflows which to some extentminimised the impact of outflows. Even on December 20, the rate ruled at 7.37 per cent. However, in the next holiday-shortened week, there was pressure on liquidity and thecall rate surged to 7.91 per cent on December 24 and further to 7.95 per cent on December 26. Following the massive liquidity injections by the RBI, the overnight rate eased to 6.85 per cent on December 29 but rose to 7.07 per cent on December 31 (Graph A, p 24). Among the three short-term money market segments, the volume in the calland the Collat-eralised Borrowing and Lending Obli-gation (CBLO) market increased while that in repo declined,asmarket participants preferred the earlier twoseg-ments (Table 4). 2.2 Forex MarketThe rupee appreciated against the dollar by 15 paise inDecemberdespite increased demand for dollars due to a record surge in international crude oil pricesamidst lower foreign currency inflows. Though there were expectations that theRBI would not allow the rupee to appreciate in view Table 4: Comparison of Call, Overnight CBLO and Repo RatesWeek Ending Weighted Average Rates (in %) Daily Average Volumes (Rs Crore) Call Overnight CBLO Repo Call Overnight CBLO Repo 2-Nov-07 6.076.036.1212,85228,42217,9118-Nov-07 6.335.946.3212,10827,61114,61116-Nov-07 7.797.647.7210,35823,3048,77023-Nov-07 7.236.496.8410,46229,54610,48730-Nov-07 7.627.56 7.599,74232,76614,7377-Dec-07 6.866.626.648,43033,50516,29414-Dec-07 7.777.477.4910,02733,21815,13620-Dec-07 6.545.706.499,77729,04112,13528-Dec-07 7.777.737.6210,34126,76511,183Source: The Clearing Corporation of India Ltd (CCIL).Table 3: Weighted Averages of Daily Call/Notice Rates in Per Cent Per Annum: Simple StatisticalCharacteristics Month/Week Simple Standard Coefficient of Simple Standard Coefficient of Mean*DeviationVariation Mean* Deviation Variation (in %)$ (in %)$ Call Money Notice Money **November2007 All five weeks 6.91 0.86 12.47 5.97 2.23 37.33 307.600.263.397.100.537.49 23(RF)*7.290.7510.286.950.517.28 167.600.567.435.053.9277.71 9$$6.070.254.124.872.7857.14 2 5.98 0.213.455.870.254.22 December2007 All four weeks 7.11 0.91 12.80 6.13 1.87 30.60 28 7.760.293.775.433.1057.18 20$$7.460.111.536.850.669.56 147.660.212.745.642.8250.00 7 (RF)* 6.951.2217.60 6.850.9614.01** Separate reportings began on March 15, 2005. * Including data for reporting Fridays (RF). $$ Thursday data. $ Based on original unrounded figures.Source: RBI. 
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MONEY MARKET REVIEWjanuary 26, 2008 Economic & Political Weekly28Appendix Table: Secondary Market Operations in Government Papers: NDS and NDS-OM Deals(Amount in rupees, crore) Descriptions Week Ending December 2007: Yield to Maturity on Actual Trading Total for the Month 28 21 14 7 of December 2007 AMT YTM CY AMT YTM CYAMT YTM CY AMT YTM CYAMT YTM CY1TreasuryBills A91-DayBills 438.047.34721.957.49 1074.157.48 703.447.48 2937.587.46 B182-DayBills 431.227.53305.477.46 328.787.50 125.357.54 1190.827.50 C364-DayBills 3441.687.66520.447.61 1388.007.58 2713.357.60 8063.477.62 2 GOI DatedSecurities A Regular(in % Year) 11.50 , 2008 ---20.007.79 11.33 -----20.007.79 11.3312.00 , 2008 525.007.7211.84 --------525.007.7211.845.48, 2009 2605.25 7.745.651015.00 7.77 5.663595.00 7.79 5.663460.00 7.76 5.6610675.25 7.775.666.65,2009 905.00 7.756.74115.00 7.76 6.74745.00 7.75 6.742205.00 7.76 6.743970.00 7.756.746.96, 2009OMC SB ------230.008.07 7.06--230.008.07 7.06 7.07 , 2009 OMC SB 15.00 8.30 7.17 -------- 15.00 8.30 7.17 7.33 , 2009 OIL MKT BONDS 100.00 8.28 7.41 -------- 100.00 8.28 7.417.33 , 2009OMC SB ------50.00 8.07 7.39 --50.00 8.07 7.3911.99 , 2009 195.00 7.82 11.43 0.257.6011.38 0.25 7.8111.41 --195.50 7.82 11.43 5.87,2010 2330.00 7.73 6.08 1560.00 7.78 6.08 1940.50 7.78 6.09 1865.00 7.77 6.09 7695.50 7.76 6.087.55, 2010 ------175.007.79 7.59871.53 7.807.591046.53 7.807.59 11.30 , 2010 20.00 7.75 10.45 362.08 7.80 10.45 752.71 7.84 10.46 1.01 7.79 10.44 1135.80 7.83 10.4611.50 , 2010 ------50.00 7.8010.62 --50.00 7.8010.6212.29 , 2010 ------50.00 7.79 11.31 --50.00 7.79 11.31 9.39,2011 410.00 7.80 8.96 480.00 7.83 8.97 20.00 7.78 8.95 - - 910.00 7.81 8.966.85,2012 - - -0.60 7.85 7.11 1.90 7.80 7.0950.007.817.1052.50 7.817.10 7.40,2012 - - - 17.52 7.81 7.51 55.00 7.82 7.52 - - 72.52 7.82 7.51 7.44 , 2012 OMC SB 10.00 8.25 7.66 ------25.00 7.71 7.52 35.00 7.87 7.56 7.47 , 2012 OIL MKT BONDS ------265.00 8.38 7.72 -- 265.00 8.38 7.727.27,2013 505.00 7.747.432249.50 7.80 7.451655.00 7.80 7.451780.00 7.81 7.456189.50 7.807.45 12.40 , 2013 40.00 7.93 10.33 ------1.20 8.12 10.40 41.20 7.93 10.33 7.37,2014 45.00 7.75 7.51 330.20 7.81 7.53 430.82 7.82 7.54 296.20 7.83 7.54 1102.22 7.81 7.5411.83 , 2014 ---------25.00 7.87 9.79 25.00 7.87 9.797.38,2015 456.207.787.55397.19 7.817.57175.00 7.83 7.58465.107.837.581493.49 7.817.577.59,2016 25.00 7.817.69155.00 7.88 7.7345.00 7.89 7.73115.007.88 7.73340.00 7.887.73 7.46,2017 5.00 7.88 7.68 3.20 8.00 7.74 0.66 7.98 7.73 1.75 8.09 7.78 10.61 7.96 7.727.49,2017 1777.04 7.857.671242.38 7.88 7.691072.20 7.89 7.691927.41 7.89 7.696019.03 7.887.69 7.99,2017 7677.76 7.84 7.91 7212.10 7.88 7.93 4633.32 7.89 7.94 8731.51 7.88 7.93 28254.68 7.87 7.938.07,2017 802.10 7.857.96496.56 7.897.98946.50 7.91 7.991048.327.917.993293.48 7.897.985.69, 2018 190.43 7.936.78 108.00 8.03 6.83 3.50 7.97 6.80 3.90 7.98 6.81305.83 7.97 6.79 6.25,2018 5.00 7.89 7.04 2.00 8.01 7.10 0.15 8.06 7.13 - - 7.15 7.93 7.06 5.64, 2019 ---4.30 8.04 6.82 0.50 8.10 6.86 3.00 8.25 6.94 7.80 8.12 6.87 6.05, 2019 ---0.10 8.00 7.08 12.00 7.96 7.05 -- 12.10 7.96 7.05 6.35 , 2020 0.20 8.00 7.27 ------0.40 8.12 7.34 0.60 8.08 7.31 11.60 , 2020 0.11 8.04 9.03 ------0.50 8.30 9.21 0.61 8.25 9.187.94, 2021 0.168.39 8.24 ------0.27 8.07 8.03 0.43 8.198.108.13, 2021 ------5.008.42 8.33 --5.008.42 8.33 8.13 , 2021 OMC SB 5.00 8.48 8.36 47.13 8.45 8.35 111.62 8.52 8.40 185.00 8.53 8.40 348.75 8.52 8.395.87 , 2022 ------25.00 6.246.09--25.00 6.246.098.08, 2022 ---------10.00 8.068.07 10.00 8.068.07 8.15 , 2022 FCI SB ------0.10 8.45 8.36 115.90 8.43 8.35 116.00 8.43 8.35 8.20,2022 1634.58 8.02 8.08 1660.63 8.05 8.10 1948.67 8.06 8.11 5623.00 8.08 8.12 10866.88 8.06 8.11 8.35,2022 1365.80 8.04 8.14 1315.00 8.06 8.15 852.44 8.07 8.16 5032.64 8.09 8.17 8565.88 8.08 8.168.01, 2023 ------2.138.488.35 --2.138.488.35 8.01 , 2023 OMC SB 39.08 8.48 8.35 62.77 8.50 8.36 222.96 8.58 8.42 0.60 8.60 8.44 325.41 8.55 8.40 8.30 , 2023 FERT SB 45.00 8.52 8.46 -------- 45.00 8.52 8.468.03 , 2024 ------20.70 8.508.38 --20.70 8.508.38 8.03 , 2024 FCI SB 1.73 8.46 8.35 30.81 8.46 8.35 25.00 8.49 8.37 96.12 8.52 8.40 153.66 8.50 8.388.20, 2024 ------2.308.478.40--2.308.478.40 8.20 , 2024 OMC SB 23.15 8.50 8.42 132.05 8.54 8.45 315.84 8.56 8.47 42.80 8.50 8.42 513.84 8.55 8.468.23, 2027 ------12.00 8.508.45 --12.00 8.508.45 8.23 , 2027 FCI SB 20.00 8.48 8.43 5.20 8.50 8.45 10.50 8.50 8.44 32.23 8.52 8.46 67.93 8.50 8.45 6.01,2028 8.50 8.18 7.64 7.00 8.28 7.72 6.10 8.32 7.75 2.72 8.36 7.78 24.32 8.26 7.71 7.95,2032 1281.50 8.20 8.16 953.50 8.21 8.17 1365.00 8.258.212030.528.298.245630.528.248.20 8.33,2036 2841.89 8.20 8.21 4384.79 8.22 8.23 4513.65 8.258.264832.258.288.2816572.588.248.25 Sub-total 25911.20 7.90 7.63 24373.58 7.96 7.79 26347.75 7.98 7.58 40883.96 7.98 7.66 117516.49 7.96 7.66BRBI’sOMO:Sales 65.00 -----1.00 - -46.00--112.00 -- Purchase 570.00 --885.00 --2230.00 --1575.00 --5260.00 --Sub-total 635.00 --885.00 --2231.00 --1621.00 --5372.00 --(A+B) 26546.20 7.907.6325258.58 7.967.7928578.75 7.98 7.5842504.967.987.66122888.49 7.967.663 MarketRepo 41921.64 64615.88 93240.90 94280.66294059.08 4 State Govt Securities 350.00 8.29 8.74 261.81 8.35 8.48 212.52 8.32 8.63 497.21 8.39 8.44 1321.54 8.34 8.56 Grand total (1 to 4) 73128.78 91684.13 124823.10 140824.97 430460.98 (-) Means no trading. YTM = Yield to maturity in percentage per annum. CY = Current yield in per cent per annum. SGL = (RBI’s) Subsidiary General Ledger. OMO = Open Market Operations. OMC SB= Oil Marketing Companies Special Bonds. NDS= Negotiated Dealing System. OM = Order Matching Segment. Securities with small-size transactions (Rs 2 crore or less) havebeen dropped from the above list but included in the respective totals. (1) Yields are weighted yields, weighted by the amounts of each transaction. (2) Current yield has not been worked out for treasury bills.. (3) For Floating Rate Bonds (FRB’s) Current yields are based on the latest half-year yield determined in the auction.
MONEY MARKET REVIEWEconomic & Political Weekly january 26, 200829Table 10: Operations of RBI’s Liquidity Adjustment Facility** (Amount in rupees in crore) For the Week Range of Repo (Injection) * Reverse Repo (Absorption) * Net Injection Net(Nov-Dec 2007) Repo / RR Period Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding Days Number Amount Number Amount Number AmountNumber Amount DailyAbsorption(-)Amount Averages of of Liquidity at the Bids Accepted Week End@ 1 2 3 4 5 6 7 8 9 1011121305 Nov - 08 Nov 07 1-4 0 0 0 0 59 74,990 59 74,990 18,748 -74,990 2,03012 Nov -16 Nov 07 1-3 101 86,125 101 86,125 2 2,005 2 2,005 401 84,120 -30,65519 Nov -23 Nov 07 1-3 45 40,780 45 40,780 13 12,770 13 12,770 2,554 28,010 8,71026 Nov -30 Nov 07 1-3 34 25,575 34 25,575 0 0 0 0 0 25,575 -1,32003 Dec-07 Dec 07 1-3 5 330 5 330 13 11,980 13 11,980 2,396 -11,650 6,96510 Dec-14 Dec 07 1-3 37 26,410 37 26,410 5 50 5 50 10 26,360 -6,00517 Dec-20 Dec 07 1-4 31 22,455 31 22,455 3 15 3 15 4 22,444 -22,37024 Dec-28 Dec 07 1-3 100 1,43,615 100 1,43,615 1 5 1 5 1 1,43,610 -33,86531 Dec-04 Jan 08 1-3 7 9,500 7 9,500 85 83,800 85 83,800 16,760 -74,300 32,275* With effect from March 31, 2007 the Repo Rate is 7.75% and Reverse Repo Rate 6%. ** Includes Second LAF Auctions under Repo and Reverse Repo. With effect from August 6, 2007 RBI withdrawn Second LAF auctions which conducted on a daily basis, also withdrawn the cap on daily reverse repo absorptions under LAF and second LAF. @ Net of Repo and ReverseRepo Outstandings.crore in November and it was more than that raised in December 2006 at Rs 3,565 crore. In view of the approaching Basel-II deadline, banks and financial institutions raised the bulk of the funds (Table 9, p 27). Among the banks and financial institu-tions, Punjab National Bank raised Rs 300 crore through the issue of perpetual bonds by offering an interest rate of 9.75 per cent with a step-up of 50 bps if call is not exercised at the end of 10 years while for the same paper in July 2007, this bank had to offer 10.40 per cent with a step-up of 50 bps. However, the National Bank for Agriculture and Rural Development (NABARD) mobilised Rs 336 crore in December by offering 9.15 per cent for three years at the same rate as that offered in the previous month. In order to encourage the banks to increase the flow of credit to the infrastruc-ture sector, RBI has decided to allow banks to invest in unrated bonds of companies engaged in infrastructure activities within the ceiling of 10 per cent for unlistednon-statutory liquidity ratios (SLR) securities. 4 Secondary MarketDespite the pressure on liquidity, the secondary market turnover for gilt-edged securities increased as the banks increased their exposure to securities in the wake of declining credit off-take. The weekly average turnover increased from Rs 19,191 crore in the week ending November 30 to Rs 34,224 crore in week ending December7, as the finance minister said that theGDP growth had moderated by evoking expectations of a stable interest rate outlook and also due to improved liquidity situation on account of increased government expenditure. However, the turnover declined to Rs 32,013 crore in the week ending December 14 and further to Rs 21,582 crore in the week ending Decem-ber 21 due to advance tax and dated securi-ties auction outflows. In the last holiday-shortened week, the turnover dipped to Rs 18,416 crore. However, it was expected that in the new calendar year the liquidity situation would improve due to interest inflow on special deposit schemes and increased government expenditure. The short-term rates ruled steady given the pressure on liquidity while the medium and long-term yields declined. Thoughtheinternational crude oil prices recorded a historic rise, domestic inflation remained range bound spurring trading activities in medium and long-term securities. The spread between 7.99 per cent2017 and 8.33 per cent 2036 narrowed from 40 bps to 33 bps during the month. Thus, over the month, the yield curve was somewhat flat (Graph D, p 27) (see alsoAppendix Table, p 28). 4.1 RBI Reverse Repos, OMOs and MSS TheRBI maintained liquidity by injecting funds through the repo window; so much so, that amounts injected exceeded much more than those absorbedduring themonth. The liquidity support of the RBI through the repo window stood at Rs 1,98,210 crore while absorptions were just Rs 12,050 crore (Table 10). The repo bids tendered and accepted increased from Rs 330 crore in the week ending December 7 to Rs 26,410 crore in the week ending December 14 due to outflows toward advance tax and dated securities and then jumped to Rs 1,43,615 crore in the week ending December 28 in the holiday shortened week, wherein the bulk of bids were accepted between December 26 and 28. The bulk of the reverse repo bids was tendered in the first week of the month ending December 7 of Rs 11,980 crore which dipped sharply to Rs 50 crore in the week ending December 14 and to Rs 15 crore in the week ending December 20 and further to Rs 5 crore in the week ending December 28.Due to the pressure on liquidity, the trading in repo outsideRBI declined sharp-ly from Rs 3,76,968 crore in November to Rs 2,94,059 crore in December that too at a higher weighted average interest rate of 7.34 per cent as against 6.80 per cent in the previous month.The RBI undertook purchase under Open Market Operations (OMOs) after a long time. These purchases increased from Rs 30 crore as of November 30, 2007 to Rs 5,310, crore as of December 28, 2007 which exceeds the total purchases carried out byRBI at Rs 720 crore for the full finan-cial year of 2006-07.4.2 CommercialBondsLike the secondary market for gilt-edged securities, the aggregate secondary market trading in corporate debt increased from Rs 5,894 crore in November to Rs 6,979 crore in December. Of this, the turnover reported on Fimmda exceeded that reported on the two exchanges, that is, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). However, the daily average turnover in corporate bonds as reported on the NSE declined to Rs 51 crore from Rs 72 crore in November. 
