Current Economic Statistics and Review For the Week 
Ended November 10, 2007 (44^th Weekly Report of 2007)

Theme of the week:

There is a widely held view that the corporate bonds market has continued to languish for want of regulatory interest arising out of overlapping jurisdictions among the different regulators. It was perceived that following the acceptance of the recommendations of a high level committee set up by the Finance Minister in 2005, there would be significant development towards improving the performance of the corporate bond market. It is in this context that the note tries to view the developments in the secondary market and evaluate the opinion expressed in EPW about the neglect of commercial bond market (issue dated September 28, 2007). This note, however, focuses only on the secondary market recommendations and developments since February 2006.

It is indeed satisfying that Sebi has taken cognisance of critical comments offered by observers on the inaction on the part of supervisory authorities and also absence of co-ordination among them. The Sebi has listed as many as 35 action points, which have been put in place by them so far. A closer scrutiny of these points reveals that the Sebi has indeed been actively pursuing the subject of activisation of the secondary bonds market. But a major missing element in the Sebi’s action programme has been the absence of attempt to solve the most crucial aspect of clearing and settlement of trades, which is the crux of a healthy and dynamic secondary market. In addition, there is also the problem of resolving many issues concerning the primary bonds market, which is outside the scope of this note and to which we shall revert at a later stage.   

The corporate debt market has been lagging behind the equity and gilt-edged markets both in terms of microstructure as well as market outcomes. Primary issuance market is dominated by financial sector and relatively small amount of funds have been raised through issuance of debt papers by manufacturing and other service industries. Bank finance still continues to be the most sought after path to fulfil the funding requirement of these companies. In the case of the secondary market activities, the Sebi and the stock exchanges have been undertaking efforts for quiet sometime but they have not yielded desired results. With the diversifications in the financial and real sectors, the market participants have begun to consider corporate bond finance as a major source of finance. Its significance was also underscored in the South East Asian crisis wherein it was considered that a well-developed bond market would take such a crisis out of the banking system.

A Story of Committees

It was against this background that the Finance Minister in his 2005-06 budget, had announced constitution of a High Level Expert Committee on Corporate Bonds and Securitisation that would look into the legal, regulatory, tax and market design issues in the development of corporate bond market under the Chairmanship of Dr. R. H. Patil in July 2005. This committee submitted its report in December 2005, which was accepted by the Finance Minister in the union budget for 2006-07, and stated that steps would be taken to create a single, unified exchange traded market for corporate bonds. The recommendations of the committee with respect to secondary market have been enumerated in the Annexure A. 

Following the acceptance of the recommendations of the Patil committee report, Sebi in March 2006 constituted an internal committee under the chairmanship of Dr T C Nair to prepare an action plan for implementation of the budget proposals on development of the corporate bond market. The internal committee displayed awareness of the fact that both NSE and BSE have already put in place electronic trading platforms for government securities. They have evolved mechanics for clearing and settlement of government securities traded on these exchanges. The proposed arrangements for the corporate debt market could thus be a replication or in a sense, extension of these arrangements. The committee felt that since both the exchanges have gained fair experience in trading in government securities, they are generally willing to go ahead with the task of setting up trading platforms for corporate debt. Since these exchanges viz. NSE and BSE already have most of the required infrastructure in place, internal Committee felt that one of them could make a beginning towards setting up a reporting platform and thereafter a platform for undertaking anonymous order matching of trades. This view was favored by the committee for the following reasons:

In the first place, there is no adequate and relevant information available on the corporate bond market. There is, therefore, a need to evolve a reporting system, have database and information dissemination in place. The information dissemination system and the centralized database must also necessarily reside at one place, which should be an exchange.

Secondly, since the market will take time to deepen, there will be little merit in allowing more than one exchange to set up an order matching system, as the order book will be fragmented.

The internal group further felt that it would rather be most desirable to make BSE responsible for undertaking the task of creation of a reporting platform and thereafter setting up a platform for trading. The main reason for this suggestion was that BSE, being in a position to set up a separate and independent clearing and settlement mechanism would eliminate concentration of settlement risk being with one organization, say CCIL; The regulator will be comfortable to deal with one entity which deals exclusively with one segment of the market, say the corporate bonds in the instant case; It would also eliminate conflict of interests in a sense, as the shareholders of NSE are banks and financial institutions which by the nature of their operations are the entities mainly interested in wholesale debt market dealings; It would help the two big stock exchanges, say NSE and BSE, to have their own specializations in different segments of the market rather than both concentrating on the same areas. It will bring about the much required balancing of the two major exchanges as added responsibility of NSE on account of the fact that the F&O market has already created imbalances in risk bearing capabilities from the regulatory angle, so far as the two exchanges are concerned.

The committee also felt that once trading on the BSE platform stabilizes, attempt could be made to de-link this activity to a subsidiary jointly set up by the two exchanges viz. NSE and BSE, which could have its separate clearing and settlement facilities. This could be done in about two years. The new arrangement will result in creating an independent exchange exclusively for trading, clearing and settlement of debt market instruments.

Trade Reporting

BSE will set up a mechanism for reporting of all the trades undertaken in the corporate bond market. SEBI will make it mandatory for all categories of traders including brokers to report specified details of each transaction within a specified timeframe to the trade reporting system at BSE. It will issue guidelines on the details to be reported, the time of reporting and the regulations governing use of this platform. BSE will take care to eliminate double reporting. SEBI could request other regulatory authorities like RBI, IRDA, etc. to issue the required guidelines to all the entities regulated by them to enable implementation of the proposal from a specified date. The Committee felt that the first phase of evolving a trade reporting mechanism could be established within a period of three months from the date of assigning the task to BSE.

Trading by electronic order matching

In the second phase, BSE will provide facility for trading through electronic order matching based on price time priority through online trading system as operational in equities. The clearing and settlement mechanism for trading in corporate bonds will be provided through novation by BSE through the existing institutional arrangement as in the case of equities. The trades executed throughout the continuous trading sessions will be netted out at the end of the trading hours through a process of multilateral netting as in the case of equities. The transactions will be netted out member-wise and then scrip wise so as to determine the net settlement and payment obligations of the members. The task will be undertaken by the clearing house/corporation. This phase could be implemented in about a year’s time from assigning the task to BSE.

While, setting up a centralized platform by BSE for corporate bond trading will facilitate better coordination and economy in operations, it would also help one entity to have undivided responsibility over trading and reporting requirements apart from clearing and settlement of trades in corporate bonds.

Hiving off corporate bond trading activity from BSE

In the third phase of development, the corporate bond trading activity could be hived off from BSE to a subsidiary jointly set up by NSE and BSE for corporate bond market trading, clearing and settlement as suggested above. Implementation of this task could take about two years.

Setting up of optional platforms

 With the third phase, an online auction service will be introduced as an optional platform for issuers. This platform will support both private and public issues and will provide for different ways in which issues are offered to investors. This platform could be modelled on the existing government securities auction platform which could provide even for non competitive bidding by individuals, provident funds etc. in case felt desirable. During this phase, repo contracts can be added to the order matching system as another instrument that can be traded on the platform provided there is regulatory approval for the same. This phase could be completed after the operations in the first two phases are stabilized.

Further Action Required by Sebi

Having accepted the fact that there is a need to assign the tasks of setting up a trade reporting platform and a platform for anonymous order matched trading system, the internal committee felt that if the Indian corporate debt market is to actually take off, a number of steps as indicated by the High Level Committee on Corporate Bonds and Securitization are also to be initiated by SEBI. A list of such measures where action required to be taken has already been provided by the High Level Committee on Corporate Bonds and Securitization. The list broadly comprises issues which are related to enhancing issuer base, listing of issues, consolidation of privately placed bonds, etc. There are also issues relating to stamp duty, TDS, evolving unified market conventions etc. SEBI would, also set up a Corporate Bond Market Development Advisory Committee to review the progress of implementation of plans for creation of a unified exchange traded market for corporate bonds. It will suggest measures to hasten the process of the implementation of the project on the one hand and removal of the bottlenecks, on the other. The Advisory Committee could have representatives of Government, RBI, major stock exchanges, financial institutions, banks, depositories, FIMMDA, Primary Dealers and rating agencies apart from SEBI. The Committee could meet at least once a quarter to take stock of the developments and provide guidance to SEBI in going ahead with appropriate measures for creating an exchange traded corporate bond market in the country in the shortest possible span of time. The action plan recommended by the committee has been enumerated in Annexure B

Governments Market Design

In January 2007, however, when the government discussed the issues of regulatory jurisdiction and put forth the following market design:

OTC as well as exchange based transactions need to be reported to reporting platforms; all the eligible and willing national stock exchanges need to be allowed to set up and maintain reporting platforms if they approach Sebi for the same. Sebi needs to coordinate among such reporting platforms and assign the job of coordination       to a third agency;  the trades executed or reported on a exchange need not be reported to a reporting platform; the participants must have a choice of platform. They may trade on OTC or any exchange trading platform; existing exchanges could be used for trading of corporate debts. NSE and BSE could provide trading platforms for this purpose. There is no need to create a separate infrastructure; there would be no separate trading platforms for different kinds of investors. Institutional and retail investors would trade on the same platform; only brokers would have access to trading platform of an exchange. Banks would have the option of becoming a broker or trading through a broker. RBI may if considered necessary restrict a bank to trade only on propriety account as a broker.

Implementation of Recommendations         

As suggested in the report, the first step has been towards establishing a trade reporting portal a system to capture all information related to trading in corporate bonds as accurately and as close to execution as possible, and disseminate it to the entire market on real time basis. However, the Finance Minister showed preference for single unified exchange traded market for corporate bond. Correspondingly, Sebi constituted a committee to draw action plan for implementation of this proposal.   

            As per the committee’s recommendation, BSE was supposed to be the single unified exchange for corporate bonds, but in the subsequent clarification of the regulatory jurisdiction, the government has stated, “all eligible and willing national exchanges need to be allowed to set up and maintain reporting platforms”. Thus, though it was envisaged that the BSE would be single unified exchange, subsequently, NSE and FIMMDA have been permitted to start the reporting platform.

         Table 1 shows the data for reporting on these 3 platforms.

Besides establishing the trade reporting portal, in April 2007, the Sebi has  permitted both BSE and NSE to have in place a trading platform to enable efficient price discovery and reliable clearing and settlement facility in a gradual manner. To begin with, the trade matching shall be order driven with essential features of OTC market. It is also announced that eventually a system of anonymous order matching system will be established. They were advised to make use of the existing infrastructure with them for operating the trade matching platforms for corporate bonds with necessary modifications.

However, in case of clearing and settlement, the Sebi is of the view that with the introduction of anonymous order matching system, clearing and settlement facility is to be provided along with multilateral netting facility for trades executed on the platform. 

Other Changes

Besides these trading infrastructures, Sebi has reduced the shut period in corporate bonds in order to align them with that on government securities. Also, the traded lot size has been made uniform of Rs 1 lakh for investors including qualified institutional investors. Moreover, the day count has been changed from 30/360 to actual day count convention similar to that followed for the gilt-edged securities.

The listing agreement has been modified to include services of ECS (Electronic Clearing System), Direct Credit, RTGS (real time gross settlement) or NEFT (National Electronic Funds Transfers) for payment of interest and redemption amounts as applicable RBI norms. Further, Sebi states that no material modification shall be made to the debentures issued without the prior approval of the Exchanges. Moreover, its been mandatory in the case of debentures listed companies to disclose details of defaults on interest payments and on redemption, failure to create a charge on assets and revision of ratings assigned to the debentures on its own website as well as on the Exchanges. Further, its compulsory to display reports/ information on the debentures issued on the website of the company as well as on the Exchanges websites for dissemination of information.

Further, the Sebi has begun disseminating information on its website about the private placement of the issues (Table 2).  

Issues        

However, these recent developments undertaken by the Sebi on the basis of the recommendations of these committee reports appear to have ignored the past happenings. For instance, it was way back in June 1994 that NSE had set up a trading platform, the first exchange driven wholesale debt market for gilt-edged and corporate bonds, known as NEAT (National Exchange for Automated Trading) which is a fully automated screen based trading system that enables members across the country to trade simultaneously with enormous ease and efficiency. The trading system is an order driven system, which matches best buy and sell orders on a price-time priority. The identity of the buyer and seller are completely protected on the system. Subsequently, BSE also began debt market operations from June 15, 2001. 

            But, given the lack of regulatory support, such an advanced technology was reduced to a reporting platform with no compulsions to trade or report the trades on the exchanges.   

Nevertheless, there has been some progress in this direction following the setting up of reporting platforms and also these exchanges have expressed their preparedness to shift to order matching system and introduce repo on corporate bonds in October 2007.  (In a way achieving this has been easier as there is a backing of more than 10 years of experience of the exchanges and the Sebi behind these developments)

In regards to clearing and settlement, there have a number of success stories in the domestic financial markets such as NSE’s and CCIL’s case studies wherein negotiated trades have been settled using netting through novation. Though the Patil committee has elaborated in detail the phased improvement in the clearing and settlement mechanism, Sebi has taken a stand that the exchanges may provide their services for clearing and settlement of corporate bonds traded or the entities trading in listed corporate debt securities may settle their trades bilaterally. With the introduction of anonymous order matching platform, the clearing and        settlement facility shall be provided by BSE and NSE with a multilateral netting facility for trades executed on the platform. However, RBI in its mid-term review of credit policy announced on October 31, 2007 has said “As the corporate debt markets develop and the Reserve Bank is assured of availability of fair prices, and an efficient and safe settlement system based on delivery versus payment (DvP) III and Straight Through Processing (STP) is in place, the Reserve Bank is committed to permitting market repos in corporate bonds”. These statements are similar to those stated in the Annual policy statement announced by the RBI on April 2007 implying there has not been any progress in these last six months.   

It is in this sprit that EPW had raised issued regarding the dilly-dallying of trade reporting portal and issues relating to clearing and settlement of trades. Moreover, the issue raised regarding the need for instituting an institutional mechanism in the form of a ‘Board for Financial and Capital Market Development’ so that the evolving promotional issues of finance are debated and efforts made to resolve them in a coordinated manner” (EPW Sep 28, 2007) seems to be a method to expedite the developments in the corporate bond market. Even the T C Nair committee has proposed a Corporate Debt Market Development Advisory Committee which could meet at regular intervals to advise on other SEBI related areas where further action is required, to develop a vibrant and dynamic corporate debt market in this country.

These varied actions are conspicuous by their absence and hence the broader role of the bonds market to support industrial project finances and more importantly massive finances required for infrastructure development is yet to fructify.

References

EPW (2007): “Neglect of the Commercial Bonds Market” September 22-28

NSE (2005): “Indian Securities Market, Review”

Sebi (2007): Developments in the Corporate Bonds and Securitization Markets-An Update (As on 05th November 2007)

Sebi (2006):   “Report on Unified Exchange Traded Corporate Bond Market”, May

Sebi (2005) : “Report of High Level Expert Committee on Corporate Bonds and Securitization”, December

 *This note has been prepared by Piyusha Hukeri

Annexure A: Patil Committee’s Recommendations

Development of Secondary Market

There is a need to develop a transparent and efficient secondary market for corporate bonds, incorporating the global best practices and systems to the extent they are relevant and consistent with the Indian securities market. SEBI, being charged with the responsibility of development and regulation of corporate bonds market, should provide the necessary regulatory framework.

 The following roadmap is suggested to this end.

 Trade Reporting System

Steps should be taken to immediately establish a system to capture all information related to trading in corporate bonds as accurately and as close to execution as possible, and disseminate it to the entire market in real time; It would be cost effective to use the existing infrastructure available with the national exchanges for dissemination of information related to trading in corporate bonds. SEBI should frame detailed guidelines for setting up of such reporting platforms and should ensure coordination among them; The concerned regulators of the various entities, who are party to transactions in corporate bonds, should mandate them to report specified details of each transaction within a specified time to the trade reporting system. The details to be reported and the time of reporting and the regulations governing usage of this platform should be specified by SEBI; In order to provide direct access to regulated institutions such as banks, insurance companies, mutual funds, etc to the trade reporting system, suitable changes in the existing regulations should be made by SEBI.

Clearing and Settlement System

The clearing and settlement of trades in this market must follow the IOSCO standards and the global best practices by way of well established clearing and settlement procedures through recognized clearing and settlement agencies; The clearing and settlement agencies may provide the clearing and settlement services in phases by initially offering DVP I (gross trade by trade settlements) and use the experience to migrate within a reasonable time frame into DVP III (netted settlements) systems. In the first instance, in order to ensure DVP settlements of corporate bonds in accordance with international best practices, RBI may consider issue of grant of suitable access to the concerned clearing and settlement entities to the RTGS system ; In order to improve secondary market trading, repos in corporate bonds may be permitted by RBI to be operated by the proposed clearing entities for corporate bonds; As corporate bonds are governed by the SCRA and SEBI regulations, the entities handling the clearing and settlement of these securities will have to be recognized entities under the SEBI framework and SEBI will frame suitable regulations for the clearing and settlement of corporate bonds. However, in the case of trading, clearing and settlement of repos in corporate bonds, appropriate regulations will be framed by RBI in consultation with SEBI.

Order Matching Trading System

As market participants gain experience with trade reporting and the first phase of clearing and settlement systems, efforts should be made to develop online order matching platforms for corporate bonds. Such trading platforms can be set up by the stock exchanges or jointly by regulated institutions like banks, financial institutions, mutual funds, insurance companies, etc. SEBI would frame specific guidelines for setting up such trading platforms. Any platform, other than the one offered by a stock exchange would effectively be performing the functions of an exchange to a limited extent and as such would need the specific approval of SEBI; The Committee recognizes the need for more than one category of member viz., some who will trade on their own account and/or some who will do agency business. The membership criteria and responsibilities would be significantly different between the various types of members. The provisions of the relevant legislations/regulations may be reviewed and appropriate amendments made thereto, if necessary, for the purpose. As it is necessary to avoid multiplicity of regulators for entities taking limited purpose membership for trading on their own behalf in the proposed trading and clearing platforms, the responsibility of regulating their activity in corporate bonds through trading platforms will vest with SEBI while the primary regulation of these institutions will continue to vest with their respective primary regulators.

Appropriate approvals may be considered by concerned regulators to enable free participation on the trading platform through limited membership by the concerned entities for the purpose of their proprietary trading.

Phased Implementation of Recommendations relating to Trade Reporting, Clearing & Settlement and Order Matching System

The above recommendations would be best implemented in a phased manner. In Phase I, the trade reporting and dissemination system would be implemented and trades reported through the reporting systems will be accepted for clearing and settlement by the approved clearing entities. DVP I clearing could be offered for all corporate bonds and DVP III offered for those instruments that have sufficient liquidity; In Phase II, measures for improving liquidity and reducing costs will be introduced. This will include the introduction of tripartite repo contracts in corporate bonds, securities lending and borrowing and other mechanisms for reducing settlement risk. This will allow DVP III settlement to be offered for a larger universe of corporate debt securities; In Phase III, the above trade reporting could migrate to STP enabled order matching systems as well as DVP III settlements.

Reduction of Shut Period

The current shut period in corporate bonds is very high and needs to be reduced and aligned to that for Government Securities. While trading in corporate bonds just before the coupon date, buyers and sellers have to transfer a part of the money through cash and trading during shut period.

Unified Market Convention

FIMMDA, being the representative of the banks and institutions, should take a lead role to put in place unified market conventions to be followed for corporate bonds. The standardized practice of 30/360 day count convention, followed for dated Government Securities, may be made mandatory for all new issues of corporate bonds. For existing bonds, the existing terms may have to be observed unless agreed to by issuers and holders. A suitable road map may be finalised to migrate interest payment conventions across all fixed income instruments, including government securities, to an actual/actual basis.

Repos in Corporate Bonds

RBI may allow Repos in corporate bonds as already announced in the earlier monetary policy. It will give an opportunity to investors who have illiquid corporate bonds to recycle the same and borrow money against these securities. The entities that will provide the trade matching system could also provide a repo facility on lines of CBLO for Government Securities. The activity relating to trading in repo on corporate bonds in lines of CBLO and / or its settlement will be regulated by RBI.

Reduction in Market Lot

The minimum market lot criteria of Rs.10lakhs for trading in corporate bonds at the stock exchanges should be reduced to Rs.1lakh to enable better access to smaller investors.

Annexure B: Nair Committee Recommendations Regarding the Action Plan

The Action plan for SEBI would broadly comprise:

Giving mandate to BSE to implement the proposed project of setting up a unified exchange traded corporate debt market elaborating the scheme with a road map; Issuing a press release on the plans of SEBI to develop a unified exchange traded market providing the road map as given in paragraphs above; Issuing a circular making it mandatory for all entities to report trades undertaken in the corporate debt market and also simultaneously requesting other regulatory agencies to issue guidelines to all entities regulated by them on the need for reporting all trades in corporate bonds in the specified manner. Making it mandatory to undertake trades in corporate bonds only through the assigned trading platform for the purpose, once it is commissioned; and Seeking guidance from the proposed Corporate Debt Market Development Advisory Committee. This Committee could meet at regular intervals to advise on other SEBI related areas where further action is required, to develop a vibrant and dynamic corporate debt market in this country.

Highlights of  Current Economic Scene

AGRICULTURE  

According to Food Ministry, Food Corporation of India (FCI) and State agencies have managed to procure nearly 72.48 lakh tonnes of rice as on October 30, 2007 during the current marketing season (October-September) 2007-08. This is reported to be 5.8 per cent lower from 76.9 lakh tonnes purchases over the corresponding period of the 2006-07 season. In Punjab , progressive procurement has been 60.95 lakh tonnes, which is lower than that of 63.69 lakh tonnes procured during the corresponding period of last year. Similarly, in Haryana procurement has fallen from 12.69 lakh tonnes to 11.12 lakh tonnes this year.

The Directorate General of Foreign Trade (DGFT), on October 30, 2007, has issued a notification stating that the earlier ban on non-basmati rice exports (effective since October 9, 2007) would not be applicable if the minimum export price (MEP) is more than US $ 425 per tonne (f.o.b). Further, this would not apply to exports for which letters of credit were opened till October 9, 2007 and also to consignments brought into the port godowns till October 10, 2007.

The central government has kept the minimum support price (MSP) of onion unchanged at US $ 495 per tonne which was raised from US $ 445 since from October 1,2007 even though its prices are in declining trend. In addition to this, exports are tightened and exporters are required to obtain NOC (no objection certificate) and. license for the exports. During April-September 2007, country has exported 384,000 tonnes of onion as against that of 605,000 tonnes shipped in the same period last year showing a decline of about 36 per cent.

The central government is trying to soften the prices of edible oils, which are ruling at higher level in the domestic market. So it has made an attempt to reduce custom duty on imports of soya and palm oil by 15 – 20 per cent. Other measures likely to opt by the central government include suspending future trade in edible oils and banning exports of groundnut and sesamum seeds. The center’s dilemma is compounded by the fact that at present when kharif oilseed harvest has begun, some states have demanded a ban on sale of imported oils. Andhra Pradesh would place a restriction on sale of imported oil untill groundnut crop is harvested, while Gujarat has also considered some restrictions on the sale of imported oil to support oilseed prices.

According to the Central Organisation of Oil Industry and Trade (COOIT), soyabean and groundnut would witness a bumper crop in this harvesting season due to improved southwest monsoon performance. Soyabean output during this harvesting season is estimated to be around 94.6 lakh tonnes as against that of 79.6 lakh tonnes last year, while groundnut output is rebounded to 52.7 lakh tonnes as against that of 35 lakh tonnes last year. The production of groundnut oil is expected to rise from 20,000 tonnes to 100,000 tonnes. Castor seed output is likely to rise 9 per cent to 850,000 tonnes, while sunflower seed output is expected to dip to 530,000 tonnes by 10,000 tonnes. Sesamum seeds output is expected to increase to 450,000 tonnes from 400,000 tonnes. The output of major cultivated oilseeds during the ongoing kharif season 2007-08 (November-October) is seen to be at 16.8 million tonnes, up by 25 per cent year-on-year basis and is also higher than the earlier estimated 15.2 million tonnes. Cottonseed output would be at 30 million bales, up by 11 per cent and cotton oil output at 980,000 tonnes, which shows an upward trend by 9 per cent as per year on year basis. While, Coconut oil output would be at 420,000 tonnes from 400,000 tonnes a year ago.

According to the Department of Fertilisers, the estimated requirement of di-ammonium phosphate (DAP), one of the nutrients for root formation, would fall in short of its demand during this rabi season. It has been projected that (DAP) consumption for the entire rabi season (October to March) 2007-08, would be around 49.13 lakh tonnes as against that of 37.18 lakh tonnes consumed in rabi season 2006-07. State governments, currently, have access to 55.49 lakh tonnes, including 18 lakh tonnes of imports. As per the target, domestic DAP production would stand at 4.27 lakh tonnes in October 2007 and is expected to touch around 4.82 lakh tonnes in November 2007. It is expected that consumption of phosphates would go up by an unprecedented 33 per cent this year, as farmers are keen to bring greater area under wheat and mustard, taking an advantage of remunerative market and support prices.

According to Spices Board, imports of spices during April- August 2007, has declined marginally due to increase in unit prices of several commodities and increased availability of other spices at competitive prices indigenously. However, drop in international prices of cardamom has pushed up its import during the period to 245 tonnes valued at Rs 2.20 crore from 145 tonnes worth at Rs 1.34 crore in the corresponding period of last fiscal year, indicating that the unit price has fallen to Rs 89.97 per kg from Rs 92.69 per kg. While imports of black pepper during the same period have dropped to 6,500 tonnes valued at Rs 90.42 crore from 8,700 tonnes valued at Rs 65.46 during the same period a year ago. Increase in unit value to Rs 73.68 per kg from Rs 66.89 per kg has pushed down the imports of chilli to 185 tonnes form 757 tonnes. On the other hand, imports of ginger have shot up to 9,500 tonnes during the same period valued at Rs 12.38 crore from 5,139 tonnes worth Rs 7.38 crore.

During the current rabi sowing season 2007-08, mustard acreage has fallen down drastically due to bad weather conditions. It is estimated that during this season only 15.62 lakh hectares has been planted under mustard as against that of 20.55 lakh hectares during the same period last year. Acreages have dropped sharply in the regions of Rajasthan to 11.90-lakh hectares from 14.78 lakh hectares last year. While in Madhya Pradesh it has reduced to 0.89 lakh hectares from 4.17 lakh hectares last year. During 2005-06, the country had harvested a record of 81.31 lakh tonnes of rapeseed-mustard, but the output had fallen down to 70.97 in 2006-07, it is predicted that it would further decline this year.

In the states of Andhra Pradesh and Tamil Nadu, turmeric acreage is likely to decline by 20 per cent in 2008 as most of the growers have shifted to other commercial crops like maize and sunflower due to radical fall in its prices. This fall is seen due to subdued domestic and export demand.

The state government of Maharashtra has raised milk procurement price by around Rs 2 par litre. The cow milk procurement price would be hiked by Rs 1.50 to Rs 10.50 per litre, while that of buffalo milk would be raised by Rs 2 to Rs14.20 per litre.

The central government has approved state government of Kerala’s project of Rs 21.09 crore for achieving self-sufficiency in milk production. Out of which, it has sanctioned Rs 4.62 crore as advance for taking up preliminary works of the project. Apart from this, it has also sanctioned an outlay of Rs 24 lakh out of Rs 1.44 crore sought for implementing a programme to discourage debt-ridden farmers from suicide.

As ethanol would be produced form sweet sorghum in the country, entrepreneurs within the country and abroad are in the process of establishing company to boost the ethanol production in the country, out of which 3 units would be establishing their companies whose total production capacity is determined to be around 400 kilo liter per day, while group of NRIs are planning to introduce Rs 160-crore plant near Nellore and even Bio Fuels (the Indian arm of a US company) would set up 200 kilo liter per day plant near Vizag.

Under the 11^th Five Year Plan (2007-2012), coffee sector would get outlay of Rs 750 crore, which is more than two times the previous plan outlay (Rs 350 crore). The main thrust of the plan would be

To boost productivity and develop new coffee species, drive domestic consumption, and concentrate on exports of value-added coffees.

To boost productivity and replantation in coffee growing regions to the extent of 70,000-80,000 hectares.

Priority to mechanisation due to shortage of plantation labour and rising input costs.

Plan to expand coffee growing to non-traditional areas such as naxal-infested areas in Andhra Pradesh, and northeastern states like Mizoram and Nagaland.

According to Coffee Board, exports of speciality and value added coffee from India have gone up by 12.94 per cent in the coffee year (October-September) 2006-07 at 68,927 tonnes as compared to that of 61,028 tonnes during the previous crop year (2005-06). While in value terms, it has improved by 26.82 per cent at Rs 648.05 crore as against that of Rs 510.99 crore in the previous year. Coffee Board statistics have exemplified that out of total quantity of coffee (6,1618.20 tonnes) permitted for exports as on September 15, 2007, specialty coffee has accounted for around 7,730.70 tonnes, while value added coffee has constituted for the remaining 53,887.50 tonnes.

The National Bank for Agriculture and Rural Development (Nabard) has sanctioned loan of Rs 100 crore to Andhra Pradesh under RIDF-III (Rural Infrastructure Development Fund) for taking up 20 minor irrigation projects and 23 lift irrigation projects. Out of total outlay, minor irrigation projects would get Rs 25.03 crore and lift schemes would receive the remaining loan amount.

Deputy Directorate General (Horticulture) and Indian Council of Agricultural Research (ICAR) have jointly planned a proposal to upgrade the national research center on horticulture crops and forming a team to review its performance. The proposal also includes setting up of the National Research Centre for Banana in Tiruchi.

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) remained unchanged at its previous week’s level of 3.02 percent for the week ended October 20,2007. During the comparable week of the earlier year, it was 5.61 per cent.

During the week under review, the WPI rose by 0.1 per cent to 215.1 from 215.0 at the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), declined marginally to 225.0 from its previous week’s level of 225.1.

The index of  ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) was witnessed an increase 0.1 per cent due to higher price of naphtha, furnace oil and bitumen.

The index of ‘manufactured products’ group (weight 63.75 per cent) rose by 0.1 per cent to 187.4 from 187.3 for the previous week due to rise in the prices of bran, bran oil etc.

The latest final index of WPI for the week ended August 25,2007 has undergone upward revision; as a result, both the absolute index and the implied inflation rate stood at 213.9 and 3.94 per cent as against the provisional data of 213.6 and 3.79 per cent.

Banking

Private sector lender Yes Bank has made an equity placement of 1.47 crore shares worth Rs 331 crore to Singapore-based financial services major, Oriental Global. The Singapore firm would be holding 4.99 per cent stake in Yes Bank.

The RBI has proposed to form a working group to lay-down the roadmap for cross-border supervision and supervisory co-operation with overseas regulators, consistent with the framework envisaged in the Basel committee on banking supervision. Besides general market risk, specific risk arising out of deficient documentation or settlement risk is to be covered under the supervisory process.

Continuing its mission to contain the liquidity, the RBI has announced in its monetary policy on October 30, 2007, a hike in CRR by 50 basis points to 7.5 per cent, while making no change in its key rates.

Public Finance

During the first half of the current fiscal year the fiscal deficit of the government has stood at 53.8 per cent of the budget estimate (BE), amounting to Rs 81,200 crore – higher than that of the corresponding period of the previous year. Revenue deficit, however, has risen to Rs 61,124 crore (85.5 per cent of the BE) during the period under consideration. The Fiscal Responsibility and Budget Management Rules mandate mid-year targets for fiscal and revenue deficits. The rules require the government to restrict fiscal and revenue deficit to 45 per cent of budget estimates at the end of September, the first half of the financial year. The government has breached the half-yearly targets set in the FRBM Rules for fiscal and revenue deficit.

Financial Sector

Capital Market

Primary Market

The initial public offer (IPO) of Delhi-based Religare Enterprises received an overwhelming response as the issue was subscribed by 159.95 times on the last day of the offer. The qualified institutional bidders (QIB) segment was subscribed 46.23 times, according to the NSE website. The high networth investors (HNI) portion was subscribed 2.45 times and the retail portion was subscribed 13.38 times.  The company had set a price band of Rs 160-185. The company is offering 75.76 lakh shares and will raise Rs140 crore at the upper end of the price band. 

Mundra Port & Special Economic Zone’s (MPSEZL) initial public offer (IPO) was subscribed by 4.67 times on the first day of the issue. The shares were fully subscribed during the first half-an-hour of the opening itself, according to the NSE data. The IPO, the first by a port and SEZ company in India , received 18.80 crore bids. The company plans to raise Rs 1,500 crore through the initial sale of 40.25 million equity shares at Rs 400-440 price band.

With two months to go for the close of the current calendar year, India ’s mobilisation through initial public offers (IPO) has jumped 166 per cent compared with the mop-up during the same time last year. According to Thomson Financial, India ’s IPO volumes totalled $7 billion from 74 issues so far this year, surpassing the previous year’s (the whole year) IPO volumes. India now ranks the ninth largest IPO market in the world, capturing 3 per cent of the global market share, up from a mere 1.3 per cent share in the year-ago period. 

Secondary Market

Volatility characterized trading on the bourses, last week, due to alternate bouts of buying and selling. The key indices managed strong gains. Capital goods and banking stocks were the star performers, while FMCG stocks were the worst performers. The 30-share BSE Sensex gained 733.06 points, or 3.81 per cent to 19,976.23 and the broader based S&P CNX Nifty gained 230.01 points, or 4.03 per cent to 5932.40 in the week ended Friday, 2 November 2007. Among sectoral indices, BSE Capital Goods index jumped 1,846.26 points, or 9.96 per cent to 20,386.41 in the week. The BSE Banking index or Bankex rose 968 points, or 9.42 per cent to 11,241.53. The BSE FMCG index dropped 66.70 points, or 3.13 per cent to 2,062.04 in the week.

On Monday, 29 October 2007, Sensex hit 20,000 mark for the first time in its history in intra-day trade. On that day, it ended up 734.50 points or 3.82 per cent to 19,977.67 and the broader based S&P CNX Nifty ended up 203.6 points, or 3.57 per cent, to 5,905.90.

Circuit Systems ( India ) debuted at Rs 42 on BSE on Friday, 2 November 2007, a premium of 20 per cent over IPO price of Rs 35. The stock settled at Rs 43.50 on that day, a premium of 24.28 per cent over the IPO price. The company had come out with a fixed priced IPO in late September 2007-early October 2007. Circuit Systems ( India ) is into manufacturing of rigid printed circuit board (PCB), a key electronic component.

National Stock Exchange, on Tuesday, 30 October 2007, announced changes its key index viz. the S&P CNX Nifty. Cellular services firm Idea Cellular and oil exploration firm Cairn India are the new entrants in the index. The two outgoing scrips are MTNL and HPCL. These changes come into effect from 12 December 2007.

RBI has issued the new guidelines on issuing preference shares as part of regulatory capital, enhancing banks' capital raising options for capital adequacy purposes.

Derivatives                                  

After Sebi's clarifications on participatory notes, FIIs have held their ground in futures and options while continuing to buy heavily in cash. However, Indian operator’s volume is clearly down. In absolute terms, FII trading volumes are also a little down but the open interest held by FIIs has increased across most F&O segments.  While the market continues to rise, there is always the chance that operator volume will ease back in now that the FIIs are out of panic mode. 

Government Securities Market

Primary Market

RBI conducted the auction of 5.87 per cent 2010 and 11.30 per cent 2010 for the notified amounts of Rs.3000 crore each, under the Market Stabilisation Scheme (MSS) on November 1, 2007. The cut-off yields for the 5.87 per cent 2010 and 11.30 per cent 2010 were 7.7307 per cent and 7.7988 per cent, respectively.

 RBI has announced the sale (re-issue) of 8.20 per cent 2022 and 8.33 per cent 2036 for Rs.5,000 crore and Rs.3,000 crore, respectively on  November 8, 2007.

Secondary Market

At its mid-term monetary policy review, RBI raised banks’ cash reserve ratio (CRR) by 50 basis points on Tuesday, 30 October 2007 to drain out excess cash and keep inflation low. The move, which will take effect on 10 November 2007, will drain around Rs 16,000 crore from the banking system. RBI kept bank rate, repo rate and reverse repo rate unchanged.

As anticipated, the US Federal Reserve lowered its key rate – the Fed funds rate - by a quarter-percentage point to 4.5 per cent, on Wednesday, 31 October 2007. The move comes little over a month after the US central bank cut rates by 50 basis points, which resulted in a surge in foreign money into India with stock markets scaling new high.

Inter-bank call rates ranged between 6.05-6.15 per cent was in line with the previous week’s close. The RBI’s decision to reject all bids at the MSS T-bill auction helped to sustain liquidity in the market. The RBI’s decision to hike CRR surprised the market prompting a downward movement in risk free yields. The 1-10 year YTM spreads decreased by 13 bps to 25 bps. The yield of the benchmark 10 year security - 7.99 per cent 2017 was at 7.8514 per cent as against 7.8186 per cent during the previous week.

Bond Market

HDFC is tapping the market to mobilise Rs 500 crore through the issuance of bonds by offering 9.50 per cent for 10 years. The bond has been rated AAA by crisil.

Foreign Exchange Market

The rupee has continued to appreciate against the dollar from Rs 39.51 on October 26 to Rs 39.37 on November 2 before rising to a high of Rs 39.32 during the week driven by Hike in CRR and a cut in Fed Rate by US Fed, has resulted in widening yield differentials, increasing expectations of inflow of foreign currency assets. The rupee, in the later half, has moved down due to increased demand from oil companies and also stock markets were highly volatile. Forward premia has shot up in response of US fed rate cut.

Commodities Futures derivatives

Gold Standard (.999) spot and futures prices (MCX) on Monday crossed the psychological level of Rs 10,000 per 10 gram following the strong overseas Markets and expected good physical buying during the Diwali and marriage season in the fourth quarter of the current calendar year.

The Department of Post (DoP) and the Multi-Commodity Exchange (MCX) would jointly increase their presence in various parts of the country to provide market information, real time commodity prices, warehousing and agriculture inputs. So far MCX has tied up with the department in Maharashtra, Madhya Pradesh and Gujarat to reach out to farmers. The service hence would be extended to other destinations too. Both DoP and MCX had earlier agreed on providing facilities like making inquiries and futures trading at the department’s post offices in Jalgaon where a pilot project was initiated in June 2006 and recently at Dhamangaon. Initially, the response from farmers has been slow, but gradually there has been a surge in the number of queries raised by them after the successful launch of the project in Jalgaon. Under the tie-up, the IT infrastructure is being provided by MCX while DoP’s personnel are trained to handle the inquiries and transactions. DoP seeks to provide services to more and more farmers and other traders in these small towns and villages. Therefore, the DoP intends to expand and take these services to more post offices in other cities. Under the programme, a farmer can route his query to the MCX representative stationed at the post office through the village postman. The queries are sent online to the nearest agriculture research centres and responses delivered to the farmer through the postman. Besides specific queries, support information on farm-related issues and pricing are also being provided on a daily basis. The MCX hubs at post offices would be armed with a computer terminal with Internet access, a printer, a scanner, a fax machine and an electronic MCX commodity price ticker. The exchange charges Rs 10 per query on crop advisory services. Apart from making farmers understand the benefit of futures trading, MCX also provides them with timely advice on fertilisers, pesticide, finance and warehousing.

Insurance

India ’s leading housing finance company HDFC and Germany ’s Munich Re are “coming together to sell non-life insurance in India ’s growing market. HDFC would sell 26 per cent in its insurance arm HDFC General Insurance to Munich Re’s Egro International subsidiary for an undisclosed amount. The new company will be named as HDFC  Egro General Insurance Ltd.

Corporate Sector

The country’s largest steel manufacturer Steel Authority of India (SAIL) has posted 18 per cent increase in its net profits at Rs 1700 crore for the quarter ended September 30, 2007 as compared to Rs 1443 crore during the corresponding quarter last year.

DLF has recorded consolidated revenues of Rs 3349 crore for the quarter ended September 30, 2007 an increase of 7.3 per cent from Rs 3121 crore in the first quarter of the current fiscal.

Indian Oil Corporation has posted a 32.4 increase in its net profit at Rs 3818 crore for the second quarter of the current fiscal against Rs 2884 crore for the corresponding period last year.

The upsurge in global crude has helped state-owned ONGC post 22 per cent rise in net profit for the second quarter ended September 30, 2007. The net profit of ONGC is after paying Rs 3,700 crore towards subsiding  cooking fuel prices – LPG and Kerosene.

Tata Chemicals has posted a consolidated net profit of Rs 208 crore for the quarter ended September 30, 2007 as compared to Rs 185 crore for the quarter ended September 30, 2006. Total income has increased from Rs 1662 crore for the quarter ended September 30, 2006 to Rs 1778 crore.

External Economy

Reflecting currency revaluation as well as buying of dollars by the Reserve Bank of India to keep the rupee from appreciating, forex reserves have surged by US $ 1.307 billion to touch US $ 262.450 billion, for the week ended October 26, 2007 – lower than that of the previous week’s rise of US $ 4.457 billion, when the forex reserves touched $ 261.143 billion. In the week under consideration, the euro had been strong against the dollar as it moved from US $ 1.4236 to US $ 1.4319. The foreign currency assets have gone up by US $ 1.305 billion to US $ 254.629 billion for the week concerned. Foreign currency assets, as expressed in dollars, include the effect of appreciation or depreciation in non-US currencies (euro, sterling and yen) held in reserves.

As per the provisional figures of foreign trade released by the Department of Commerce, the country’s exports during September 2007 have stood at US $ 12,796.61 million, higher by 19.3 per cent than the level of US $ 10,730.34 million during September 2006. In rupee terms, exports have touched Rs 51,621.52 crore, 4.3 per cent higher than the value of exports during September 2006. Cumulative value of exports during the first half of the current fiscal has stood at US $ 72,280.60 million (Rs 2,95,233.05 crore) against US $ 60,985.84 million (Rs 2,80,275.27 crore), registering a growth of 18.5 per cent in dollar terms and 5.3 per cent in rupee terms. Imports, on the other hand, have stood at US $ 17,217.65 million representing a meagre increase of 2.3 per cent over the level of imports valued at US $ 16,828.82 million in September 2006. Cumulative value of imports for the period April-September 2007 has stood at US $ 1,09,204.43 million (Rs 4,46,520.86 crore) against US $ 8,70,110.23 million (Rs 3,99,815.04 crore). Non-oil imports during the first half of the current fiscal year have amounted to US $ 77,805.21 million higher by 34.1 per cent than the level of such imports valued at US$ 58,006.59 million in April-September 2006. The trade deficit during the first half of the current fiscal has widened at US $ 36,923.83 million than the deficit of Us $ 26,024.39 million during April-September 2006.

Information Technology

Leading portal Yahoo Indian will be providing various online services including e-mail and instant messaging in Hindi and other regional languages.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

LIST OF WEEKLY THEMES

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