Posts tagged ‘kbsonigara’

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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Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets – Draft Report

These recommendations were made on in May-12 by Gandhi committee in a bid improve liquidity in Gsec and IRD market. After reading this I think one should not ignore recommendations of various committees formed by RBI. The probability of majority of them being implemented is quite high.

Key recommendations:

  • Issuance of securities at various maturity points; to begin with, in the 2-10  year segment (especially near 2 year and 5 year);

(Note Government don’t issue securities with less than 5Y maturity)

  • In the case of MFs, there is an urgent need to address the tax anomaly that exists between ‘equity-oriented’ MF and ‘debt-oriented’ MF to encourage ‘debt-oriented’ MFs.

No Update

  • Buyback or switch operations to retire/extinguish G-Sec with small outstanding amounts;

(Note : India is set to switch debt worth of ~500bn)

  • Encourage long-term gilt funds through appropriate incentives (like taxbreaks, liquidity support, etc); and Consider introducing a web-based system of access to NDS-OM.

No Update

  • FIIs, by being global players, can provide much needed diversity of views in the market thereby providing more opportunities for trading. Thus, the group is of the view that there is a need to encourage FIIs as an investor class in the G-Sec market. Considering the possible effects of sudden exit of investors on capital flow and on market volatility, the Group  recommends that the investment limit for FIIs in G-Sec may be increased in gradual  steps.

(Note: Govt. has gradually increased FII limit and is mulling to get domestic bonds added to emerging market indices.)

  • Withholding tax has been cited as a major roadblock for FII participation in local currency bond markets since withholding tax reduces the investment yield and complicates accounting and transactions procedures for many investors, especially real-money investors. In this regard, the issue needs to be examined comprehensively by the GoI since elimination of withholding tax will lead to long-term benefits for the financial market by improving market efficiency.

(Note: Govt. has already reduced withholding tax for couple of years from 20% to 5%..Approximate revenue from FII withholding tax may be around 600cr)

  • As securities cannot trade during shut-period, a longer shut-period can directly impact the liquidity of the securities. The reduction of the shut-period  in G-Sec to one business day had a positive impact on the tradability of the  G-Sec. Moving ahead, and considering the demat of holding of G-Sec, the  Reserve Bank may consider reviewing the shut-period for G-Sec and consider removing the same for G-Sec in SGL form, if feasible.

No Update

  • Secondary market liquidity in SDLs is affected by the fragmentation of issuances due to the present policy of issuing 10-year securities at every issuance across all the State Governments. In order to improve the secondary market liquidity in SDLs, the group recommends that State Governments may consider reissuance of existing securities to increase the outstanding stock of securities, subject to acceptable rollover risk and redemption pressure. Though such a measure would bring down the weighted average maturity of the outstanding stock for the State Governments, the same would lead to pricing efficiencies in the long-run that may lead to lower borrowing costs.

No Update

  • Consider reissuance/fungibility of T-Bills/CMBs (with identical maturity dates) in the trading and settlement systems.

No Update

  • Consider linking the applicable spread for valuing unquoted SDLs on the  weighted average of the spreads emerging in the last few auctions In this  regard, a suitable framework may be developed for valuation of SDL securities,  which may be reviewed periodically

No Update

  • GoI may consider issuing inflation-indexed bonds specifically for retail/individual investors. In this regard, creating alternate channels of distribution (EDistribution Channels) could be explored.

Partly Executed

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Debt Market Circuit Filters

Below is the print screen from FIMMDA’s Document which enumerates circuit filters. Number below band applicable column is in terms of Yield (bps).

FII Debt Circuit band

FIMMDA’s release is as on 25th march 2013. Taking press release date in consideration they have tried explaining above numbers with an example. Look for revised band.

FIMMDA Band Example

Important Element : Further, on days on which RBI’s Monetary Policy/ Union Budget are announced, the Trading Bands shall not be in Operation.

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G-sec corporate bond spread in first half of calendar year

It is the month of Jan, Feb and March when CD issuances rise manifold. Corporates demand funds from banks for working capital requirement. Corporates also buy funds for plant and machinery to enjoy depreciation benefit. Hence banks fall short of money and raise funds via bulk deposit at higher rates amid tight liquidity for funds. Short term rates rises so it is well understood that banks won’t borrow funds at 8.5-9.5% to invest in bonds yielding nearly same return. This reduces demand for corporate bonds and hence spread widens substantially. Soon as and when liquidity improves (which brings down short term rates as well) spread narrows.


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