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Current Economic Statistics and Review For the
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Theme
of the week:
Currency Futures in India: An Initial Story* With
the introduction of currency futures in Comparison
of forwards in OTC markets and futures Futures are standardized products in a transparent manner while forwards are customized as per the requirements of the customer. Further in case of futures, there is upfront cost and margining requirements, which could effectively increase the cost of hedging in futures. Moreover, futures are tradable in small lots while forwards are traded in large quantities. A summary of the differences in futures and OTC has been summarized in Table 1.
I Global
Position: A Brief Review Evolution
Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972 after the system of fixed exchange rates was abandoned along with the gold standard in response to the need of some commodity traders at the CME who did not have access to the inter-bank exchange markets in the early 1970s. They established the International Monetary Market (IMM) and launched trading in seven currency futures on May 16, 1972. Currently, currency futures are traded on three main exchanges: CME, NYSE Euronext and Tokyo Financial Exchange. Status
of Currency Futures Globally Worldwide, the currency futures market remains small, though rapidly growing market, in relation to the size of OTC spot as well as forward market. As per the latest data as shown in Tables 2 and 3, the OTC foreign exchange contracts account for US $ 56,238 billions while exchange traded account for on $ 159 billions.
According
to the Triennial Central Bank Survey of Foreign Exchange and Derivatives
Market Activity in 2004 (BIS, 2005) covering 52 central banks, the average
daily turnover in exchange traded currency contracts was USD 23 billion in a
total foreign exchange turnover of USD 1,880 billion which included USD 621
billion in the spot foreign exchange market. According to the preliminary
results of the just released Triennial Central Bank Survey of Foreign
Exchange and Derivatives Market Activity in 2007 covering 54 countries and
jurisdiction, the average daily turnover in exchange traded currency
contracts has trebled since then to USD 72 billion in 2007. However, it is
still small in relation to USD 3,220 billion total foreign exchange daily
turnover, which includes USD 1,005 billion daily spot turnover in 2007. The
exchange traded currency contracts comprise futures as well as options and
options on futures. As such, currency futures still comprise less than 2 per
cent of the foreign exchange market. Therefore, the currency futures market
is far from becoming a significant segment of the foreign exchange market
and can be seen merely as an add-on to risk management kit and a tool for
furthering transparent price discovery.
The low turnover of currency futures in the world foreign exchange markets could mean that price discovery in foreign exchange occurs primarily in the OTC spot and derivative market segments. It is likely that the spot segment may be a major driver of price discovery in the foreign exchange market, in spite of it being half of the OTC forwards and swaps where daily turnover slightly exceeded USD 2 trillion in 2007. Interest parity condition may ordinarily act as an error correction mechanism, forcing forwards to converge with spot price changes. However, at times significant deviations in interest parity are observed and the role of forward market in exchange rate determination cannot be ignored (RBI 2008). II Status
Report on
As per the above mentioned survey (2007), the foreign exchange market
in Requirements
of Hedging It
is for the first time in However, in the recent times, RBI has undertaken a series of measures to liberalize the markets such as the permission to SMEs engaged in export-import business to hedge their foreign exchange exposures without complying with the complicated documentation requirements or past performance of exports and imports. Further, it is permitted to resident individuals to book forward contracts on the basis of current or anticipated exposures up to a limit of USD 100,000. Thus, the first step towards liberalization of hedging tools has already been initiated. As per RBI, under the currency futures regime, the requirement of an underlying exposure doesn’t remain valid since futures by definition are meant to be used not only for hedging but also for speculation and leveraging. After introduction of currency futures, if an entity is permitted to take a speculative position, then this would clash with the FEMA requirement of hedging for permitted purposes which currently doesn’t include speculation/leveraging. Contract
Size The contract size on the domestic exchange is much smaller as compared to the other international exchanges. The size of $ 1000 contract will help the small and medium enterprises as well as retail investors can hedge their positions. Thus, its meant to provide non-institutional market participants a means to hedge their currency exposures in a transparent and price-efficient manner. The price discovery function of the exchanges is significant for the individuals and SMEs. Further, price discovery should be such that the individuals and SMEs are able to trade on the same prices as are available to the large customers. If the price discovery is done for a large size lot, the individuals and SMEs may not be able to capture the fineness of that rate for their small-sized lots. As it is, the large institutional and corporate customers are able to manage beneficial rates even in the OTC segment. Cash
Settlement In the case of settlement of the contracts, the RBI has preferred cash settlement in comparison to the physical settlement. Though physical settlement results in a tight relation between the futures and the underlying market, it has been observed that the countries with full capital account convertibility have followed physical settlement, while others have preferred cash settlement. From the viewpoint of monetary and exchange rate policies, physical delivery based contracts could result in lower exchange rate volatility, which reduces the need for intervention and so delivers better control on liquidity conditions. At the same time, physical delivery based contracts in presence of capital controls could result in uncontrolled changes in foreign asset positions and pose relatively greater risk of dollarization. Dollarisation refers to the broad use of foreign currency as a substitute for domestic currency for transaction or other purposes. Though the fear of dollarisation due to introduction of currency futures exists, it has been observed that it occurs even when the foreign currency is not officially recognized as a legal tender. The serious risk emanating from the process of dollarisation is that it makes it very difficult for the domestic monetary authority to conduct an independent monetary policy. If the shocks facing the economy are asymmetric vis-à-vis the country of the currency of dollarisation (i.e., they are not coinciding or are of a similar nature to that of the country whose currency is permitted as a legal tender), they could pose serious policy dilemmas. Thus, it could be extremely damaging to the domestic economy if, for instance, the domestic demand shock warrants a monetary policy compression in the domestic economy at a time when the external monetary authority is pursuing an expansionary monetary policy on the basis of its own macroeconomic situation, or vice-versa. Since in a dollarised economy, the domestic monetary authority would also find it difficult to perform the lender-of-the-last resort (LOLR) function, on account of its inability to print additional money to provide emergency funding to the banks, it could potentially lead to financial stability problems with an accelerator effect. In addition, dollarisation also leads to loss of seigniorage for the dollarised economy, (seigniorage is the profit a country earns when it issues a currency as the difference between the products the currency can buy and the cost of printing that currency). Exchange
Rate Volatility
There is a view that currency futures could result in enhanced volatility due to inherent differences in the regulatory prescriptions for the OTC and the futures markets. While for the exchange-traded FX-futures, the regulatory framework could possibly be placed somewhere between the extant capital account regime and that of a full convertibility, the desirability of such a regulatory framework would have to be viewed in the light of the path of fuller capital account convertibility, as currently envisaged. The impact of these changes on the exchange rate volatility in the currency futures market would need to be managed prudently. International experience of the emerging markets with the introduction of currency futures is a mixed one. In several cases, the volatility is found to be reduced following the constitution of currency futures market, though empirical evidence to the contrary also exists. The transaction volumes in currency futures in these countries have remained too small to put any significant upward pressure on exchange rate volatility. Also, there is no clear evidence to prove that futures contracts traded on exchanges result in increased volatility in the prices for the underlying commodity. For most products, volatilities are higher or lower depending upon the choice of the time period and no causation is established. There have, however, been some episodes of build up of speculative price rise in case of some futures contracts. However, it is expected that the potential for increased volatility could in effect be neutralized by the presence of wider pool of market participants who would be having divergent perceptions, views, exposures and horizons. While currency futures market provides an additional instrument to manage participants risks, it generally facilitates the conduct of policy and does not necessarily impede it, though the risks from dollarization and increased exchange rate volatility could arise. If currency futures add to the degree of dollarization in the economy, the risks in the form of exchange rate volatility would also grow. Eventually this would impact interest rates, the pace of economic activity and inflation. However, these risks have to be managed by adopting appropriate product design, risk management, monitoring and surveillance, such that in net terms the risks are outweighed by the benefits. Table 4 shows the volatility in the underlying and futures volatility as per the trading on NSE. Impact
of Futures on Spot and Forward Markets There
are concerns about impact of currency futures price on the spot price or
vice versa. There is no clear evidence to suggest that currency futures
result in enhancement of volatility in the spot exchange rates in a causal
sense. Empirical evidence is ambiguous as to whether currency futures afford
distinctly higher speculation than is possible without them. In theory,
futures price would largely operate on a premise similar to forward markets
i.e. it should largely reflect interest rate differentials. In Empirical research on market microstructure of foreign exchange markets suggests that often future prices do lead the spot price changes by couple of minutes. Over longer horizons, however, the futures prices are found to have a more significant influence on foreign exchange price discovery, which is not commensurate with its relative market share. While exchanges bring together rational as well as noise traders, it is important to recognize that informed traders could prefer trading in currency futures which afford anonymity. On the whole, however, the inter-dealer trades through direct market or through electronically brokered market can be expected to have a more pronounced impact on spot and forward foreign exchange market than the trades in futures markets. Further, by imposing the trading time limits, the RBI has ensured that its control remains over futures as well and not allows currency futures to be a lead for spot and forward markets. III Turnover
in Currency Futures: Initial Experience
Though its just over a month since the currency futures have begun trading on the NSE, it worth while to review its initial statistics. At present volume is thin and mostly as a result of propriety trade by banks and speculators. Also, the bulk of turnover is in the near month contract (Table 5). Also, as the market grows, it would attract the gold and silver traders as there is a presence of huge arbitrage activity on MCX and the global markets which has been now accounting for more than about 50 per cent of the total trade on the MCX. As per the data published by NSE, the trading pattern shows that the near month, two and three months, followed by more than six-month contracts (Table 6).
The daily close price on the futures exchanges and RBI reference rate has shown close movements as shown in the chart.
Entry
of FIIs
Though the
RBI-SEBI committee has not favoured the immediate permission to the FIIs and
NRIs to operate in the currency futures market, the Finance Minister in his
inagural speech at NSE has said that the market regulators should consider
allowing more than one currency for futures and permit FIIs and NRIs to
hedge in this market. He further said that
While
introduction of these requirements nevertheless make the market more
diversified and liquid, it would also throw open the market to onslaughts of
speculators and in turn may jeopardize the financial stability. The recent
events in the It is heartening to note that the SEBI Chairman, in view of the persistent demand for allowing FIIs, has said that before allowing FIIs and NRIs to participate in currency futures trading, “We need to gather some experience about how futures are functioning and how people are participating in the market.” However, the cautious and prudent attitude adopted by the SEBI and RBI regarding permitting the FIIs and NRIs in the currency futures market is required so that the FIIs are not in a position to drive the currency movements. The finance minister, however, has been pushing for their entry. Dr R H Patil, chairman of CCIL, has said that FIIs entry into currency futures can curtail RBIs’ ability to intervene in the foreign exchange market. He further suggests that if they have to be allowed, there should then be a cap on their open interest position in currency futures, though the entry of FIIs and NRI would result in increased liqudity and increased arbitrage activities. Turnover
on In 2007, the exchange launched the world's first Indian Rupee contract versus the dollar. This is the first time Rupee risk can be traded and hedged on an international electronic platform. It was said at that time that some NDF business will migrate to the Dubai Gold and Commodities Exchange (DGCX) as well as trading would migrate to foreign exchanges, as domestic markets did not provide the required infrastructure. However, recently it has been found that there is hardly any trading in these contracts on DGCX belying the claims of possible migration of the market. Conclusion Unlike the interest rate futures which had not picked up due to excessive restrictions, the regulators have ensured that currency futures have been introduced with a balance between various market participants. The turnover has been rising consistently indicating that the market participants have found the instrument useful. It is required that the regulators approach the currency futures with utmost care given the policy and financial stability implications. Reference: BIS (2004 & 2007): Triennial Survey of foreign Exchange and Derivatives Market (2008): Quarterly Review, June Gopinath S (2008): Remarks on the occasion of the launch of currency futures RBI (2008): Report of the Internal Working Group on Currency Futures. * This note has been prepared by Piyusha D Hukeri and the accompanying tables have been made by Anita B Shetty. Highlights of Current Economic Scene AGRICULTURE
According to Agriculture
Ministry’s, ‘first advance estimates’ (I AE) country is likely to
produce 115.33 million tonnes of foodgrain in the 2008-09 kharif season,
down by 4.65 per cent from the fourth advance estimates of the previous
year, but up by 2.75 per cent from the Ist AE of last year. Apart
from erratic behaviour, there was a dry spell of monsoon during the peak
sowing period of July mostly in the peninsular regions, followed by
excessive rains from late-August leading to floods in Bihar, Uttar Pradesh,
Orissa and The central government’s rice procurement for the kharif marketing season (October-September) 2007-08 so far has touched an all-time high of 27.9 million tonnes against a target of 27.6 million tonnes and is likely to touch 28 million tonnes by the end of September 30 2008. It is expected that record rice procurement might enable the government to undertake the open market sale scheme (OMSS) for rice, as it is doing for wheat at present. The overall improvement in procurement can be attributed partly to hike in the minimum support price (MSP) (Rs 105 per quintal each for common variety of paddy (to Rs 850) and for Grade A variety (to Rs 880)) for the marketing period 2008-09 (October-September) and mandatory declarations of rice purchase exceeding 10,000 tonnes to state governments and purchase exceeding 25,000 tonnes to the union government. Paddy
output in The central government is planning to provide a bonus of Rs 50 to paddy farmers over and above the minimum support price (MSP) of Rs 850 per quintal in 2008. This hike in procurement price is likely to be announced by the first week of October 2008. Meanwhile, the area under paddy in the ongoing kharif season has increased to 373.51 lakh hectares till September 19, 2008, as compared with 361.81 lakh hectares during the same period a year-ago. One of the government official has stated that acreage under rice would surpass the five-year average of 389.66 lakh hectares in 2008. Union
Agriculture Ministry has reiterated that the country has lost about 20 lakh
hectares of kharif crop area on account of recent floods in many states. He
has opined that rains in the month of August-September have caused damage to
the standing kharif crop, but would help preserve soil moisture for better
rabi sowings. Recent floods in most parts of the country have not only
caused damages to paddy, but also affected sugarcane crop. Although the
marketing season of sugarcane officially starts only in October, this time
it has been pre-poned and it has begun from September 22 2008 in Haryana and
from September 29, 2008 in The Food Corporation of India (FCI) on September 20, 2008 recited that rice bags damaged during the recent rains in the state of Jharkhand would not be delivered for public consumption but would be auctioned for cattle feed. The agenda note circulated by government's annual ‘Rabi Campaign-2008’ reiterated that wheat crop in India in the next crop year starting from April 2009 would increase marginally to 78.50 million tonnes from this year's estimated actual output of 78.40 million tonnes, due to stagnating yields. In case of rice, the government aims to scale up harvest to 14 million tonnes during the coming rabi season, up from 13.62 million tonnes last year. Around 10 to 12 million tonnes of rabi rice is grown mostly in southern states during the rabi season. Government officials has estimated that total rice crop in the country (kharif and rabi) would be around 96.43 million tonnes. Directorate
General of Foreign Trade (DGFT) in its notification as on September 24 2008,
stated that the import of dairy products (including milk and milk-products)
from As
per the notification by directorate general of foreign trade, As
per the estimates by Mahyco Monsanto Biotech (MMB) about 4 million farmers
in Solvent Extractors Association (SEA) has favoured to raise import duty on edible oil due to decline in trend in domestic edible oil prices, since last two months due to a crash in the international market. Export of spices for the first five months of the current fiscal of 2008-09 has registered an increase of 12 per cent in quantity terms to 223,050 tonnes as compared with 198,985 tonnes during the same period last year. In rupee terms, exports of spices augmented by 16 per cent to a level of Rs 2265.25 crore during the April-August period as against Rs 1,950.09 crore a year ago. While in dollar terms, it surged by 13 per cent to US $537.30 million as against US $476.45 million during the corresponding period a year ago. Spice oils and oleoresins including mint products contributed 39 per cent of the total export earnings. Chilli contributed 22 per cent followed by cumin by 9 per cent, pepper by 8 per cent and turmeric by 5 per cent. Exports of pepper, chilli and mint products suffered in the month of August 2008. As
per the latest statistics released by International Coffee Organisation (ICO),
the preliminary estimation of world coffee consumption in the calendar year
2007 stood at around 124.7 million bags, up by 2.9 per cent from 121.1
million bags consumed in 2006. It is expected that world coffee consumption
in 2008 would increase to around 128 million bags. Producing countries like
India, Brazil, Mexico and importing countries like Spain, UK and Netherlands
attributed to the growth in world coffee consumption since last five years.
Consumption of coffee in Demand for fertiliser would rise significantly during the coming rabi sowing season, in the wake of plans to bring more area under cultivation during the coming rabi sowing season. Country has planned to scale up to 53.29 million hectares in the up coming rabi season as against 50.28 million hectares last year due to losses suffered by floods during the ongoing kharif season. Demand for urea is expected to rise almost by 3.09 per cent to 14.42 million over the same season last year. Demand for di-ammonia phosphate (DAP), up by 6 per cent from last rabi to 5.02 million tonnes of, while that of MOP is up almost by 5.36 per cent to 2.06 million tonnes of over last year. However, the demand for complex fertilisers is expected to fall by around 7 per cent, to 4.33 million tonnes. Meanwhile, the availability and requirement of urea during the current kharif sowing season has been largely below requirement and barring the availability of MOP, supplies of all others namely urea, DAP and complex fertilizers have been below requirement till August 31, 2008. Official documents show that till August 31, around 10.99 million tonnes of urea have been made available to farmers against the requirement of 13.71 million tonnes. In case of DAP around 3.91 million tonnes have been made available against a requirement of 4.27 million tonnes, while in case of complex fertilisers around 2.85 million tonnes were available against a requirement of 4.89 million tonnes. Only in case of MOP, supplies were higher than required; around 1.78 million tonnes of MOP was supplied to farmers as against a requirement of 1.72 million tonnes. President of Gunny Traders Association, reiterated that record foodgrains production this year has pushed the prices of gunny bags by 25 per cent since last three months due to increase in demand by the government to procure foodgrains in jute sacks. Industrial
Production The General Index stands at 273.0, which is 7.1% higher as compared to the level in the month of July 2007. The cumulative growth for the period April-July 2008-09 stands at 5.7% over the corresponding period of the pervious year. Mining, Manufacturing and Electricity sectors for the month of July 2008 stand at 164.9, 293.3, and 225.9 respectively, with the corresponding growth rates of 5.0%, 7.5% and 4.5% as compared to July 2007. The cumulative growth during April-July, 2008-09 over the corresponding period of 2007-08 in the three sectors have been 4.5%, 6.1% and 2.6% respectively, which moved the overall growth in the General Index to 5.7% Ten out of the seventeen industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of July 2008 as compared to the corresponding month of the previous year. The industry group ‘Beverages, Tobacco and Related Products’ have shown the highest growth of 28.6%, followed by 18.7% in ‘Transport Equipment and Parts’ and 16.0% in ‘Machinery and Equipment other than Transport Equipment’. On the other hand, the industry group ‘Wool, Silk and Man-made Fibre Textiles’ have shown a negative growth of 9.2% followed by 9.1% in ‘Wood and Wood Product: Furniture and Fixtures’ and 4.9% in ‘Leather and Leather & Fur Products‘. Sectoral growth rates in July 2008 over July 2007 are 5.9% in Basic goods, 21.9% in Capital goods and 1.6% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 11.2% and 6.1% respectively, with the overall growth in Consumer goods being 7.3%.
Infrastructure The
Index of Six core-infrastructure industries having a combined weight of 26.7
per cent in the Index of Industrial Production (IIP) with base 1993-94 stood
at 240.1 in July 2008 and registered a growth of 4.3 per cent compared to a
growth of 7.2 per cent in July 2007. During April-July 2008-09, six
core-infrastructure industries registered a growth of 3.7 per cent as
against 6.6 per cent during the corresponding period of the previous year.
Crude
Oil production (weight of 4.17 per cent in the IIP) registered a negative
growth of 3.0 per cent in July 2008 compared to a growth rate of 0.9 per
cent in July 2007. The Crude Oil production registered a growth of (-) 0.9
per cent during April-July 2008-09 compared to (–) 0.3 per cent during the
same period of 2007-08. Petroleum
refinery production (weight of 2.00 per cent in the IIP) registered a growth
of 11.8 per cent in July 2008 compared to growth of 4.7 per cent in July
2007. The Petroleum refinery production registered a growth of 5.4 per cent
during April-July 2008-09 compared to 11.0 per cent during the same period
of 2007-08. Coal
production (weight of 3.2 per cent in the IIP) registered a growth of 5.5
per cent in July 2008 compared to growth rate of 1.1 per cent in July 2007.
Coal production grew by 7.7 per cent during April-July 2008-09 compared to
an increase of 0.8 per cent during the same period of 2007-08. Electricity
generation (weight of 10.17 per cent in the IIP) registered a growth of 4.5
per cent in July 2008 compared to a growth rate of 7.5 per cent in July
2007. Electricity generation grew by 2.6 per cent during April-July 2008-09
compared to 8.1 per cent during the same period of 2007-08. Cement
production (weight of 1.99 per cent in the IIP) registered a growth of 8.8
per cent in July 2008 compared to 9.4 per cent in July 2007. Cement
Production grew by 6.5 per cent during April-July 2008-09 compared to an
increase of 7.7 per cent during the same period of 2007-08. Finished
(carbon) Steel production (weight of 5.13 per cent in the IIP) registered a
growth of 1.9 per cent in July 2008 compared to 10.8 per cent (estimated) in
July 2007. Finished (carbon) Steel production grew by 3.8 per cent during
April-July 2008-09 compared to an increase of 6.8 per cent during the same
period of 2007-08. Inflation Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100) for the week ended 13th September 2008 remained unchanged at 241.1 for the previous week. The annual rate of inflation, calculated on point-to-point basis, stood at 12.14 percent for the week ended 13/09/2008 as compared to 3.46 percent a year ago. The
index of primary articles rose by 0.1 percent due to higher prices
fish-marine, tea, fruits & vegetables, condiments and spices, The price index of major group fuel, power, light and lubricants remained stable at previous weeks level of 375.3. Index of Manufactured Products declined by 0.05 percent from its previous weeks level of 207.5. The WPI index for the week revised upward from 239.3 to 240.5 for the week 19-7-2008. As a result the inflation rate also stand revised to 12.54 per cent. Financial MarketsCapital Market Primary
Market According
to media sources, the global market for initial public offerings (IPO)
collapsed in the third quarter of 2008 in its worst performance since early
2003, with Europe and the Securities and Exchange Board of India (SEBI) has expanded the horizon of reforms in the primary capital market by launching the process of applications supported by blocked amount (ASBA) in rights issues on a pilot basis. This is a sequel to the introduction of ASBA in book-built public issues. As per a SEBI circular, ASBA facility in rights issues will be available to all shareholders of the issuer company as on the record date, subject to qualifications. It will co-exist with the current process, wherein cheque/demand draft is used as a mode of payment. According
to Reuters, Tata Motors, Secondary
Market The
domestic markets mirrored weak global markets amidst uncertainty over the
proposed $700 billion bailout deal for the The
S&P CNX Nifty fell below the psychological 4,000 level. A financial
crisis engulfed the global markets earlier this month with the Among
the sectoral indices of BSE, all the indices posted negative gains over the
week except FMCG with marginal gains of 0.64 per cent. Among the losers,
Reality and IT have been the worst hit with nearly 12 per cent each. IT
stocks were hammered as more bad news from the Derivatives There was no let up from bear hammering during the week, as the Nifty October future finished at 3998.15, registering a fall of 6.4 per cent over its previous week’s close. September 25- the expiry of the monthly contract saw the cost-of-carry for stock market traders shoot up to 18-24 per cent in many counters. The expiry of September series saw a rollover of 57 per cent (into October series) in Nifty futures and 69 per cent for the overall market-wide positions. This is a sharp jump from 10-15 per cent in the previous two months. The rates are as high as 36 per cent for traders who are seeking funds from other sources like high net-worth individuals (HNIs). The September series witnessed a total rollover of 76 per cent (six-month average is 81 per cent). The Nifty rollover has been even lower at 60 per cent (six-month average is 68 per cent). Trading volume improved on the settlement day of September series to Rs 82,698 crore from Wednesday’s figure of Rs 67,052 crore. The premium of Nifty October future, which was about 41 points previous week, has narrowed down to about 13 points, indicating that there could have been accumulation of fresh short positions. The Nifty September future closed at 4113 against the spot close of 4111 while the October future closed at 4152, with a hefty premium of 41.45 points. Nifty rollover stood at about 57 per cent versus 75 per cent in the last expiry. Even, the overall market-wide rollover was lower at about 69 per cent against previous month’s of over 80 per cent. Among the October options, Nifty 4100 put and 4300 call were the most active. Apart from them, Nifty 4500 call and 4000 put also remained active. While 4100 put and 4300 call witnessed genuine buying interest (according to un-matched bid/ask deal), the 4000 put and 4500 call saw the emergence of writers (sellers). This indicates that Nifty might hover between 4000 and 4500 range. During the week, NSE volatility index slipped to 35.61. FIIs remained net sellers to the tune of about Rs 420 crore; they offloaded index futures worth Rs 1,477.5 crore but bought index options (Rs 373 crore), stock futures (Rs 569.5 crore) and stock options (Rs 115 crore). Overseas investors were also net sellers in the cash segment by Rs 1,050 crore, according to NSE provisional data. The cumulative FII positions as percentage of the total gross market position in the derivative segment as on September 25 has been 38.39 per cent. FIIs have been offloading quite heavily, particularly index futures throughout the week. They now hold index futures worth Rs 8,969.7 crore and stock futures worth Rs 14,583.04 crore. Their holding on index options stood at Rs 16,303.8 crore. 2.
Government Securities Market Primary
Market On September 20, 2008, the Reserve Bank of India (RBI) has cautioned market participants in the Government securities that they should provide sufficient funds in their current account with the RBI on the auction settlement day before 3 p.m, in case of a primary auction. Otherwise, it would be treated as an instance of SGL bouncing. The RBI also said that dealers would be penalised if they don’t provide the funds before auction settlements. Some primary dealers and banks are meeting the fund requirements of primary auction allotments from their receivables in the secondary market, said the RBI. Dealers are allowed to sell the stock on the same day as it has been allotted only in order to facilitate distribution of the stock and minimise the risk on the part of the allottees, which should not be done to meet the fund requirement of primary market settlements. RBI conducted the auction of "7.94 per cent Government Stock 2021" and "8.28 per cent Government Stock 2032" for the notified amounts of Rs.6,000 crore and Rs.4,000 crore, respectively on September 26, 2008. The cut-off yields for the securities were 9.04 per cent and 9.26 per cent, respectively. RBI
conducted the auction of State Development Loans (SDLs), 2018 for three
states and the Union Territory of Puducherry for an aggregate amount of
Rs.1,212 crores on September 25, 2008. The cut-off yield for the security
has been 8.81 per cent for Puducherry, 8.82 per cent for Himachal Pradesh,
8.83 per cent for Secondary
Market Call rates continued to rule at elevated levels, moving in the range of 10-14 per cent through the week owing to the severe cash crunch in the system. Rates eased towards 10 per cent as banks appeared to have covered their positions ahead of the reporting Friday and the bond auctions. RBI injected an average Rs 63,857 crore through the repo window and in turn mopped up Rs 125 crore through the reverse-repo window during the week. The 10-year benchmark yield rose by 18 basis points to 8.57 per cent, as bond markets reacted negatively to the devolvement of the 2021 auctioned bond on PDs. Earlier, bonds had found respite from the lower-than-expected inflation rate. Government plans to raise Rs 39,000 crore from the market through bonds in the third quarter of the current fiscal to meet its financing needs. An indicative calendar for government borrowing was issued on September 26, for the second half of this fiscal, but only details of the figures for the third quarter is given in it. As per the Budget estimates, the gross borrowing plan of the government is pegged at Rs 1,45,000 crore for 2008-09. Government has already borrowed Rs 1,06,000 crore during the first half of this fiscal, which means that its target for the whole fiscal will be met with the borrowing for the third quarter, as per the calendar. On September 26, RBI, in a signal that interest rates should be lower than what bonds markets expect, has allowed the Rs 10,000-crore government bond auction to partly devolve on primary dealers by fixing a lower cut-off yield. Despite the lower-yield signal, bond prices fell immediately after the devolvement on supply fears as primary dealers are expected to offload all bonds in the secondary market immediately. According to dealers, the market could have seen the devolvement as a positive, but the upside is limited as the central bank announced its borrowing calendar for the second half of this year, which included Rs 20,000 crore of government securities to be auctioned in October. The
International Monetary Fund (IMF) has recommended tighter monetary policy
and a targeted social security programmes to tackle inflation in low-income
countries like 3.Bond
Market During the week under review, a bank and a NBFC have tapped the market by issuance of bonds.
Issuing
the final set of guidelines to operationalise the issuance of Foreign
Currency Exchangeable Bond (FCEB) immediately, the RBI has said the promoter
group company receiving such investments will not be permitted to utilise
the proceeds for investments in the capital market or in real estate in 4.Foreign
Exchange Market The
rupee closed at Rs.46.43 per dollar on September 26, 2008 as compared with
Rs.46.32 per dollar as on September 19, 2008. The Rupee moved between
Rs.45.4 and Rs.46.43, with a standard deviation of 41 paise during the week.
The rupee lost 1.6 per cent over the week, seeing a sharp increase in
corporate dollar demand accompanied by short covering. The positive impact
of the easier ECB rules (infrastructure firms) failed to have a lasting
impact on the unit. The rupee shed 0.7 per cent to close at its lowest in
more than a week on Friday, as month-end demand for the Currency
Futures The BSE will launch exchange-traded rupee futures on October 1 and Multi Commodity Exchange Stock Exchange (MCX-SX) Ltd has received an in-principle approval from the SEBI for the launch of currency derivatives. 5.Commodities
Futures derivatives The Forward Markets Commission (FMC), the commodity market regulator, is considering fixing a minimum networth of Rs 100 crore for volume-starved regional commodity exchanges. The move will allow regional bourses to demutualise and go national. FMC is likely to finalise the norms for demutualisation and upgrade of regional exchanges in the next fortnight. The regulator may grant the regional exchanges a period of 3-5 years to raise their networth to Rs 100 crore. The minimum networth for national commodity exchanges, like MCX and NCDEX, is Rs 100 crore. FMC is also considering norms for valuing the reserves and surpluses of commodity exchanges. It will also set norms for calculating a premium on bourses’ brand name, goodwill and the like, which can be considered for calculating the networth. The ownership structure of regional commodity exchanges will also be a part of the proposed norms. The
country is expected to produce 30 per cent more guarseed this season, due to
good rainfall and better yield. The prospects of better crop have dented the
futures as well as spot markets of guarseed. Futures have dropped by 8.4 per
cent since the beginning of this month. In the physical market of According
to FMC chairman B C Khatua, the financial meltdown in the Banking
The RBI has decided to call for basic information from non-deposit taking NBFCs with asset size of Rs 50 crore and above but less than Rs 100 crore at quarterly intervals. The first such returns for the quarter ended September 2008 may be submitted by first week of December 2008. Mangalore-based
public sector Corporation Bank has opened its first overseas representative
office in The RBI has allowed holding companies to issue bonds overseas to raise funds on behalf of listed group companies. The bonds can be converted into shares of the company for which funds were raised. RBI has decided to operationalise the scheme six months after the finance ministry notified the guidelines for issuing foreign currency exchangeable bonds (FCCBs) as it had certain reservations about the new fund raising mechanism that was announced by Finance Minister P Chidambaram in February 2007. RBI has raised concerns over monitoring FDI caps and end-use of the funds raised through FCEB. The notification comes at a time when the liquidity conditions are tight globally and the government and the central bank has decided to ease the ECB norms for infrastructure companies. Now the scheme has been operationalised, Indian holding companies can issue bond expressed in foreign currency, with the principal and interest also payable in foreign currency. The bonds can be subscribed to by those who are not Indian residents. The bonds can be converted into equity of a listed group company that is engaged in a sector that is eligible to receive foreign direct investment and is eligible to issue or avail of foreign currency convertible bonds (FCCB) or ECB. The RBI has allowed banks to use floating provisions held for the advances portfolio to meet the interest/charges arising out of agricultural debt waiver and debt relief scheme. Floating provisions are free reserves earned in profitable timed maintained by banks for the provisioning requirement in the future. Corporate
The
finance ministry has announced a five-fold increase, from $100 million to
$500 million, in the amount companies building roads, ports, power plants,
telecom and other infrastructure sectors can borrow overseas to spend in Information
Technology
New
Delhi based HCL Technologies has offered an 8.3 per cent higher bid at 650
pence a share in cash to acquire UK-based SAP consulting player, Axon Group
for around Rs 3,790 crore. Microsoft Corp, Cisco Systems Inc and computer manufacturers may lose $4.3 billion in orders next year as the credit crisis forces financial companies to cut spending to the lowest level since 2000 as more than 20 per cent of global technology spending comes from the finance industry. TCS,
Telecom
The Indian telecom industry’s subscriber base crossed 300 million in August, according to data released by the TRAI. With
terrorists using open Wi-fi networks to communicate, the Department of
Telecommunications (DoT) and Department of Information Technology (DIT) are
working out steps to check this practice. Investigations into the recent
bomb blasts at Ahmedabad and The finance ministry’s hope of earning about Rs 40,000 crore from the sale of spectrum for 3G mobile services may be dashed as most operators are unlikely to bid more than the reserve price of Rs 2,200 crore. According to an assessment by the Department of Telecommunications (DoT), a maximum of 5-7 operators would bid for the spectrum and the amount per bid would be Rs 2,200 – 2,500 crore. Going by this, the government is likely to earn a maximum of Rs 17,500 crore and not Rs 40,000 crore, leaving a gap of over Rs 20,000 crore. Sources said a price of more than Rs 2,500 crore for pan-India spectrum would make the operations financially unviable for the company. UAE-based
Emirates Telecommunications Corporation (Etisalat) has signed an agreement
to acquire 45 per cent stake in
*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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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