Market Roundup. Macro-Economic Overview. Domestic Macroeconomic Development

Transcription

1 Market Roundup Domestic Macroeconomic Development The Monetary Policy Committee (MPC), in its bi-monthly meet to decide on the key policy rates in the economy, reduced the policy repo rate by 25 bps to 6.00%, effective immediately. There was an increasing clamor from the market participants as well as from within the political milieu for a rate cut as inflation rate fell for successive months and growth remained elusive amidst the twin balance sheet crisis hampering industrial lending. However, the RBI warned that the trend in inflation might be a fleeting one, as favorable base effect is set to reverse from, and vegetable prices are observing a seasonal spike. The Committee also urged the Government to get more proactive in removing infrastructural bottlenecks and boosting rural demand through mass housing provision initiatives, which are key ingredients towards growth resurrection, in the absence of private investment supporting industrial growth. Core industries growth was the first to be hit by the disruption caused by GST implementation as many commercial entities limited their output while transitioning to the new tax structure to be functional from the 1st of July Overall industry growth came to a crawl at 0.42%, a nineteen month low, also burdened partially by a high base effect. Amongst the sub-sectors, only steel (5.80% in June vs 3.90% in May) and natural gas (6.43% vs 4.51%) showed a positive growth for the current period, while the slump of coal was the lowest (-6.73% vs -3.18% in May), followed by cement (-5.77% vs -0.43%). Growth in electricity generation also hit a roadblock (0.7% vs 8.6% in May), as tepid demand caused the industry output to decline. Since a majority of electricity generation is through the utilization of coal as input, slump in demand in the former affected the production of the latter as well. Extending the signals from core industries into the month of July, India's Manufacturing PMI survey, conducted by IHS Markit, came in at the lowest since December 2016, which was in the aftermath of demonetization. PMI Index for the month of July was reported at 47.9, at its lowest since February 2009, apart from December New orders coming in declined, burdened by GST transition and associated uncertainty, and reflected on the production and output as well. Higher cost on certain items also deterred demand, though firms tried to reignite new business by continuing to offer pre-gst prices on certain items. However, the overall discount rate came out to be marginal. However, yearly business outlook from vendors remained upbeat in the expectation of more clarity and transparency on GST in the coming months. Echoing similar trends, the services industry PMI also slid to a historical low since 2009, barring that in December The Nikkei India Services Industry PMI came in at 45.9 in July from 53.1 in June Low work orders and consequently low activity on account of GST implementation were attributed as the primary reasons for the downfall. Outstanding business on account of delayed payments rose from last month, but the increase was marginal. Like in the case of manufacturing industry, business owners remained hopeful of the 12 month outlook for the industry segment. Industrial production for the month of June 2017 echoed similar sentiments as core industries, as growth plummeted to a four year low of -0.1%. Manufacturing sector declined by 0.41% in June, compared to 7.45% in June 2016; while capital goods growth declined by 6.77% (15.04% in June 2016). More importantly, 22

2 consumer durables growth, which was propping up the economy in the absence of private investment, also declined to -2.13% in June 2017 (4.55% in June 2016). This despite the fact that many consumer durable companies offered deep discounts on most of the white goods on offer, in order to get rid of the old inventory before the implementation of GST. With the temporary confusion in the aftermath of the GST, consumer demand and private investment are expected to remain subdued, and the twin balance sheet problem will hamper the restart of the capex cycle. Consumer demand is expected to remain subdued at least till the festive season, post which a normal agricultural harvest could provide an impetus to growth. Period Table M1: India's Industrial Production Growth Profile (at Base Year ) Growth (Y/Y) Rate (%) Source: MOSPI & CCIL Research Growth (Y/Y) Rate on Use-Based (Goods) Classification Mining MFG Electricity IIP Primary Capital Intermediate Infrastructure/ Construction Consumer Durables Consumer Non-Durables Jan Feb Mar Apr May Jun Wholesale price inflation for July rebounded from a historic low in the previous month, as a spike in vegetable prices caused the price index to reverse its short term trend. Growth in WPI was reported to be 1.88% for July 2017, up from 0.90% in the previous month. Prices of Primary articles grew by 0.46% in July, including food articles (2.15% in July vs -3.47% in June). Price of minerals grew by 24.84% in July 2017, primarily due to a significantly low base in 2016, as compared to -2.02% in June Within food articles, Ragi prices have been undergoing a spike of late with a 45.89% growth in July 2017 (40.28% in June). Tomato prices (209.56% in July vs % in June) have been the greatest influencer in the surge in aggregate vegetable inflation (21.95% vs %), due to a shortfall in supply as farmers harvested less than optimal amount in the current year due to lack of adequate minimum support prices (MSP) for the crop. However, this appears a minor blip as vegetable prices have begun to come down in local markets as supply normalizes. Core inflation i.e. total inflation excluding food and fuel, also rose to 2.14% in July (vs 2.01% in June). 23

3 Table M2: Indian Inflation Environment: Inflation (Y-o-Y) Rate (%) Type WPI Inflation Rate (New Series) Items Jul'17: P Jun'17: R/F 3 Months Ago: R 6 Months Ago: R 1 Year Ago: R Primary Fuel & Power Manufacturing WPI FOOD CPI-Rural CPI Inflation Rate CPI-Urban CPI-Combined CFPI (C) Source: Office of the Economic Advisor & MOSPI, CFPI : Consumer Food Price Index (Combined), * P: Provisional; R: Revised for WPI; F: Final for CPI; Chart M1: Trajectory of WPI & CPI (Combined) Inflation (%) Y-o-Y growth (%) CPI (C) WPI -9.0 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Imitating the trend in the wholesale prices, consumer price inflation too increased from its historic low in the previous month, to 2.36% (combined) for the month of July Combined food prices were still deflationary (-0.3% vs -2.12% in June), as reflected by the consumer food price index (CFPI), while there was an increase in price levels across all broad categories. Vegetable prices underwent a significant increase as reflected in WPI, but it did not register in the CPI growth due to a higher base in the previous year. Though the monsoon distribution has been even across the country, and incoming data suggests a record harvest for the second consecutive year, floods in some of the northern and north-eastern states might hit the supply situation, albeit temporarily. 24

4 Chart M2: India's (Region-wise) Retail Inflation Profile Y-o-Y growth (%) CPI (R) CPI (U) Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Chart M3: India's Trade Balance ($ Mn) & Exchange Rate (INR/USD) US$ Mn Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun INR/USD Ex. Rate India's export sector continued to show positive growth in the face of stronger global recovery. Growth in exports continued to rise for a year now, as marine products (30.53%), organic & inorganic chemicals (20.67%), petroleum products (20.27%) and engineering goods (15.16%) showed significant growth in the segment. However, traded deficit still remained high at US$11.45 billion, as against US$7.76 billion in July This was due to an increase in India's import bill, which more than offset the growth in the export receipts. Imports for the month of July came in at US$33.99 billion (growth of 15%) over US$29.45 billion in July Gold imports (growth of 95.05%) made up the bulk of the import bill, as dealers continued to stock 25

5 up on the precious metal ahead of the festive season, and in the face of GST uncertainty. Petroleum, crude and products (15.02%) and electronic goods (22.5%) were the other major import items in July Table M3: India's Trade (Merchandise & Services) Profile ($ Million) Merchandise Trade Services Trade* Period Exports Oil Imports Imports Non-Oil Imports Source: Department of Commerce / Trade Statistics; * Services Trade Data with 1 Month Lag from Reported Month Total Trade Balance Exports Imports Balance Growth (%) Apr-Jul' Apr-Jul' Growth (%) Fiscal deficit of the government for the cumulative period from April-June 2017, reached 80.82% of the budgeted estimates for the fiscal year , according to the latest data release. Total receipts by the government was 13.06% of the budget estimate for FY , while total expenditure reached 30.31% of the budgeted estimate, as government front-loaded their fiscal expenditure. Key initiatives included release of the increase in the HRA allowance as per the Seventh Pay Commission recommendations, defence pension schemes, fertilizer and other fuel subsidies etc. The finance minister had projected the fiscal deficit to come down to 3.2% in the current fiscal, which implies that the Government would have to look at other options to increase the expenditure on reforms, at least in this fiscal. Tax revenues grew by 1.9% in the month of June over previous year. For the cumulative period of April-June 2017, growth in tax revenue was 14.5% over the corresponding period in the previous fiscal. The deceleration in tax revenue was caused by stagnation in excise duty collections and a mild dip in corporate taxes. However, tax revenue might receive a boost after GST implementation due to increased tax net and compliance to the new regulations. 26

6 Table M4: Table: Central Government's Income - Expenditure Details : PR Source: Ministry of Commerce / Trade Statistics : BE Growth (%) Jun-17 Apr-Jun'17 ( ` Crore) Cumulative Actuals / BE (%) Total Receipts % Revenue Receipts % Non-Debt Capital Receipts % Total Expenditure % Revenue Expenditure % Capital Expenditure % Fiscal Deficit % Revenue Deficit % Primary Deficit % The second volume of the Economic Survey for the fiscal year was released by the Ministry of Finance. The volume included a final appraisal of the financial year gone by, outlook to the fiscal year ahead, as well as special analysis on some of the key reforms/initiatives undertaken by the Government during the period. The survey indicated that achieving 7.5% growth in output for the economy might be difficult in as downside risks in the form of real exchange rate appreciation, increasing stress to the infrastructure sector balance sheet and transitional challenges from GST implementation posed significant hurdles for the economy. Farm loan waivers are also estimated to impact the GDP growth by 35 bps on the downside. Inflation is expected to run below the 4% medium target set by the RBI, as farm loan waiver is estimated to impart a deflationary impact to prices, and the impact of the HRA allowance under the Seventh Pay Commission is expected to be felt only six months from the awarding of the same, and will contribute between the range of per cent to the inflation. Fiscal expenditure faces downside risks in the form of a subdued spectrum auction due to structural jolts to the incumbent firms, expenditures from the Seventh pay Commission implementation pegged at `30,000 crores, and reduced revenues through lower post-gst tax rates on commodities. Global Economic Development The global economy continued to experience mixed headwinds, though growth trajectory appeared on a stronger footing than in the previous month. Developed nations have seen growth firm up through improvements in fundamental indicators, while the developing nations grapple with stagnating growth and depressed job sectors. The International Monetary Fund (IMF) released its July edition of World Economic Outlook (WEO). According to the release, global economic growth is poised to grow by 3.5% in 2017 and by 3.6% in Over the medium term, risks to the global growth remain on the downside, as rich valuations and lack of volatility in the global markets in an era of high policy uncertainty expose themselves to a correction. Also, a quicker return to normal monetary policy operations by the US might lead to higher volatility in the global 27

7 markets, triggering reversal of capital flows from emerging countries, dollar depreciation and balance sheet mismatches. In the long term, failure to achieve expected growth through unconventional or expansionary monetary policy might lead to trade protectionism to boost domestic demand, which might have an adverse impact on global growth, subduing international trade, and even giving rise to domestic inflation, with several previously-cheap items being out of reach of low-income households, who form a majority of the population in most of the emerging and developing countries (EMDEs). Growth forecast for the US has been downsized to 2.1% in 2018, from 2.5% in the April WEO report, as fiscal policy is assumed to be less expansionary than previously assumed. Forecast for UK has also been downwardly revised on meek economic activity in the first quarter of By contrast, forecast for many Table M5: Global Economic Growth Rate (%) Prospects Regions / Country World ADEs US Euro Area Japan UK EMDEs China India Russia Brazil S. Africa Source: IMF's WEO, July 2017 Table M6: Major Global Macroeconomic Indicators (%) GDP Growth Inflation IIP Growth 10-Y Sovereign Bond Yield Economy (Q2:2017) Jul'17 Jun'17 M-END: Jul'17 Eurozone US UK Japan (June) China India (FY17Q4) Russia Brazil South Africa Source: Respective Country Official Data Source, IMF, World Bank, OECD, M-END: Month End 28

8 Euro area countries have been upgraded on account of a boost in economic activity, led by domestic demand, in the first quarter. Canada and Japan also saw their respective forecast being upgraded marginally, on account of better performances in private consumption, investment and exports. Emerging and developing countries are expected to grow at an overall rate of 4.6% in 2017 and further to 4.8% in 2018, up from 4.3% in Growth is expected to be led by commodity importers, but more importantly, large commodity exporters who experienced a recession in due to a global crash in commodity prices, are experiencing gradual improvement in economic conditions. China is expected to grow at 6.7% in 2017, the same as in 2016, and marginally lower at 6.4% in Downside risks remain in the form of a delay in fiscal adjustment by maintaining high public investment, which might lead to a large increase in outstanding debt. India is also expected to grow at a higher rate of 7.7% in 2018, from 7.2% in 2017, at the same level as forecast in the April edition of the WEO. China's second quarter GDP growth came in at 6.9%, the same as in the first quarter of Growth was the strongest since the third quarter of 2015 as industrial output and retail sales picked up. For 2017, GDP is expected to grow by 6.5%, marginally lower than 6.7% registered in the previous year. Industrial production grew by 7.6% in June, as manufacturing, electricity, gas and water production showed robust increases from previous month. The Bank of Japan left its key short term interest rate unchanged at -0.1% at its July 2017 meeting. Policymakers expect economy to expand 1.8% during FY 2017, stronger than the April projection of 1.6%. According to the release, downside risks remain to economic growth as well as price levels due to a cyclical slowdown in business fixed investment and the effects of the scheduled consumption tax hike. The Central Bank has vowed to continue its bond purchase programme, known as 'quantitative and qualitative easing' aiming to achieve the price stability target of 2%. The South Korean economy expanded 2.9% on an annual basis in the 1st quarter of 2017, up from 2.4% registered in the previous quarter. Higher growth in manufacturing (4.5% in Q1 of 2017 vs 2.7% in Q4 of 2016) and construction (12.2% vs 10.1%) more than offset the decline in agriculture (-2.4% vs -4.7%) and st utilities (-1.1% vs 0.4%). Services too declined marginally in the 1 quarter of 2016 to 1.7% vs 1.8% in the previous quarter. The Federal Reserve decided to keep its key policy rate unchanged in the range of % in its July 2017 meeting. The Federal Open Market Committee (FOMC) has observed that labor market in the US has continued to strengthen since its last meeting in June, and economic conditions have also improved, albeit moderately. Near term movement in the inflation rate is expected to remain below the FOMC target rate of 2%, but may gradually stabilize around it in the medium run. Though the FOMC's stance remains accommodative, it believes that the development in the economic conditions will warrant a gradual rise in interest rates. Additionally, the Committee has also indicated that it might begin rolling back its massive bond purchase programme, known as quantitative easing (QE) relatively soon. 29

9 The US Economy continued to recover, based on the advance estimates for the second quarter of 2017, according to the Bureau of Economic Analysis (BEA). According to preliminary data, gross output grew at an annual rate of 2.6% for the second quarter, up from 1.2% in the previous quarter. Personal consumption expenditure, exports, government expenditure boosted the output of the economy for the aforementioned period, while private investment and local & state government spending remained bearish. Extending the feel good factor, US composite PMI, calculated by the IHS Markit group, registered a reading of 54.6 in July, up from 53.9 in June. The composite PMI includes individual readings from the Manufacturing and Services sectors of the economy (53.3 & 54.7 respectively). Data showed solid expansion of business activity in both the sectors, as firms added jobs at the quickest pace since December. Rate of employment has been the quickest this year, although capacity utilization had some head winds to counter. The rate of growth was far superior in the services sector though, as compared to the manufacturing sector. Europe continued its strong showing in the current calendar year, with a flash estimate by the statistics division of the monetary union putting the second quarter GDP growth at 2.2%, against 1.9% registered in the first quarter. However, July PMI data as recorded by IHS Markit shows that the momentum has begun to slow down a little, led by deceleration in the largest economies in the zone such as Germany and France while Italy continued to grow faster than the others. The IHS Markit Eurozone Composite PMI posted a six-month low of 55.7 in July, down from 56.3 in June. This is the 49th consecutive month of expansion as signaled by the index. A reading over 50 signifies expansion. The strongest expansions were observed in Spain and Ireland, along with Italy. Robust increase in new business activity underpinned the growth trajectory, while output growth stymied in both the manufacturing as well as the services sectors. Chart M4: Markit's PMI (Composite): A Measure of Economic Activity Global Economy Dotted Line No Change in Economic Activity US Eurozone JAPAN China India Russia Brazil South Africa Jun-17 Jul-17 Neutral Line

10 Market Overview Japan also continued to thrive on the back of strong government intervention to boost investment, private consumption and quantitative easing provided by its central bank, Bank of Japan (BoJ). In the second quarter of 2017, GDP of Japan grew by 4.0% on an annual basis, as against 1.5% recorded in the previous quarter. Private consumption increased by 0.9%, the most in three years, while government expenditure expanded by 0.3% after a 0.1% contraction in the previous quarter. Public investment in particular rebounded by 5.1% (0.6% in Q1). However, as in the case with Europe, slowdown was observed at the beginning of the third quarter, in July, as observed by the Nikkei Japan Services PMI as compiled by IHS Markit. The Services business activity index registered 52.0 in July, down from 53.3 in June; while the composite index fell to 51.8 in July, from 52.9 in June, and the lowest since October. New orders increased at a lower rate, with the pace greater in the manufacturing sector than the services sector, while backlogs for pending orders continued to rise, implying capacity utilization is still not at the optimum level for the economy. Money Market Review After hardening for two consecutive months, weighted average rates in money market segments eased minimally during July Call market where rates remained range bound with lower volatility as compared to previous month witnessed average rate remaining steady around 6.07%. However, in the Repo and CBLO segments, average rate eased by 3 bps to 6.14% and 6.07% respectively. Average amount traded in all the three segments dipped in the month of July with Repo market experiencing the highest contraction. Over June 2017, average volume transacted in Call was lower by 1.61% while there was a decline of 1.54% in CBLO traded amount. Daily average volume in the Repo fell below `50,000 crore - a decrease of 12% m-o-m. Following tables provide the comparative weighted average rates over a period of time and the comparative statistics of volume and rates across the various sub-groups of the money market. Table M7: Comparative Weighted Average Money Market Rates (%) Jul-17 Jun-17 3 Months ago 6 Months ago Year ago CALL REPO CBLO Table M8: Comparative Money Market Volumes and Rates Gross Daily Average Std Minimum Maximum Market Share Volumes (` Cr) Volumes (` Cr) Dev Rate (%) Rate (%) (%) Jul-17 Jun-17 Jul-17 Jun-17 Jul-17 Jun-17 Jul-17 Jun-17 Jul-17 Jun-17 Jul-17 Jun-17 CALL 299, , , , REPO 1,024, ,163, , , CBLO 2,143, ,176, , ,

11 Market Overview Liquidity Adjustment Facility To boost an economy struggling to recover from cash clampdown, with inflation remaining persistently lower providing headroom, Monetary Policy Committee cut LAF Repo rate by 25 bps to through Marginal Standing Facility dropped by over-30% on a monthly basis in July However, average cash injected in the system via MSF was ` crore in the second half of the month - 62% down from the average injection in the first half. Table M9: Volume under LAF Reverse Repo and Repo auctions as well as the MSF Amount ` Crore LAF Reverse Repo Vol LAF Repo Vol MSF Vol Jul-17 Jun-17 Jul-17 Jun-17 Jul-17 Jun-17 Total Vol Average Vol % - lowest since LAF Reverse Repo and MSF rates stands adjusted to 5.75% and 6.25% respectively. By refusing to accept allegations that higher cost of capital is to be blamed for the slower private investments, RBI called for the speedy project clearances by the government. Stressed balance sheets of public sector banks and infrastructure bottlenecks were also responsible for the reducing private investment. Dissatisfied with the poor transmission of previous rate reductions through marginal cost of funds based lending rates, RBI has set up an internal study group to study various aspects of the MCLR system. After declining by 15% m-o-m in June 2017, excess liquidity absorbed through fixed rate LAF Reverse Repo auctions improved by an equal percentage points in July to `374,810 crore. Average cash absorption at `15,617 crore is 10% higher than the previous month. Total and average borrowings by banks via RBI's fixed rate Repo auctions stood at `66,139 crore and `2,756 crore - showing negative growth of 3% and 7% correspondingly. Additional cash provided by the RBI to banks After a decline for previous two months, excess systemic liquidity absorbed through numerous variable rate Reverse Repo auctions increased by 20% to `838,206 crore. Along with 7-day, 14-day and 27/28-day tenors, RBI also conducted overnight auctions for 3 days in the month of July. Variable rate Repo auctions were restricted to only 14-day term injecting `3,230 crore - surging by 25% over the previous month's tally. Government Securities Market Primary Market During July, RBI re-issued 16 government securities for `66,000 crore, auctioned 30 SDLs worth `33,263 crore and issued treasury bills amounting to `91,008 crore. RBI conducted OMO sales on July 6 and July 20 to absorb `20,000 crore from the system. RBI neither conducted auctions pertaining to CMBs nor offered any security under MSS. Following tables provide the details of the auctions of G-Secs, sale of securities under OMOs, SDLs and treasury bills along with the average cut-off yields. 32

12 Market Overview Date of Issue/ Auction Security Table M 10: Details of the Auctions of the G-Secs Amount (` Crore) Cut-off Price (`) Yield (%) Devolvement on PDs (` Crore) ACU Commission Cut-off rate (paise per `100) 07-Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul-17 FRB , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul-17 FRB , Jul % G.S , Jul % G.S , Jul % G.S , Date of Sale Security Table M11: Details of securities sold under OMOs Amount Sold (` Crore) Cut-off Price (`) Cut-off Yield (%) 06-Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S , Jul % G.S ,

13 Market Overview Date of Issue/ Auction Table M12: Details of SDL Auctions/re-issues Security Amount (` Crore) Cut-off Price (`) Yield (%) Undersubscription 11-Jul % Arunachal Pradesh SDL Jul % Goa SDL Jul % Mizoram SDL Jul % Uttarakhand SDL Jul % Gujarat SDL , Jul % Kerala SDL Jul % Himachal Pradesh SDL Jul % Tamil Nadu SDL , Jul % West Bengal SDL , Jul % Uttar Pradesh SDL , Jul % Jammu & Kashmir SDL Jul % Punjab SDL Jul % Andhra Pradesh SDL , Jul % Maharashtra SDL , Jul % Maharashtra SDL 2032 (Jun) 3, Jul % Telangana SDL , Jul % Odisha SDL , Jul % Gujarat SDL , Jul % Tamil Nadu SDL , Jul % Kerala SDL , Jul % Uttar Pradesh SDL , Jul % West Bengal SDL , Jul % Punjab SDL Jul % Meghalaya SDL Jul % Assam SDL Jul % Maharashtra SDL , Jul % Andhra Pradesh SDL , Jul % Maharashtra SDL 2032 (Jun) 3, Jul % Rajasthan SDL Jul % Telangana SDL ,

14 Market Overview Date Amt (` Cr) Table M13: Details of T-Bills Auctions 91 day T-Bill 182 day T-Bill 364 day T-Bill Price (`) YTM (%) Amt (` Cr) Price (`) YTM (%) Amt (` Cr) 05-Jul-17 13, , Jul-17 10, , Jul-17 27, , Jul-17 13, , Total Price (`) YTM (%) Table M14: Average T-Bills Cut-Off Yields (%) Jul-17 Jun-17 3 Months ago 6 Months ago Year ago 91-day T-Bill day T-Bill day T-Bill Secondary Market Yield Movement Trading activity in the secondary outright market lost momentum with total number of trades declining by 10% to 96,893 trades, while amount traded decreasing marginally by 5% to `1,323,617 crore in July Average outright volume settled by CCIL remained steady close to the level observed in June. In absolute terms, average amount settled stood at `63,812 crore (July) vis-à-vis `65,285 crore (June). Average 10-year benchmark yield eased by 5 bps to 6.47% in July from 6.52% in June; on rising expectations of rate cut by the RBI to revive slacking economy and private investment. Between July 3 and July 13, yields dropped by 15 bps to 6.44% on excessive liquidity in the system, benign consumer price based inflation and increasing bets on easy monetary policy. After touching monthlow of 6.42% on July 25, 10-year G-Sec yields closed the month at 6.46% largely due to profit booking. The yields of different tenors on the last working day of the month and the spread analysis of various tenors over a period of time are exhibited in the next tables. 35

15 Market Overview Table M15: Yield Movements (%)* Tenor Jul-17 Jun-17 3 Months ago 6 Months ago Year ago O/N month month year year year year * on the last working day of the month Table M16: Spread Analysis Period G-Sec Spread (bps) Jul-17 Jun-17 3 Months 6 Months 1 Year 1-5 Years Years Years Years Foreign Exchange Market Rupee movement against major international currencies was largely stable during the month. It appreciated marginally (1%) against the USD, whereas, it weakened by 0.76% and 1.85% versus Japanese Yen and the Euro. In the first week of July, rupee moved around `64.75 per dollar mark on worries that the implementation of the GST could bring upturn in falling inflation and may impact the economic growth. However, sustained dollar selling by banks and exporters to take advantage of spectacular rally in domestic stock market provided an edge to the rupee which strengthened to `64.32 by July 21. Global weakness in the greenback following US Federal Table M17: Exchange Rate Movement Reserve Chair Janet Yellen's dovish tone in her testimony to the US Congress and skepticism regarding the ability of President Donald Trump's administration to deliver on its economic agenda after efforts to overhaul health care collapsed helped domestic currency to appreciate. After weakening by 5-10 paise over the couple of days, rupee jumped to the month's strongest level of `64.08 per dollar at the end of the month after the US Federal Reserve's monetary policy statement diminished the expectation of another interest rate hike this calendar year. Subsequent tables illustrate the analysis of the rupee movement and the exchange rate prevailing on the last working day of the month over a period of time. ` / Euro ` / Pound ` / 100 yen ` / Dollar Movement (%) Average Rate Stdev Max Min

16 Market Overview Table M18: Exchange Rate Movement Exchange Rate Jul-17 Jun-17 3 Months ago 6 Months ago Year ago ` / Euro ` / Pound ` / 100 yen ` / Dollar Average 1-month, 3-month and 6-month forward premia maintained declining trend over the last three months, though at a slower pace from around bps in May, to bps in June and further down to 8-11 bps in July. Table M19: Movement of Forward Premia over a Period of Time (Monthly Average) (Percent) Jul-17 Jun-17 3 Months ago 6 Months ago Year ago 1-month month month Expectations of speedy reforms to accelerate economic growth, steady currency and improving sentiments on earning results has given FIIs reasons to stay invested in Indian financial assets. They parked $1.18 billion in the equity market during July 2017-an increase of 111% over the previous month's purchase of $0.56 billion. Despite marginal sell-off amounting to $0.94 billion, FIIs purchased debt worth $3.05 billion-fourth instance in the past five months that they have bought Indian debt instruments for more than $3 billion. Cumulatively, FIIs remained net buyers of Indian assets worth $4.23 billion in July as compared to $4.55 billion during previous month. Table M20: Movement of FII Flows (USD Million) Quarter Net Investment in Equity Net Investment in Debt Total Q Jul RBI's foreign exchange kitty has been rising steadily, inching towards $400 billion mark since January RBI accumulated $6 billion in the month of July and a whopping $32.57 billion since the and forward forex markets to mop up capital inflows due to stock market rally coupled with strong rupee has provided the suitable opportunity to improve foreign reserves. beginning of Its active intervention in the spot 37

17 Market Overview CHART M5: FOREIGN EXCHANGE RESERVES USD Million 390, , , , , , , , , , , ,000 15,000 10,000 5, ,000-10,000-15,000 USD Million Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Change in Reserves Foreign Exchange Banking Sector Growth in non-food bank credit maintained an upward trend as it increased by 6.61% y-o-y and 0.40% m-o-m to `76.36 lakh crore during the fortnight ended July 21. Aggregate deposits with the banking system grew 9.83% y-o-y to ` lakh crore. It clocked positive growth of 0.19% over the previous month. Banks' investment in government securities was at `32.73 lakh crore higher by 17% over the corresponding fortnight previous year. The credit-deposit (CD) ratio of the banking system rose10 basis points (bps) to 72.36% from month ago. Table M21: Trends in Scheduled Commercial Banks' Business ( ` Cr.) Jul-17 Jun-17 3 Months ago 6 Months ago Year ago Money Stock Aggregate Deposits Non-food Credit Investment in G-Secs Table M22: Key Banking Rates and Ratios (%) Jul-17 Jun-17 Credit-Deposit Ratio Investment-Deposit Ratio Base Rate MCLR (Overnight) Term Deposit Rate >1 Year Savings Deposit Rate