The decision by US Fed in September 2013 to maintain its pace of bond purchases appears
to have considerably calmed markets. Since then, EMDE equity markets and currencies have
rallied. Pressures in bond markets have also slackened. Tracking these global developments
and significant policy actions by the Government and the Reserve Bank, Indian stock markets
turned around in September 2013 after the slump in the preceding two months. The Rupee also
strengthened in response to improved trade flows and return of equity inflows. While markets
have got a temporary breather, near-term uncertainties remain and steps need to be taken to
build buffers to manage contingent risks.
Fed announcement lowers near-term
uncertainties
V.1 Although the exact timing of a possible
tapering by the Fed remains unclear at present,
what is obvious is that market participants have
been making adjustments to a new world of
potentially less liquidity. In the aftermath of the
Fed indication on May 22, equity, bond and
currency markets across countries and especially
in emerging markets had experienced significant
losses. Unsettled geo-political environment in
some Middle East countries which raised crude oil prices had further added to the selling
pressures.
V.2 In the H1 of 2013 till mid-May,
equities had experienced significant rally,
aided, among others, by accommodative
monetary policies by central banks of the
advanced economies. US bonds also rallied in
April 2013. However, the Fed’s communication
about exit from QE led to sharp fall in the
prices of these risky assets for both advanced
and emerging market and developing
economies (EMDEs) (Charts V.1).
V.3 In the start of Q3 of 2013, global
financial markets witnessed volatility on the
back of speculation over the timing of tapering
off of QE by the Fed. In general, there was an
outflow of capital from EMDEs, especially to
the US. This reversal prompted a spike in the
Emerging Market Bond Index (EMBI) spread
to nearly 375 basis points (bps) by end-August
from around 278 bps on the eve of the Fed
tapering off statement; EMDE stocks declined
and their currencies also depreciated. Country-specific issues such as weaknesses in the current
account, subdued export growth and
infrastructural bottlenecks aggravated their
concerns.
V.4 The Fed’s decision on September 18 to
continue with the monthly quantum of asset
purchase, stating that they will await more
evidence of an enduring economic recovery
before adjusting their pace, brought significant
improvement in market sentiments. Equity
markets in advanced economies and EMDE
equity markets surged, government bond yields
moderated and currencies appreciated against
the US dollar. Although the signing of the fiscal
deal on October 17 has avoided potential debt
default by the US, concerns remain since the
deal only funds the US government through
January 15, 2014 and raises the debt ceiling
through February 7, 2014. Further contentious
debate over spending cuts and entitlement
programmes seem likely to ensue over the next several months. In October so far (up to October
24, 2013), the equity markets in select EMDEs
increased by 5.7 per cent on an average.
Pressure on Rupee appears to be abating
V.5 Subsequent to the Fed’s ‘announcement
effect’, downward pressure on the local
currencies along with considerable volatility
was discernible across major EMDEs. This
permeated both countries with CAD as well as
those with current account surpluses. Among
the former, the volatility was particularly high
in the case of South Africa, India and Brazil.
After touching a historical low of 68.36 per
dollar on August 28, 2013, the spate of policy
initiatives enabled the Rupee to recover (as on
October 24, 2013) by almost 10 per cent
(Chart V.2).
Currency derivatives activity subdued
V.6 The impact of the regulatory measures
announced by the Reserve Bank and SEBI
against the backdrop of heightened exchange
rate volatility, were manifest in the derivatives
market wherein activity in the currency
derivatives declined in Q2 of 2013-14
(Chart V.3).
Initial money market upheavals and
subsequent moderation
V.7 The situation in the money market was
comfortable during the first half of July 2013.
However, the exceptional measures taken by the Reserve Bank during July and August 2013
impacted the money market. The weighted
average call and CBLO rates increased to 9.97
per cent and 9.90 per cent, respectively, in
September 2013 (Chart V.4). In continuation
of its move towards calibrated withdrawal of
the exceptional measures, the Reserve Bank on
October 7, 2013 lowered the MSF rate by 50
bps to 9.0 per cent and announced additional
liquidity measures in the form of term repos of
7-day and 14-day tenor for the amount equivalent
to 0.25 per cent of banking system NDTL
through variable rate auctions every Friday
beginning October 11, 2013. As a result, the
money market rates softened with the average
call and CBLO rates standing at 8.92 per cent
and 8.97 per cent, respectively on October 25,
2013.
Decline in CD issuance
V.8 The measures by the Reserve Bank
aimed at tightening liquidity appears to have
impacted this segment, with the weighted
average effective interest rate (WAEIR) of CDs
increasing to 11.20 per cent on September 6,
2013 from 8.19 per cent as at end-June 2013
(Chart V.5). The average gross fortnightly
issuance of CDs declined to `96 billion during
Q2 of 2013-14 (up to September 6, 2013) from
`340 billion during Q1 of 2013-14. The
outstanding amount of CDs also declined to
`3,011 billion as on September 6, 2013 from
`3,645 billion at end-June 2013.
Appetite for CP lacklustre
V.9 With rise in discount rates, the appetite
for CP issuance has fallen markedly and
corporates are substituting funding through the instrument with alternative financing sources,
especially bank credit. The weighted average
discount rate (WADR) of CPs increased to 11.53
per cent as on September 15, 2013 from 8.54
per cent at end-June 2013 (Chart V.6).
G-secs yields moderate
V.10 The ‘announcement effect’ on May 22,
2013 and subsequent measures by the Reserve
Bank led to a significant hardening of G-sec
yields. Generic yields on 10-year G-secs peaked
to 9.27 per cent on August 19, 2013, after which
it softened on announcement of OMO purchase
auction on August 20, 2013. The yields
hardened to 8.83 per cent on September 30,
2013 after a hike in the repo rate in the mid-quarter
monetary policy review (Chart V.7).
However, the markets rallied and yields
softened after the Reserve Bank announced an
OMO purchase auction of `100 billion on September 30, and reduced the MSF rate by 50
bps to 9.0 per cent on October 7, 2013. The 10-
year generic G-sec yield closed at 8.65 per cent
on October 25, 2013.
V.11 The average daily trading volume of
central government securities remained low
(Chart V.8).
Despite rising yield environment, cost of
borrowing for government falls
V.12 The gross market borrowings of the
Central Government through dated securities
during 2013-14 (up to October 21, 2013) stood
at `3,890 billion (net borrowings of `3,143
billion) as compared with `4,090 billion (net
borrowings of `3,234 billion) during the
corresponding period of the previous year
(Table V.1). The weighted average maturity of
the dated securities improved to 14.40 years.
The benchmark 10-year yield in the primary
auctions eased during early 2013-14 touching
a low of 7.16 per cent on May 21, 2013 and
remained subdued. The yields increased
significantly post July 15, 2013 due to liquidity
tightness. Despite this, the weighted average
cost of borrowing so far has remained much
below that in the corresponding period of the
previous year. However, the quantum of
devolvement till October 24, 2013 increased to
`163.76 billion as compared to `18.28 billion
in the corresponding period of the previous year.
Table V.1: Weighted average yield of
primary issuances fall in 2013-14 |
Item |
2011-12 |
2012-13 |
2013-14* |
1 |
2 |
3 |
4 |
Central Government |
|
|
|
Gross amount raised (` billion) |
5,100 |
5,580 |
3,890 |
Bid-cover ratio (Range) |
1.39-5.12 |
1.47-3.59 |
1.33-6.09 |
Weighted average maturity (years) |
12.66 |
13.52 |
14.40 |
Weighted average yield (per cent) |
8.52 |
8.60 |
8.17 |
State Governments |
|
|
|
Gross amount raised
(` billion) |
1,586.3 |
1593.4 |
970 |
Cut-off yield range (Per cent) |
8.36-9.49 |
8.67-9.31 |
7.57-9.94 |
Weighted average yield (per cent) |
8.79 |
8.97 |
8.88 |
* Up to October 24, 2013 |
V.13 During 2013-14 (up to October 24,
2013), 24 states raised `970 billion on a gross
basis (net amount of `654 billion) as compared with `966 billion (net amount of `862 billion)
raised by 25 states in the corresponding period
of the previous year. In the corresponding
period, the weighted average yield eased to 8.88
per cent up to October 24, 2013 from 8.93 per
cent during the corresponding period last year.
Equity market responds to measures and
taper deferment to register gains
V.14 During the financial year 2013-14 (till
October 25, 2013), the stock markets have
gained 9.8 per cent (Sensex) and 8.1 per cent
(Nifty). This movement, however, masks wide
gyrations over the period (Chart V.9a). After
initial gains, the announcement effect of May
22 put the global stock markets into a tail spin.
Between May 22 - August 30, the Sensex and Nifty declined by 7 per cent and 10 per cent,
respectively, as FIIs disinvested US$ 13 billion
in domestic markets during this period.
However, the equity market recovered after the
Reserve Bank announced a slew of measures
on September 4, 2013. The positive feel-good
impact of the Fed’s September 18, 2013
announcements also boosted markets. The
momentum continued in October as well with
the BSE Sensex and Nifty gaining 11 per cent
and 13 per cent, respectively till October 25,
2013 over September 4, 2013. Confidence also
returned, with FIIs investing US$ 1.0 billion in
equity and debt segments during September-
October (upto October 24, 2013). Equity market
volatility, measured by NSE’s VIX index
heightened during Q2 of 2013-14 (Chart V.9b).
Primary capital market remained lacklustre
V.15 During H1 of 2013-14, an amount of
about `32 billion was raised from the primary
equity market through 24 issues. Resource
mobilisation via private placements declined
sharply. Resources mobilised by mutual funds
during H1 of 2013-14 also declined drastically,
mainly on account of heavy redemptions
recorded in debt-oriented funds, especially
during June-July and September 2013.
Resources mobilised through ADR/GDR also
fell substantially (Table V.2).
Table V.2: Primary capital market
mobilisation remained lacklustre |
(` billion) |
Category |
2012-13
(Apr-
Mar) |
2012-13
(Apr-
Sep) |
2013-14
(Apr-
Sep) |
1 |
2 |
3 |
4 |
a. Public Issue (i) + (ii) |
219.2 |
27.3 |
68.2 |
i) Public Issue (Equity) |
49.4 |
5.1 |
10.6 |
of which: IPOs* |
49.4 |
5.1 |
10.6 |
FPOs |
0.0 |
0.0 |
0.0 |
ii) Public Issue (Debt) |
169.8 |
22.2 |
57.6 |
b. Rights Issue |
89.4 |
67.5 |
21.7 |
Total Equity Issues (i+b) |
138.8 |
72.6 |
32.2 |
c. ADR/GDR |
10.4 |
9.9 |
1.2 |
d. Mutual Fund Mobilisation (net) |
765.4 |
1018.7 |
353.4 |
i) Private Sector |
637.9 |
841.3 |
248.2 |
ii) Public Sector |
127.5 |
177.5 |
105.3 |
e. Private Placement in corporate debt market |
3614.6 |
1808.2 |
1428.2 |
f. QIP |
160.0 |
46.5# |
52.0# |
*: Does not include offer for sale. #: Up to August.
Source: SEBI. |
Turnover in the equity derivatives segment
surges
V.16 During April-August 2013, the turnover
in equity derivative segment increased by 29.0 per cent to `206.7 trillion from `160.3
trillion in the corresponding period last year.
Trading volume also increased by 15.3 per cent
to 716.3 million contracts during April-August
2013 from 621.1 million contracts in April-
August 2012.
Crisis of NSEL exposes regulatory gaps
prevailing in systemic institutions
V.17 Consequent to the directions of the
Ministry of Consumer Affairs (MCA) to the
National Spot Exchange Ltd (NSEL), NSEL
decided to suspend trading of all contracts,
including e-contracts as well and settle all one
day forward contracts under the supervision of
the Forward Market Commission (FMC).
V.18 This crisis in NSEL has raised the issue
of inter-connectedness of financial institutions.
Many brokerage firms are active in multiple
segments, including equity, commodity and
forex. A loss in one segment of their operations
can have a cascading effect on other segments,
in turn, propagating contagion effects throughout
the market.
V.19 The Union Government has taken
several policy initiatives to plug regulatory
deficiencies. It has transferred the administrative
control of FMC to the Ministry of Finance and
constituted two committees, one under RBI Deputy Governor, Dr. K. C. Chakrabarty and
the other under the Secretary, Department of
Economic Affairs, Shri Arvind Mayaram, to
look into various aspects relating to this crisis.
These committees have since submitted their
reports to the Central Government.
House price increases abated in Q1 of
2013-14
V.20 The q-o-q growth in the Reserve Bank
house price index (Base year:2010-11) at the
all-India level was lower at 0.89 per cent in Q1
of 2013-14 (latest available quarter) as compared
to 2.46 per cent in the previous quarter. The
increase was the highest for Lucknow, followed
by Ahmedabad and Kochi (Table V.3).
Table V.3: House price growth moderates,
with city-specific variations |
City |
Q-o-Q
(Q1 of
2013-14) |
Q-o-Q
(Q4 of
2012-13) |
Y-o-Y
(Q1 of
2013-14) |
Y-o-Y
(2012-13) |
1 |
2 |
3 |
4 |
5 |
Ahmedabad |
4.47 |
2.90 |
15.05 |
11.87 |
Bengaluru |
0.23 |
0.54 |
6.70 |
12.76 |
Chennai* |
0.61 |
-0.09 |
15.98 |
18.95 |
Delhi |
0.79 |
6.18 |
21.15 |
41.66 |
Jaipur |
0.00 |
8.78 |
14.10 |
10.71 |
Kanpur |
-9.35 |
-2.11 |
-28.00 |
-7.08 |
Kochi |
2.28 |
-8.98 |
28.55 |
14.13 |
Kolkata |
1.42 |
4.25 |
27.06 |
47.66 |
Lucknow |
4.66 |
-1.82 |
27.56 |
25.06 |
Mumbai |
0.28 |
0.36 |
8.38 |
18.15 |
All India # |
0.89 |
2.46 |
13.75 |
22.73 |
*: Index is based on both residential and commercial
properties.
#: Index is a weighted average of city indices, weights based on population proportion. |
Near-term uncertainties remain a
lingering concern
V.21 The Fed has decided to wait for more
convincing evidence prior to initiating a
graduated withdrawal of its bond buying
programme. This has provided markets with
much-needed breathing space. However, market
uncertainties remain associated with how the
debt ceiling issues will play out over the next
several months and whether the incipient signs
of recovery in the euro area sustain. Markets in
India also face domestic uncertainties stemming
from protracted slowdown, falling corporate
earnings and rising leverage, besides risks of
political uncertainties associated with the
electoral cycle. |