Posts tagged ‘Fixed Income Kush Sonigara’

Monthly Liquidity Monitor – December 2013

Read my note on liquidity for December.

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Fiscal Multipliers for India – Sukanya & Bhanumurthy

Good piece from professors of NIPFP. Fiscal multiplier gives one an idea about how government spending/revenue impacts the final output of the economy. India’s growth has tumbled to a decade low due to a number of reasons. Faltering growth has only exacerbated government’s concern with regard to fiscal deficit. Authors in the paper present a framework for the estimation of fiscal multipliers.


Accordingly they list down below numbers after their assessment:


Capital Expenditure Multiplier: 2.45

Other Revenue Expenditure Multiplier: 0.98


Corporate Tax Multiplier: -1.02

Every 100rs increase in capital expenditure will boost country’s GDP by Rs.245. Similarly for every rise in Rs.100 via direct tax collection GDP falls by Rs.102.

Not listing transmission mechanism (in the paper) but one should read it.

They conclude

Despite policy targets that have sought to raise the capital expenditure by the government, allocation for capital account expenditure continues to be a residual expenditure as observed in recent budgetary exercises. The high value of the estimated capital expenditure multiplier points to a high multiplier effect of capital expenditure on output, and underscores the need to prioritize capital expenditure.

Government is widely expected trim its plan expenditure in addition to payment delays and other stuff to limit its deficit number at 4.8% of GDP. Plan expenditure has two components – Capital and Revenue expenditure. In the previous year FM saved heavily on plan expenditure (primarily on revenue expenditure). Among other ministries rural is the one which is expected to take a big hit on its budgeted amount. Last year government set aside ~763bn for Ministry of Rural Development out of which they were allowed to spend only ~550bn on the back of last minute austerity. This year budgeted amount of the ministry was set at ~801bn. Let’s see how situation pans out this time. If post monsoon harvest falls out of line then probably a double whammy for rural population.

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Banks prefers to stay light on bonds

Banks are the biggest investor in the government bond market (holding ~34.5% of outstanding papers). Low interest among banking community to maintain high SLR indeed affects bond prices. Recent spike in yields can be attributed to RBI’s hawkish stance (fear of rate hikes), less OMO expectation, global factors and unfavorable demand supply dynamics.  RBI releases Investment to deposit ratio on a fortnightly basis. Recent numbers stands at ~29.8%(Oct 18, 2013) i.e. out of every 100rs deposit, banks invest ~29.8 in mandatory securities as specified by the RBI from time to time. This ratio is fairly low compared to same period previous year. Investment to deposit ratio as on Oct 19, 2012 was seen at ~30.7%. Normally banks increase SLR holding during uncertain and low growth bouts. Current situation should compel banks to keep investment to deposit ratio high. However that is not the case. This deciphers bank’s fear of taking a hit on P/L due to undue volatility in bond prices. If banks were to maintain a year before ratio of ~30.7% then probably excess demand of 730bn (~15% of net FY14 borrowing) would have supported gilt prices considerably.

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Monthly Liquidity Monitor – November 2013

Read my note on liquidity  for November.

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Micro-Updates On Twitter

I have started a twitter account to tweet/re-tweet fixed income and related updates. I hope I will be consistent.

Follow me at : FixedIncomeIN


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