Posts tagged ‘Kush Sonigara kbsonigara’

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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Priority Sector Lending – Explained

Banks in any country are the backbone of the economy. Primary role of banks is to cater the demand of funds from various communities. RBI has made it mandatory for banks to lend at least 40% of their credit to select sectors i.e. weaker sections which impact a larger chunk of population. Below is the list of sectors:

  • Agriculture
  • SSI (Small Scale Industries) – Artisans, Cottage Industries
  • Small Business – (Defined in RBIs publication)
  • Housing – (Loan for less than 15L)
  • Education Loan – (covers 10L for India and 20L for abroad)
  • Micro Credit – (Akin microfinance. up to 50k/entity)

Not only on a consolidated basis but RBI has also decided for sub targets. For example Bank ABC gets a deposit of Rs.150 and after complying with mandatory requirement they plan to lend Rs.100. Out of this Rs.100 they will have to lend at least Rs.40 to the aforesaid sectors. Banks while lending to the above sectors will have to fulfill individual target as well. At least 18 %( Rs.18 in our example) should be lent for agricultural activities.  At least 10% (Rs.10 in our example) should be for the weaker sections and so on. Ratios differ for domestic and foreign banks. For Foreign banks total priority sector lending target is kept at 32% of total credit.  For foreign banks at least 10% (Rs.10 in our example) should be SSI and so on.

Banks need to comply with 40 %/(32% foreign banks) by the end of the financial year. Since this check is done in March end, banks keeps the PRL ratio low for major part of the year and rush for the same in the last few months. Banks are the key investors in securitized products having underlying credit from any of the above sectors. A microfinance company normally charges ~26-28% for a loan. After they have completed their capital (lending borrowers) they package those assets and sell the securitized asset to banks with a yield of ~10-14%. Banks happily apply for it even at 10% given this investment also complies with RBI’s PRL requirement. (Note banks consider rating of the asset before buying ht same)

What if Banks fails to comply with this requirement?

Banks have to make up for the balance and deposit it with institutions as asked by RBI. Let’s continue with our example. If bank fails to lend Rs.40 and instead offers only Rs.35 by march end towards PRL then bank is mandated to invest the balance with rural infrastructure development fund (RIDF). RIDF is a government organization operated by NABARD and funds projects related to rural roads, irrigation, flood protection and related rural activities.

What will be the return offered by RIDF?

This depends on the quantum by which bank failed to keep up its mandated requirement. In our example bank’s shortfall was at 5% (Rs.40-Rs.35) and so it will be paid bank rate less 2%. See below


Foreign banks need to lend the shortfall to Small Enterprise Development Fund (SEDF) which is managed by SIDBI.

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Headlining Currencies

Currency Update

Key points

  • Japan – Yen appreciated substantially in mid June as investors feared BoJ will not be able to deliver bold monetary steps as promised. Soon after a steep YEN appreciation, dollar showed some strength on the back of easing geopolitical tensions.
  • Indonesia – Indonesia has been in news for its surprising rate hikes to counter fund outflows. Even after subsequent rate hikes and stern steps to contain CAD (Similar to our level) rupiah still continues to remain weak primarily on the back of Central bank’s interference in reporting numbers i.e. they were seen deliberately publishing overvalued number.
  • Brazil – Sentiments reversed for Brazilian real when its central bank announced intervention programme worth some $60bn in conjunction with rate hikes. Central bank intervened heavily in derivatives market by supplying dollars.
  • India – It was the announcement of FCNR (B) swap window which helped rupee prop up substantially. Dollar swap window for Oil marketing companies was also among the important stabilization step. Steps on export promotion from New delhi will contain speculative dollar demand.

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FII Debt Limit Auction – Details

Refer this latest press release of SEBI (SEBI Circular) on enhanced FII debt limit wherein each head is described to its best. One can understand broadly which securities are included under different segments identified by the watchdog. Auction is scheduled on every 20th. FII debt limit auction could be held on the next working day in case 20th happens to be a holiday. Auctions would be held on recognized exchanges like BSE and NSE if free limits greater than Rs1000 crore are available for any of the three categories — Government Securities (G-Sec), corporate bonds and long-term infrastructure corporate bonds. One has to bid in premium terms. FIIs have to utilize these limits within 90 days in case of corporate debt and long-term corporate infrastructure debt. The time period for utilizing G-Sec limits is 45 days. FIIs bid in bps as premium to actual yield. When they feel bonds are undervalued they probably bid with higher premium and vice versa. If an FII bid for Gsec at 8bps then that signifies that he/she is willing to buy Gsec (which is currently trading at 7.5%) at 7.42%. These figures are not released by the exchange and are difficult to find on SEBI’s portal.  An FII can let the auction limit get lapse but that doesn’t mean that they will be refunded with their bid premium.

Find information on most recent auctions here : BSEINDIA & NSEINDIA

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Fiscal Multiplier

Fiscal multiplier explains to what extent an economy’s GDP is affected by reduced spending. India’s Fiscal Multipliers stands at ~0.55 which says of every reduced spending of Rs.100, GDP of India falls by 55rs. Studies indicate that closed economies and economies which follow semi-floating method of currency valuation have a higher number. Hence when we hear that government will be reducing spending by say ~1000BN then GDP may see a dip of ~550BN.

Appreciate your inputs.

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Budget, Gross Borrowing & Net Borrowing Expectation

Budget Expectation – Download Sheet

Appreciate your inputs!!

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Factors affecting money market rates {Excel on CBLO-CD allocation attached}

Money market rates move in tandem with liquidity condition in an economy. As far as India is concerned major factors affecting liquidity are
• Currency in circulation
• Government cash balance
• Credit Deposit Growth differential
• Open Market Operations
• FX intervention (spot markets)

Liquidity deficit is structural in nature. Every quarter end heavy chunk is sucked from the system on account of advance tax outflows. Liquidity also marginally gets worse every month end/start as currency in circulation increases on account of salary draw down  Sale of govt. resources also affects liquidity due to cash outflow. Situation of liquidity going forward can be to some extent easily analyzed contemplating above factors. Normally in the month of February and August end fund managers sit on cash awaiting better yield CDs as tight liquidity and heavy supply increases the yield of short term papers. Now they probably work on whether to invest in CD right away at 9.05 %( hypothetical) or wait (i.e. invest in CBLO synonym to cash @7.75% [near to RBI’s REPO rate]) for few days and pick same maturity CD at 9.25%.

Below is the excel sheet wherein one can contemplate and see if it’s better to lock in money in a CD right away or wait for sometime placing the same cash in CBLO.

Download – Money Market Investment Decision

Examples performed

If CD rates after 20days are expected to be at 9.40%. Currently CD is at 9.05%. CBLO is at 7.75% then probably it is better to get into CBLO for 20days then invest in CD @9.40%. Annualized yield would then be 2bps higher comparatively.

If CD rates after 25days are expected to be at 9.40%. Currently CD is at 9.05%. CBLO is at 7.75% then probably it is better to get into CD right away at 9.05%. Annualized yield would then be ~6bps higher comparatively.

Appreciate your inputs…

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Total market capitalization to GDP ratio

If you have been working daily with macro numbers then probably this would entice you. Total market capitalization to GDP is an indicator of the total listed wealth of a country as a percentage of its GDP. Ratio above 100% which actually values economy more than its GDP is said to depict that the market is overvalued, while a value of around 50%, which is near the historical average for the U.S. market, is said to show undervaluation. More developed a country is more can be its market capitalization to GDP ratio. Since there isn’t any specific level for straight conclusion, one should compare this ratio with peer (in economy terms) countries.

Total market capitalization during 2007-08 (boom period) went to a record high of ~Rs.75000BN whereas at the same time GDP was seen at ~Rs.60000BN which clearly showed that India then was overvalued as aforesaid ratio climbed to a whopping 125% from ~20% in early 2002. Now if one compares this ratio with other emerging economies than we are probably at a higher level. Russia, Brazil and China even today are below 50% whereas India is at ~68%. India has been losing charm from last few years on account of uncertainty and sub standard administration then I don’t understand why India is attracting heavy capital inflows.
One should also note that nominal GDP figure increases ~14-16% Y-o-Y (i.e. Inflation + GDP Growth) hence it is possible for equity markets to deliver similar kind of return (other things remaining constant. i.e. sentiment, liquidity, etc) on the back of maintaining the Market capitalization to GDP ratio.

Market Cap. to GDP

Looking at the graph above one thing seems most likely i.e. Indian equity markets will perform well. This is because India is a developing country, looking at ratio levels of developed country I presume India will come up from current levels (long term horizon) of 68% to 80-90% and supplementing the fact that our nominal GDP will grow at 14-16%. So in al If taken a very long term horizon i..e probably 10Y+ then one can expect annualized returns of more than 16%.

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Investment Guidelines for Banks, Provident Fund and Retirement Fund

SLR also known as Statutory liquidity ratio is quantum of minimum allocation of funds in G-sec , SDLs and other approves securities.

Banks, PF and Retirement Trusts are mandated to invest particular specific amount into above mentioned instruments. Banks SLR allocation is very much discussed hence one can always come to know whenever it is tweaked. Below is the data I gathered on Investment norms for PFs and Insurance Companies. I hope it’s accurate. I would appreciate your inputs.

G-sec Demand_Investment Norms

Above figures are not accurate. But one can say near to actual. One should also keep in mind that it is not necessary that above four borrows every month captioned amount. They sometimes may be sellers for some period and then buyers in bulk the other month. Hence what we can see is that above institutions has the capacity to consume ~300000-350000cr of G-sec.  Net borrowing via G-sec for 2012-13 is seen at ~480000Cr. Rest is taken care by RBI’s OMO, PDs (Underwriters) and FIIs.

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Fixed Income Portfolio Management – Excel Solver

Let’s try and understand something very basic in Fixed Income Portfolio Management. I am not an expert or a fund manager so it may have some subjective issues.

Bond Portfolio – Download the Sheet

Area marked in brown is to be edited. Though there is provision for only 9 instruments in attached excel, one can extend the cells to the right making a note that all formulas are then updated respectively. There are income funds which have a mandate to keep the maturity profile of the fund limited to some number. For. E.g. Birla Dynamic normally keeps the duration near to 3. So how does one keep constant watch on it? How does one optimize return with respective duration? How should one allocate his funds to enjoy maximum convexity other things (i.e. duration, yield) remaining constant. How can one optimize returns of the portfolio following risk mandates like maximum allocation to one security should not be more than 30%, maximum in Gsec should not be more than 50%, etc..

Yes excel solves every above mentioned aspect. “SOLVER” is an optimizer tool which helps you generate better results with in hand parameters.

In the attached sheet I have highlighted two tables i.e. “USE SOLVER HERE” and “SOLVER PARAMETERS”. One will have to work on the above tables once bonds/NCDs/other papers information is entered in the brown cells. Let’s try out one case which will help you understand in a better way.


Now using solver tool we are asking excel to return us the best portfolio allocation to get maximum yield keeping some parameters in mind. Just to understand one conditions we have specified is that $B:$30:$F$30<=$N$3 i.e. Any gilt paper should not exceed 30% of the portfolio value.

If I was not using Solver than probably would randomly allocated money to papers available keeping mandate in mind.


This could have been one of the results. Yield here is tad low than optimum yield possible.

Hence one performs optimum adhering to mandates of the scheme using solver.

Appreciate your inputs…

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