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What is net demand and time liability (NDTL)?

 

  • NDTL is sum of demand and time liabilities (deposits) of banks with public and other banks wherein assets with other banks is subtracted to get net liability of other banks.
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  • Deposits of banks are its liability and consist of demand and time deposits of public and other banks.
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  • Demand and time deposits from public form the largest part of bank deposits.
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  • Demand deposits include all liabilities which are payable on demand and includes current deposits, demand liabilities portion of savings bank deposits, demand drafts, balances in overdue fixed deposits etc.
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  • Time deposits are those which are payable otherwise on demand and includes fixed deposits, staff security deposits, time liabilities portion of savings bank deposits etc.
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  • Banks also invest in demand and time deposits of other banks and certificate of deposits. Banks also borrow from other banks in call market etc. This represents banks liability to other banks.
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  • NDTL is calculated and reported every fortnight Friday by banks.
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  • NDTL is used by banks for computation of CRR, SLR and now LAF.
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  • Chart below shows trend of demand and time deposit from public for all scheduled banks from 2001 till June 2013.

 

Tren of Demand and Time Deposit from Public

 
Source: RBI

 

  • From above chart, we can observe that time deposit forms largest part of deposits from public as compared to demand deposits.
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  • Time deposit contributes to around 90% and demand deposit contributes around 10% of aggregate deposits for all scheduled banks.
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  • Chart below shows fortnightly trend in NDTL of all scheduled banks from 2005 to June 2013.

 
Source: RBI

 

 

  • CAGR for all scheduled banks NDTL from March 2000 to 2013 is around 17%.
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  • NDTL for all scheduled banks as on 28thJune 2013 was around 79339bn.

 

Bank and Area wise contribution to Deposits
 

 

 

  • From above two charts, we can see nationalized banks have maximum contribution to deposits of 52% while area wise metropolitan cities dominate with 55%.

 

How the deposits are used

 

 

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What is liquidity adjustment facility-LAF?
 

Liquidity adjustment facility (LAF) is a monetary policy tool used by RBI to manage market liquidity and money supply targets.

 

  • LAF was introduced in June 2000 and conducted daily on overnight basis.
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  • It helps banksto adjust their daily liquidity mismatches by pledging government securities over and above the SLR of 23% (Banks generally maintain SLR excess of 23% to borrow under LAF).
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  • LAF consist of Repo and Reverse Repo transactions.
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  • To meet liquidity shortage, banks can borrow from RBI through a repo transaction.
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  • In a Repo (Repurchase agreement) transaction banks make short term borrowing by selling government securities to RBI in agreement to buy back the same security at repo rate.
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  • Repo rate is the rate at which banks borrow from RBI.
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  • Repo transaction injects liquidity by RBI into the market through banks.
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  • Reverse repo transaction is opposite of a repo transaction.
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  • Since May 2011, RBI has linked reverse repo rate to repo rate. Reverse repo rate will be 100bps lower than repo rate.
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  • Chart below shows how a repo and reverse repo transaction takes place.
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Repo & Reverse repo transaction

 

  • When there is shortage of liquidity banks borrow from RBI at repo rate and when there is excess liquidity banks park their surplus liquidity with RBI at reverse repo rate.
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  • Chart below shows daily liquidity requirement and repo and reverse repo rate from April 2006 till 16thJuly 2013.
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Liquidity, repo & reverse repo rate

 

  • From the above chart, we can see from 2010 banks have being facing liquidity shortage and borrowing from RBI.
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  • When there is excess liquidity one of the reasons RBI starts hiking repo rate is to ensure money doesn’t flow into speculative transactions.
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  • This can be observed from 2010 RBI hiking rates when there was excess liquidity.
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  • RBI’s comfort level of liquidity is ?1% of Net Demand and Time liability (NDTL).
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  • Chart below shows the trend of net liquidity injection and absorption and RBI’s liquidity comfort level of ?1% of NDTL
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Marginal Standing Facility (MSF)
 

  • MSF was introduced by RBI in2011, where banks can borrow from RBI when there is a Considerable shortfall of liquidity.
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  • Under MSF, banks can borrow from RBI up to 1 % of NDTL and can pledge securities within the SLR unlike under LAF where has to be above the SLR .
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  • RBI recently restricted borrowing under LAF to 1 % of NDTL or approximately 75000cr.
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  • This implies that any additional borrowing required banks will have to go through other routes like call money market or marginal standing facility (MSF) which increases their cost of borrowing.
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  • RBI recently hiked MSF by 200 bps above repo rate and currently stands at 10.25%.
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  • Prior to the recent RBI announcement, borrowing under MSF route has been minimal.
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  • However after the announcement borrowing under MSF route can increase

 

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Subsidy

By: Punam Sharma

Trend of India subsidy bill
 

  • Subsidy is benefits given by the government to companies and citizens of India either in form of cash payment or tax reduction.
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  • Subsidy forms the part of the revenue non plan expenditure of the government and adds to the fiscal deficit.
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  • Chart below shows trend in subsidies from 1999 to 2013.
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India subsidy trend

 

  • From the above chart, we can see that India’s subsidy bill has been increasing.
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  • India’s subsidy bill has increased almost 9 times from 236bn in 1999 to 2577bn 2013 (RE).
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  • FY14 subsidy bill is budgeted at 2311bn which is 10% lower than FY13 (RE).
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  • FY13 (RE) subsidy was at 2.6% of GDP and is budgeted at 2% of GDP for FY14.
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Composition of India subsidy bill
 

  • Major components forming part of subsidy bill are food, petroleum (fuel) and fertilizer.
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  • These major subsidies accounts for more than 90% of the total subsidy.
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  • Food subsidy generally accounts for the largest share of the total subsidy. It is provided to Food corporation of India (FCI) under targeted public distribution system (TPDS), welfare schemes and maintenance of buffer stock.
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  • Fuel subsidy is in form of compensation paid by the government for the under recoveries incurred by oil marketing companies. Under recovery is the difference between international and domestic selling price of crude.
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  • Retail selling price of diesel, PDS kerosene, LPG are regulated by the government to protect summers from the full impact of crude prices.
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  • Fertilizer subsidy includes subsidy on indigenous urea, imported urea and sale of decontrolled fertilizers with concession to farmers.
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  • Chart below shows trend in % share of the major subsidies to total subsidy from 1999 to 2014(BE).
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Major subsidies as % of total subsidies

 

  • From the above chart, we can observe composition of major subsidies as % share of total subsidy has changed over the years.
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  • Fuel subsidy has formed part of India subsidy bill from 2003.
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  • Chart below shows % share break up of subsidies for FY14 (BE) of total subsidy.
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break up of subsidies

 
Effect of rupee depreciation on subsidy bill
 

  • One of the factors fuel and fertilizer subsidy bill depends on is international commodities price and exchange rate.
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  • Rupee depreciation increases cost of imported crude oil and fertilizer which will increase the subsidy bill thereby increasing fiscal deficit.
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  • India imports about 80% of its crude oil requirement. FY13 imports stood at around 3.7 million barrels per day.
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  • Its rupee cost depends on international crude oil price and exchange rate.
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  • Rupee depreciation will increase cost of imported crude oil. As the retail prices of diesel, PDS kerosene and LPG are modulated by the Government, prices are generally lower.
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  • This increases the under recoveries for oil marketing companies, thereby increasing the fuel subsidy.
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  • Petrol price is no longer regulated by the government.
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  • Similarly, rupee depreciation will increase price of imported fertilizers and increase the fertilizer subsidy burden of the government.
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  • Out of the total fertilizer subsidy of 660bn (FY13 RE), 30% is allocated to indigenous urea, 23% towards imported urea and 46% towards sale of decontrolled fertilizers with concession to farmers.

 

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Who is a foreign institutional investor (FII)?
 

  • FIIs are entities incorporated or established outside India who are allowed to invest in Indian capital market.
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  • FIIs include asset management companies, pension funds, mutual funds, investment trusts as nominee companies, incorporated / institutional portfolio managers or their power of attorney holders, university Funds, endowment Foundations, charitable trusts and charitable societies.
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  • FIIs are also allowed to invest on behalf of their sub accounts (underlying fund on whose behalf FIIs invest). Entities eligible to be registered as sub accounts are partnership firms, private company, public company, investment trusts and individuals.
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Regulation and Investment limit of FII
 

  • FIIs are required to be registered with SEBI in order to invest in Indian capital market.
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  • SEBI acts as the nodal point in the registration of FIIs. The RBI has granted general permission to SEBI registered FIIs to invest in India under the Portfolio Investment Scheme (PIS).
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  • FIIs can invest in equity (primary and secondary market), dated government bonds, corporate bonds, mutual funds, derivate traded on a recognized stock exchange subject to investment limits.
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  • Investment limit for all FIIs and their sub-accounts taken together is 24 % of the paid up capital of the Indian Company.
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  • FIIs investment limit in government securities including T-bill is USD 25bn and in corporate bonds is USD 51bn.
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  • RBI monitors the investment position of FIIs in listed Indian companies on a daily basis.
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Factors influencing FII investments
 

  • FIIs investments in India are influenced by factors like rupee movement, policy reforms, investment regulations, interest rates, liquidity and macro-economic conditions.
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  • FIIs track the MSCI indices (MSCI emerging market index).
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  • India’s weighting in MSCI emerging market index is around 6.4%.
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Trends in FII flows
 

  • Charts below shows FII flows in equity and debt and registered FII numbers with total investment (equity +debt) from financial year 1993 to 2013.
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Trends in FII Flows

 

  • From above charts, it’s seen that FII flows to debt market have only increased in recent years.
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  • Majority of FII flows are into equity market.
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  • Except for 1999 and 2009, India has had positive FII investment.
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  • There was net addition of 2 SEBI registered FII in 2013 totaling to 1767 compared to net addition of 43 SEBI registered FII in 2012 (total 1765).

 

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