Macro Monetary Management
a) Monetary and Liquidity Management
2.1 Introduction
Monetary management (medium and long-term) involves the choosing of variables that
can act as indicator variables for the monetary policy objective of economic growth with
low inflation. The final goal being economic growth, the intermediate target is
represented by variables that largely
“explain” or “predict” future economic
performance. The efficacy of monetary policy can be gauged by the extent to which the
chosen intermediate variables explain the final goal variables and the extent of their
control by the RBI. To control the movement of intermediate targets, the RBI uses
various operating targets on a day-to-day basis, depending on prevailing circumstances.
Besides interest rates, the intermediate targets used are monetary aggregates and credit
aggregates. These variables represent the total interaction of the financial system with
the rest of the economy.
RBI has the responsibility to ensure reasonable liquidity (short term or day-to-day) in the
banking system. For this, RBI infuses funds into the market or draws them depending
upon the liquidity conditions. This interaction of RBI, with the rest of the banking
system is also reflected in RBI’s Balance Sheet. While this principle has remained
unchanged over the years, some of the institutional arrangements through which this is
implemented have undergone change. The Committee on Banking Sector Reforms
(Chairman: Shri M Narasimham) had, inter alia, suggested that for orderly movements of
interest rates in the inter bank call money market, the RBI’s support to the market should
be through liquidity adjustment facility “under which it would periodically, if not
necessarily daily, reset its repos and reverse repo rates which would in a sense provide a
reasonable corridor for market play”1. In line with the above recommendations and to
meet the changing needs, RBI has reduced its reliance on direct control mechanism
(using instruments like Cash Reserve Ratio, Export Refinance, General Refinance,
Collateralised Lending Facility, etc.) to the active use of repurchase (repo) and reverse
repurchase (reverse repo) transactions in Government securities. This along with Open
Market Operations (OMO) in rupee and foreign currency assets helps in managing the
liquidity in the system and also to bring stability in the money market, foreign exchange
market and Government Securities Market.
2.2 Scope and Objective
The subject area “Monetary Management’ encompasses an understanding of the flow and
composition of money supply and its terms of exchange (interest rate) within the
economy by market participants. The RBI strives to ensure an adequate flow of money
1
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within the banking and financial system at the desired interest rate level. To achieve this
objective, the RBI estimates the total quantum of money in the economy and keeps track
of prevailing interest rates in various market segments.
The scope of monetary management with respect to information management would be to
bring together all the relevant information from various sources and present them in an
analytical framework. The variables, available with time series of data, will be logically
arranged to explain the hierarchy of the items that constitute the variable. Information
management in this subject area would also be to keep the time series data in preaggregated forms to facilitate quick access to establishing relationships among the
variables to satisfy various analytical needs of the user.
The core management group under the stewardship of the Governor of the RBI takes
policy decisions relating to monetary management. The analysis of money supply and the
monitoring of financial markets, the core functions of monetary management, are done by
the following functional units within the RBI:

Compilation of the monetary, liquidity and credit aggregates and the growth of
money supply as done by Division of Money and Banking (DMB) in DEAP.

Analyses of the growth of monetary and credit aggregates of the entire banking
system and close monitoring of interest rate movements in the money market and
various financial markets as done by the Monetary Policy Department (MPD)

The analysis of the movements in the foreign exchange market is closely
monitored by the Department of External Investments and Operations (DEIO).

Analysis and movement of equity market as is done by the Capital Market
Division (CMD) of DEAP.

Monetary management through a prudent blend of the Government borrowing
program through the issue of securities, granting of Ways and Means Advances
(WMA), the supply or absorption of reserve money through Open Market
Operations (OMO) and repurchase transactions by the IDMC. The IDMC also
keeps a close watch on the movement of prices and yields rulings on the
Government Securities Market. The Monetary Policy Department (MPD)
monitors these activities.

The operational aspect of liquidity management is to ensure orderly conditions in
the money market, avoid unusual movement of rates in various financial markets
and to provide liquidity support to the financial system to mitigate its day-to-day
excess/shortfall in liquidity. These functions are carried out by the IDMC. To
meet these objectives, the analysis of the past data on liquidity indicators,
financial markets and liquidity intervention is useful. This helps the RBI to assess
the various trends and behaviour patterns that emerge in the process.
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2.3 Business Functions
Under the subject area of monetary and liquidity management, the RBI carries out the
following important functions:

Estimation of monetary, liquidity and credit aggregates and analysis of the growth
and composition of these aggregates

Analysis of assets and liabilities structure and growth of the banking system. This is
carried out to assess the sources and uses of funds of the banking system and to meet
the key objective of the monetary policy i.e., to provide adequate credit to the desired
sectors of the economy.

Monitoring and analysing the activity of the inter-bank funds market and the demand
and supply of reserve money in the inter-bank call money market. The volumes and
rates in this market form the basis for understanding the rates in the money market.

Monitoring interest rates across the entire spectrum of markets beginning with money
market instruments and analysing the interest rates on products comprising both
assets and liabilities in the balance sheet of the banking system.

Analysis and monitoring of financial markets comprising the money market, equity
market, foreign exchange market and Government Securities market.

Resource management of the banks and analysis of expectations from the banking
system.

Assessment of liquidity conditions prevailing in the market, which attempts to find
the net liquidity position in the market.

Market trends analysis, which involves understanding of the market movements and
their likely impact on the system.

Liquidity Adjustment Operations for a short period (starting with daily to fortnightly
positions)
2.4 Analytical Perspective
The broad analytical framework in which the Monetary Management objective is
addressed can be classified into:



Analyses performed at a micro (bank level) and a macro (bank groups or
banking/financial system level)
Analyses performed with the regulatory framework (e.g. CRR maintenance)
Analyses performed to monitor various trends (e.g. money supply, credit
expansion, etc.,) in this subject area.
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The analytical framework in which liquidity management is addressed is mainly at the
aggregate level comprising the entire financial system. However, the liquidity position is
analysed from the following perspectives:


Origin / cause of excess / shortage in liquidity position. This may be analysed
by sourcing information from different markets like liquidity emerging from
FX market, Call market, Gilt market etc.,
Net Liquidity Position emerging from entity level (banking sector and
Government sector)
The various types of analyses that may be considered are:
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Trend analysis (e.g. trend in food credit, credit to commercial sector etc.,)
Comparative analysis (e.g. amongst bank groups)
Ratio analysis (e.g. credit-deposit ratio)
Incremental ratio analysis (e.g. incremental credit-deposit ratio)
Intra group/ sector analysis (e.g. public sector, private sector)
Cumulative analysis (e.g. cash reserve maintained so far, required reserve for
the rest of the fortnight etc.,)
Top “n” analysis (e.g. top 5 borrowers in the call market)
Trend Analysis like trends in rates and volume,
Intra group/sector analysis (i.e. comparing entities like banks, institutions and
NBFCs against each other)
Cumulative analysis (i.e. liquidity position up to a given point of time within
the fortnight etc.,)
The focus of the analysis in the monetary management is on the movement of variables
across different timeframes. The time can be classified as




Financial Year
Calendar Year
Reporting week/fortnight
Seasons
The above analyses help in drawing important conclusions and generalisations, while on
the look out for early warning signals that call for the initiation of regulatory and
supervisory action. Trend analyses could be used to formulate/ modify policies and
guidelines. The information base for the various analyses consists of primarily:



Statutory daily and fortnightly returns from the banks and financial
institutions
Information collected from financial markets
Information received and compiled by other departments of the RBI
The analytical needs as outlined above may be further grouped into:
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Monetary and Credit Aggregates: The compilation of money supply and credit
aggregates facilitates the judging of the liquidity position in the economy. The analysis is
based on the balance sheet of the financial system where the liability side represents the
money supply in the system and the assets side reflects the credit and investment profile
of banks.
Money Market Analysis: Money market analyses focus on analyses of the market for
short-term money market instruments with special emphasis on the inter-bank funds
market, popularly known as the call money market. Monetary management essentially
aims at maintaining orderly conditions in the money market where volatility in the call
money market is seen as an indicator of liquidity conditions prevailing in the banking
system and has a consequential impact on other financial markets.
Financial Markets and Interest Rate Analysis: The focus here is on volumes and rates
prevalent in various financial markets that reflect their asset value. The analysis is also
done on the entire spectrum of the assets and liabilities products of banks covering the
interest rate scenario.
Resource Management and Expectations: Resource management exercises examine
the perception of important banks in the banking system on the composition of their
balance sheets and its expected composition in the future. The exercises are also aimed at
understanding the interest rate scenario expected to prevail in the immediate future. The
information received from the banks gives an indication to the RBI on bank expectations
on the future course of asset/liability conditions and interest rates, as also their strategy
towards resource mobilisation and deployment in light of their perception of the current
and future overall economic and market conditions.
Liquidity Analysis: The analysis is driven towards finding out the net excess/short
liquidity for the day. Based on the analysis the Liquidity operations are undertaken
through which the RBI meets its objective of either providing or absorbing liquidity from
the financial system. The choice of the instrument is dependent on the amount of liquidity
required to be injected or absorbed and the source of the expected action.
Market Trend Analysis: Primarily the market trend analysis centers around monitoring
the volume and rate movements in various markets. The broad markets covered are the
overnight inter bank borrowings or call money market, equity markets, Government
Securities market and foreign exchange market.
The aspects relating to Money Market Analysis, Financial Markets and Interest Rate
Analysis and Market Trend Analysis are dealt in a separate subject area captioned
“Financial Markets Analysis”. The three important areas - Monetary and Credit
Aggregates, Resource Management and Expectations and Liquidity Management
are outlined below:
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2.5 Monetary and Credit Aggregates
Introduction
Monetary and credit aggregates, analysed over a period of time, represent the overall
supply of money and credit in the financial system. Short-term monetary (liquidity)
management can be looked at as the management of the quantum and terms (interest
rates) of these aggregates. The monetary and credit aggregates as a distinct subject area
tries to focus on the quantum and flow of the aggregates among the participants of the
financial system. This financial system consists of the RBI, Scheduled Commercial
Banks, Co-operative banks, Financial Institutions and all Non-Banking entities that
operate in the financial market.
Financial System
SCBs
FIs
Non -banking
entities
Financial
Markets
RBI
Analytical Issues
As outlined earlier, the focus area 'Monetary and Credit aggregates' explains the analysis
of the monetary position of the financial system at different levels of aggregation. The
different levels are:

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

The RBI Balance Sheet: the Reserve Money Computation and analysis – M0
The RBI Balance Sheet: Autonomous / Discretionary liquidity analysis
The Banking System Balance Sheet: New Monetary / Credit Aggregates and analysis
of NM1, NM2 and NM3 and credit aggregates
Extended Financial System Balance Sheet Analysis- Liquidity Aggregates and
analysis of L1, L2 and L3
The information hierarchy, where granular level data of assets and liabilities of individual
participants can be rolled up (aggregated) into different categories of monetary and credit
aggregates, measures with certain principles governing the aggregation. To start with, the
RBI’s asset/liability position represents the Reserve Money (liability of the RBI) and
assets (domestic and foreign). Inter-temporal RBI balance sheet items and their changes
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reflect the liquidity position in a framework of autonomous and discretionary
components. Similarly, changes in the asset side with its components as domestic assets
and foreign assets offer an analytical perspective on the movements of the balance sheet
over time.
This system of hierarchy in the balance sheet and the principle of aggregation further
expand to cover more entities like banks and financial institutions to measure other
monetary and credit aggregates reflecting the asset/liability position of the entire financial
system. Analyses of these variables (being the target variable) across time can be done
for the entire banking / financial system and for its causal relationship with real economy
variables.
The aggregates (both liability and asset) can be observed at the following levels:


Individual component level within the hierarchy of liability and
balance sheet i.e., sources and components of the aggregates.
At the individual participant level and then aggregating them
aggregation principle (as defined through computation of M1,
commercial sector, food credit etc.,) at the participant group
commercial banks, cooperative banks, FIs etc.,)
2.5.1
asset side of the
based on certain
M3 or credit to
level (scheduled
RBI Balance Sheet or Reserve Money Analysis
In monetary management, the primary player whose balance sheet is directly controllable
is the RBI. There are two major frameworks used in analysing the RBI's balance sheet.
One involves the basic definition of the Reserve or Base Money and the other is based on
changes in the RBI's balance sheet and the degree of control over its components.
Reserve money is primarily a view of the RBI's balance sheet that contains the currency
in circulation and the balances maintained with the RBI by banks and others. The data on
the Reserve Money is collected through Weekly Statements of Affairs prepared each
Friday.
The hierarchy of sources and components that lends itself to the computation of Reserve
Money, alternatively called base money or high-powered money. One of the most
natural ways of analysing the change in liquidity is by looking at the changes in the RBI's
balance sheet and classifying the sources of the change in liquidity as either completely
autonomous to the RBI's actions or those based on the discretionary actions initiated by
the RBI.
The following chart depicts the view of the RBI’s balance sheet in the most stylised form
at the highest aggregated level. Another view of the balance sheet is a classification of the
assets and liabilities components based on the extent of their control by the RBI.
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Stylised RBI ‘s Balance Sheet
RBI's Balance Sheet
liabilities/
components
Assets/sources
Ÿ
Ÿ
Ÿ
L1: Currency
L2: Bank Reserves
Ÿ
Ÿ
Ÿ
A1: Net Credit to
Government
A2: Credit to Banks
A3: Net Foreign
Assets
A4: Net Other
Assets
The first difference of these aggregates from one point to another provides us a view on
the change in Liquidity Conditions
Autonomous Liquidity (AL): A1 +A3+A4-L1
Discretionary Liquidity (DL): A2
Net Liquidity (NL): AL + DL = L2
Analytical Issues

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What is the trend in the growth of Reserve Money and its variations observed during
the year and over the last few years?
Is there any seasonality observed in the growth of Reserve Money?
Which components have contributed to this growth in Reserve Money and have the
patterns in the contribution changed across time?
What is the trend in the Net Domestic Assets and Net Foreign Assets? Which sources
have contributed to the growth of Reserve Money?
What is the composition of monetary and non-monetary liabilities of the RBI?
What is the trend in the growth of monetised deficit reflected through loans and
advances to the Central Government and the net RBI credit to the Central
Government?
What is the composition of Net Foreign Assets and their trend across time?
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What is the composition of the Net RBI credit to the Central Government and its
movement during the year as compared to the last few years?
What is the composition of RBI’s credit to the Commercial sector reflected through
credit to banks and primary dealers and its position as compared to the last few years?
What is the relationship between growth in Reserve Money and target variables like
inflation or GDP growth?
Are these sources of change in liquidity autonomous or are they being created
through the RBI's actions?
What is the percentage contribution of the autonomous and discretionary components
to the total liquidity change?
How has the call market rate moved in response to the changes in autonomous and
discretionary changes in liquidity?
What was the effect of changes in liquidity conditions and its components on the
financial markets reflected through the rates prevailing in G-Sec market, Credit or
intermediated market?
Variables to be tracked
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Granular level information of sources and components of the RBI's balance sheet
prepared for the Issue Department and Banking Department
GDP
WPI
Yield structure of Government Securities
PLR of banks
Average call market rates
2.5.2 Banking and Financial System Balance Sheet and New
Monetary/Liquidity Aggregates
The consolidated balance sheet of the financial system is also analyzed as a measure of
the total interaction of the financial system with the outside world. The balance sheet of
the financial system can be analyzed from the perspective of the liabilities being created
by the financial system classified into varying degrees of “liquidity” as “Monetary
Aggregates” and from the assets side as the destination of credit/investment created as
“Credit Aggregates”. A new dimension, on the basis of the report of the Working Group
on “Money Supply: Analytics and Methodology of Compilation”, is to include in the
definition of the financial system for the purpose of liquidity aggregates a computation of
liabilities incurred by non banking finance companies and financial institutions at a
frequency, lesser than that for the banking system.
The frequently used monetary aggregates and credit aggregates for understanding
monetary activity in the economy are examples of a representation of the balance sheet of
the banking system characterised by this hierarchy:
Banking System Participants
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Reserve Bank of India
Banks
Scheduled Commercial Banks
Co-operative Banks
Other Banks
Like in the case of RBI, the report of commercial banks of these components can be at
various levels:

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Gross aggregates like aggregates deposit, food credit, bank credit to the commercial
sector etc. for each market participant.
Net for the entire banking system with appropriate netting off inter bank transactions.
This is the example of monetary aggregates and credit aggregates.
The new liquidity aggregates recommended by the Reddy Committee, which has
expanded coverage from pure depository institutions to other financial system
participants. And
The old aggregates with appropriate definition of assets and liabilities hierarchy.
The variables monitored are primarily pertaining to various balances, their difference
from a previous period and their percentage growth.
Portions of this arrangement of data for assets and liabilities would compute aggregates
like Narrow Money, NM1, and NM2 &NM3 as well as credit aggregates.
A combination of these hierarchies with the measures allow for analyses both at a point
in time as well as across time periods by looking at incremental changes and the
composition of these changes. Incremental change can also be defined in a variety of
ways – from the previous fortnight, the same fortnight the previous year, the period to
date, etc. The component data can be seen at varying degrees of detail – individual bank
level, bank group level and the banking system level.
2.5.3
Banking System Balance Sheet
Analytical Issues
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What is the growth of the money supply (M3), its components and their variations
over the last few years?
What is the ratio of broad money to narrow money and reserve money (money
multiplier)? What is the trend in maximum, minimum, mean, standard deviation and
coefficient of variation of money multiplier taken with various time periods?
Is the money multiplier showing wide variation over a long time period?
What is the quantum of credit created by the commercial banking system? What is its
trend over time and its composition?
What are the trends and composition in key indicators of banking variables like
demand and time liabilities, borrowing from the RBI, investment in Government
Securities?
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What are the food and non-food credit levels and their trend?
Which bank/ bank groups are creating the credit / liquidity in the financial system? Is
the composition changing?
What is the trend in the co-movement of Non-food credit and IIP?
What is the trend in Credit Deposit (CD) ratio and incremental CD ratio of the
banking system?
What is the trend in the level and composition of external liabilities of the bank/bank
groups and the banking system? Which type of non- resident foreign deposit has
contributed significantly to the external liabilities of the banking system?
What is the trend in the level and composition of bank balances and loans given in
foreign currency?
What is the trend in the sources and uses of funds by banks?
What is the trend of monetary deepening (monetary aggregates like M1, M3,
Currency with the public, average deposits, M0, Net bank credit to the Government
and Bank Credit to the Commercial Sector as a percentage of the GDP)?
What is the trend in the velocity of money indicated through mean, standard deviation
and coefficient of variation of M3 and M1?
What is the trend in average monetary ratios like Currency-aggregate deposits,
Demand deposit-aggregate deposits, and Time deposit-aggregate deposits?
Variables to be tracked
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Granular data on the liabilities and assets of the banking system reported through
Sec42 (2) L returns from all banks.
SFR VII data from banks on foreign currency balances held aboard
SFR VI data from banks on sources and uses of funds
GDP
IIP
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2.6 Resource Management & Expectations
Introduction
One of the direct ways to perform expectation monitoring is to conduct periodic surveys
much like the one done by the Bank of England. Dr. Ganti Subramaniam reiterated this
point during a seminar conducted on mid-project understanding of monetary policy in
September 2000. The second way is to extract expectations indirectly from market prices
for financial assets within an analytical model. The rate variables may range from term
structure of bonds to derivative asset prices.
The RBI conducts a survey with a select set of banks on the resource management area.
The numbers furnished by the banks present an indicative picture on the expectations of
commercial banks on the measures the RBI is expected to take as also on general
economic conditions.
Resource Management discussions, an institutional arrangement in place after the
abolishment of direct credit control and credit budgeting exercises, are carried out by the
RBI with select commercial banks. The twenty selected banks provide their feedback on
previous monetary and credit policy announcements as well as inputs on their projections
of both sides of their balance sheet. There is a prescribed set of seven statements, which
cover projections on deposits, credit, investments, sources of foreign currency funds,
destination of advances and estimates of spreads.
Analytical Issues
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What is the perception of banks individually and together about the growth of key
banking indicators? These indicators are aggregate deposits, borrowings, and
balances with the RBI, investment, net food credit and non-food credit.
Where do the banks see acceleration and deceleration in terms of deposits or credit
and investment?
Is there any change in perception emerging among different kinds of banks like
public sector, private sector and foreign banks in terms of growth of key indicators?
What is the projection of banks in terms of composition of savings (time and
demand), foreign and domestic, short-term and long-term?
What is the projection of banks on investment in India and abroad, investment in
Government Securities and non-Government securities, investment in shares,
debentures and other instruments like bonds, CPs, Mutual Funds?
What are the projection of banks on sources of foreign currency funds and their
composition?
What is banks’ actual position and projection towards industry-wise exposure of
credit to them?
What is the spread earned by banks and what is their projection for the future?
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Variables to be tracked
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Banks' projection on growth in volume of assets- quarterly data, type of asset class
wise
Banks' projection on volume of liabilities- quarterly data, type of liability class wise
Banks' projection on average interest rates- quarterly data, product wise
Banks' projection on average spreads - quarterly data
Trend in spreads expected vis-à-vis the actual spreads earned.
Constraints
It was stated that monitoring expectations from the resource management data furnished
by banks was not very reliable in terms of accuracy of numbers but it gave a definite
indication of the banks’ outlook for the future.
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2.7 Liquidity Analysis
Introduction
The focus of the liquidity analysis is to find out net liquidity position in the financial
system. The system is characterised by two sets of players with whom RBI interacts. One
set of inflows and outflows takes place into and out of Government sector and the other
into and out of Banks and Financial Institutions.
The information on liquidity position is collected from the various sources (as depicted in
the following diagram) to assess inflows and outflows for a broad policy decision on
liquidity adjustment.
Liquidity Management
Financial Market Committee
Liquidity flows to banking/
Govt. Sector
Market
Information
Refinance(DAD)
Reserve requirement(DAD)
Call Rates(MPD)
OMO
FXIntervention(DEIO)
Rupee (IDMC)
Loans redemption(PDO)
Coupon payments(PDO)
LAF
OMO(GSEC)
OMO(FX)
&
other
measures
FX Rate(DEIO)
Equity Market(IDMC)
LAF bids(IDMC)
Gilt Trades(IDMC)
LAF outstanding(IDMC)
WMA and OD
outstanding(CAS)
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Analytical Issues
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What is the net liquidity position prevailing at various points of time in the current
year? These liquidity conditions are also compared with corresponding figures of
previous year.
What is the co-movement (if any) between net liquidity position and other major
market indicators like call rates, forex rates and Gilt prices?
Which liquidity components have been major contributors to the overall liquidity
position in the system? Is there any change observed in the pattern?
What has been the level of OMO by RBI in both foreign exchange market and
Government Securities Market?
What is the position of Reserves maintained by banks in the current account with RBI
during the current fortnight? Is there a need for higher average level of reserves to be
maintained by the banks during the remaining period of the fortnight?
What is the level of refinance provided by RBI to banks from various sources? What
are its components and is there a greater reliance on refinancing as compared to
previous periods?
What is the level of refinance accommodation from RBI to Scheduled Commercial
banks?
What is the extent of export refinance limit availed by banks and the amount
outstanding?
Which are the players whose bids are being accepted regularly and which are the
players whose bids are not being accepted regularly?
What is the quantum of liquidity requirements of the players in the market and at
what rate the players desire to place or borrow funds with/from RBI?
Variables to be tracked (all variables are tracked on daily frequency)

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Foreign Exchange Operations (sales and purchase) of RBI
Repurchase transactions by Primary Dealers, Banks
Treasury bills subscription by banks
Finance through the Liquidity Adjustment Facility
Cash Reserves maintained by Banks
Vault cash as CRR
Refinance provided by RBI to Banks
Refinance provided to Primary Dealers
Schedule of maturity of Central /State Government Securities
Drawal by governments of ways and means advances and overdrafts.
Redemption of Central/State Securities
Schedule of Coupon payment on Central/State Government Securities
Net Open Market Operations of Government Securities
Variables to be tracked (daily frequency with participant level granularity)

Liquidity market activity including Liquidity Adjustment Facility bids received in
total number by participant group and the amount.
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Cut-off amount in LAF bids accepted
Maximum LAF bid rate received
Minimum LAF bid rate received
Range of LAF bid rates
Weighted average of LAF bid received
Trends in rates received from markets
Tenor of LAF provided
Constraints:
Current data on liquidity analysis is made manually and in excel sheet for which
historical database is not available.
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b) Debt Management
2.8 Introduction
Government plays a leading role in driving the economic growth of the country by
investing in core areas and providing basic infrastructure facilities for boosting private
investment in industrial, agricultural and services sectors. It also invests significant
amounts in the social services sector. The burgeoning fiscal deficits (and consequent
large borrowings), revenue shortfall, expenditure overrun, recurring expenditure (e.g. pay
revisions) etc. of the Central and State Governments are a constraint for an effective
fiscal management. In addition, the need to maintain an appropriate interest rate
environment in the economy especially during incipient industrial recovery further
necessitates the need to understand Government finances and their implications for
effectiveness of monetary policy.
2.9 Scope and Objective
Conduct of fiscal policy and stance on fiscal management by the Government (both at
Central and State levels) have a strategic bearing on the effectiveness of the monetary
management by RBI. This emphasises the need for RBI to analyse the Government
Finances to assess the overall resource gap that emerges from time to time during the
year and to relate this resource gap to its strategy of raising funds for the Government.
Thus, RBI’s role as banker to the Government has to be perceived not just from the point
of view of discharging its functions as a traditional banker, but would also include
understanding the various facets of resource mobilization and expenditure pattern (within
the economic and social constraints).
2.10
Business Functions
The scope and objective of Debt Management with respect to the information
management is centred around the following business functions.
1. Understand the resource raising potential of the Government from all sources, the
pattern of receipts of revenue, expenditure pattern, resource gap in the government
finances and the ways it finances the deficit, and trends in public debt.
2. Raising funds for the Government (Central and State) at market related terms, debt
structuring to move from short term borrowings to medium and long term
borrowings, to avoid bunching of debts and payment problems, reducing
subscriptions by RBI and reducing monetisation of deficit.
3. Co-ordination and centralisation of public debt accounts of the Central and State
Governments, flotation, retirement and servicing of rupee loans and all other matters
pertaining to debt and registration of debt holdings.
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4. Providing banking services to the Governments like acceptance of monies on
Government account, payment and withdrawal of funds, collection and transfer of
funds, grant of WMA and OD, investment of surplus funds and disinvesting the same
in case of need.
The Division of Fiscal Analysis (DFA of DEAP) and Internal Debt Management Cell
(IDMC) carry out the functions like the analysis of various facets of Government
Finances, while the Department of Government and Bank Accounts (DGBA), the Public
Debt Offices (PDO), Public Accounts Departments (PAD) and Central Accounts Section
(CAS, Nagpur) conduct the operations relating to Government Finances and provide data
for analysis.
2.11
Analytical perspective
The broad analytical framework in which the above objective is addressed can be
classified into analysis encompassing both Central and State Governments and at entity
as well as aggregated level. The various types of analysis that may be considered are:





Trend analysis (e.g. market borrowings, WMA and OD utilizations, tenor wise
composition of debt etc.)
Comparative analysis (e.g. trends of deficit, pattern of revenue receipts, expenditure
pattern etc. of various State Governments)
What if analysis (e.g. compare the trends of various deficit indicators and extrapolate
to assess debt sustainability)
Ratio analysis (e.g. measures of deficit of the Central Government as percentage to
GDP at current market prices)
Cumulative analysis
The above analysis helps RBI in drawing important conclusions, early warning signals in
the areas of debt sustainability of the Governments, debt management, fiscal management
etc. on the basis of which Governments may be advised and policies formulated.
The information base for the above kind of analysis consists of






Original Budget Documents - from all State Governments and the Central
Government
WMA and OD limits and market borrowings information from IDMC
WMA and OD utilizations from CAS
Outstanding Debts position from DGBA
Plan Outlays from Planning Commission
Transfers to States as awarded by the Finance Commission
The analytical needs outlined above may be further divided into following analytical
domains:
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Government Finances
Fiscal
Issues
(DEAP)
Merchant
Banker
(IDMC, PDO)
Public Debt
Administration
(DGBA, PDO)
Banking Services
(DGBA, CAS,
PAD)
1. Fiscal Issues, covering the understanding and advising (both strategic and tactical)
of Governments on financial matters (DFA, DEAP).
2. Debt Structuring, which entails scheduling the raising of funds, identifying the right
time and terms to raise funds and also working towards bringing depth in the
Government Securities Market in India2. Not only the amount of funds to be raised
for the Government is a focus area, the terms and conditions, their impact on market
rates, net RBI credit to Government and its pattern have also important bearing for
monetary policy considerations (IDMC).
3. Debt administration, which includes all operational aspects related to flotation,
retirement and interest payments of rupee loans and all other matters pertaining to
debt certificates and registration of debt holdings (PDOs, DGBA).
4. Banking services to the Government, which includes acceptance of monies on
Government account, payment / withdrawal of funds and collection and transfer of
funds by various means throughout India (CAS, PAD). Banking services to the
Government are also provided by Agency Banks (acting on behalf of RBI) for which,
turnover commission is paid by RBI to them.
2
Issues regarding development of Debt Market is discussed in Government Securities Market subject area
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The following context diagram depicts the broad information source and the analytical
domains as identified above.
Budget Documents
Information about total borrowings during the fiscal year
Fiscal Analysis
DEAP
(DFA)
GOI, State Govt.,
Planning & Finance
Commission
Treasuries &
Sub-treasuries
Inter Government
transactions
WMA & OD utilisation
State Government
transactions
Government
transactions
WMA, OD limits
IDMC
Details of WMA & OD utilisation,
Investment in intermediate
treasury bills etc
Government
Borrowings (Auction,
allotment, SGL data etc)
CAS
Advices regarding
collections on
Government
borrowings
Government
transactions
PAD
Central Government
transactions through link
branch
PDO
DGBA
State Government
transactions
AGENCY
BANKS
Government Borrowings (Stock, SGL etc.)
GOVERNMENT FINANCES
The major business issues and the significant variables that are tracked / studied in each
of the above mentioned analytical domains are explained in detail in the following
sections.
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2.12
Fiscal Issues
Introduction
RBI analyses the Government Finances to assess the overall resource gap that
emerges year on year and relate this resource gap to its strategy of raising funds for
the Government. It also analyses the trend of Government resource and expenditure
plans to assess their resource requirements as against their resource raising capacities.
The assessment of resource gap helps in understanding the pressure of fiscal deficit on
overall monetary management functions of RBI.
Analytical requirements
The broad analytical requirements that evolved during user requirement survey are
centered on:




Analysis and estimation of the deficit indicators
Borrowing requirements of individual governments
Expenditure pattern of the governments and
Trends in public debt
Analytical Issues
The solutions to the key requirements can be explored by answering certain strategic
questions such as:

What is the budgeted resource gap in government finances? What is the trend in
financing the resource gap?

What is the trend in the deficit indicators of the Government Finances?

What is the trend in the indicators of fiscal dependency, fiscal stability and
sustainability of State Finances3? (Fiscal dependency – Gross transfer of resources
from Centre / Aggregate Disbursement of the State, Loans / Aggregate
Disbursement of the State; Fiscal Sustainability – Debt / State Domestic Product,
Primary Deficit / State Domestic Product, Interest Payment / Revenue Receipts)

What is the pattern in resource raising potential (total receipts) and its comparison
across Central and State Governments (e.g. type of receipt wise, State
Government wise).

What is the expenditure pattern of the Central and State governments? What is
State wise comparison of types of expenditure and trends in reducing non-plan
expenditure and subsidies?

What is the trend of the Government meeting disinvestment target vis-à-vis
budgeted figures?
3
Variables as reflected in the report on STATE FINANCES - RBI publication (Jan 2000)
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
What are the trends in public debt issuance?

What is the variance between the actual (AE) and the budget estimates (BE) of the
State Governments’ and Central Government’s receipts and expenditure, both at
aggregated level and at the major budget items level?

What is the trend in the interest burden and debt service ratios of Central and State
Governments?
Variables to be tracked (Frequency: Annual)



Granular level budget items are aggregated on a common classification
method. Therefore, analysis of budgetary items at various level can be
undertaken.
Major deficit indicators computed from budget document.
Plan and non-plan expenditure computed from budget document.
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2.13
Debt structuring
Introduction
One of the important functions of RBI is to raise the debt for different Governments
from the market without having to depend heavily on RBI and at the same time,
structure it in a form that does not distort the yield structure prevalent in the market.
Evaluating the past performance in auctions and floatations is the first step towards
having a better understanding of what has led to success or failure in the attempts to
raise money. Such analysis helps in relating the success or failure to causes which can
in a way give feedback to further enhance RBI's ability to time and structure loan
floatation. The present focus of RBI is to:






Elongate the maturity profile of the loan structure to avoid bunching of loan
repayments.
Make the yield structure of Government Securities market related
Ensure securities of all choices of tenor and depth in the yield curve.
Ensure that market absorbs most of the loan amount.
Have least impact on liquidity conditions.
Help develop widespread holding for a healthy secondary market and provide
adequate liquidity.
Analytical Issues
The broad analytical requirements in relation to raising of funds for Governments
encompasses the following areas.









What are the borrowing requirements of the Central and different State
Governments?
What is the trend in the fresh borrowing and reissues due to redemption coming in
the current year? How is the composition changing over time?
What is the trend in the composition of funds raised in terms of RBI’s
subscription/devolvement and funds raised from market?
What is the trend in the public debt in terms of holding pattern, type of securities
and coupon rates?
What is the average cost structure of loans? Whether the cost of loans is falling
over time and what is its level for Central and State Government loans?
Is there a seasonality observed in the subscription of loans by the market like less
subscription in the first half of the year compared to second half of the year?
What is the expected yield and investment intent as revealed through auction
information?
How much is the divergence in the yield structure of instruments of same tenor
between secondary market and cut-off yield decided by RBI? (The secondary
market yield structure provides information on the market expectations)
Why is a particular tenor security not traded in the market? Is it because of its
holding concentrated amongst few players and / or because of its small size?
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
What is the trend in the liquidity indicators (seasonality, if any) of the banking
system, which can provide indication to raising of funds at the appropriate time?
(E.g. Interest rates, deposit growth, Credit Deposit Ratios, depth in secondary
markets, trends in interest rates, etc.)

Whether timing of the loan is influenced largely by compulsive factors like WMA
utilizations by Government/s? How many times has RBI come out with fresh
borrowings, which is triggered by compulsive factors of WMA and OD
utilization? What has been its effect on yield pattern, market participation and
devolvement?
Variables to be tracked
The key variables that are required for answering these questions are:







Items of the budget documents of the Government (Source: Budget documents,
Frequency: Annual).
Loan data (security type, amount, tenor, coupon rate, amount subscribed, amount
devolved)
Holding pattern (Top 10/20 holders with sizes, Maturity pattern and tenor wise
sizes, Security profile, Issuer details)
Issuer (Central Government, State Government/s)
Holding Pattern (Banks, Insurance Companies, Financial Institutions, Primary
Dealers, RBI, Special categories viz., State Government Sinking Fund, Welfare
Commissioner etc.,)
Secondary Market trading pattern and yield structure (Daily data)
Liquidity indicators of the banking system from Sec42 (2) data
Some of the causal variables identified include:






Seasonality
Difference in yields (cut off and secondary market yields)
Difference in yields (cut off and weighted average of bids)
Types of security: tenor and other structural elements
Yield Spread differential
Context in which the issue was made: planned versus specific event driven.
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2.14
Administration of Public Debt
Introduction
Public Debt includes regular loans raised by government from the public in India,
from Foreign Governments, International institutions etc. It does not cover other
interest bearing obligations such as post office savings bank deposits, loans raised
through post offices in the shape of savings certificates, provident funds etc.
Central Debt Division (CDD) of DGBA and PDOs manage the public debt of Central
and State Governments and their broad areas of operations can be represented as
follows.
Administration of Public Debt
Central Debt Division (of DGBA)
 All the operational aspects relating to
loan floatation
 Recording and maintenance of loan
book portfolio
 Claiming issue commission for the new
loan floatation
 Claiming of brokerage and expenses
 Claiming of management commission
on the total debt outstanding
 Supervision and Control of Public Debt
Offices
Public Debt Office
 Issue of Securities
 Servicing of Securities
 Renewal,
consolidation,
sub-division and conversion
of securities
 Repayment
of matured
loans
 Other operational aspects
falling within the scope of
the Public Debt Act and
rules framed there under
Analytical requirements
The broad analytical requirements that evolved during user requirement survey are
mainly operational and are centered around:

Analysis of the geographical pattern of investors

Analysis of the quantum of collections on account of small savings

Analysis of the quantum of loans matured and outstanding

Improving customer service, increasing the reach and reducing complaints
in the area of servicing of securities like Relief Bonds etc.
Analytical Issues
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The broad analytical requirements in the area of 'Administration of Public Debt' are:

What is the quantum of outstanding debt (loan wise) of Central and each State
Government? What will be the estimated interest cost (loan wise) across years
until date of maturity? (This information can be provided to Central and
respective State Governments which is useful to them during budget
preparation)

What is the geographical pattern of the investors, category of investors,
investor’s preferences for various schemes like government securities, PPF,
relief bonds, gold bonds etc.?

What is the quantum of Small Savings Schemes collections mobilized through
the banking sector (Bank wise, State wise and Scheme wise)?

What is the quantum of loans matured and period outstanding thereof? What
could be the interest liability because of these loans?
Additional Analysis
Following are some of the analyses requested for by the users, which cannot be
provided for want of comprehensive transaction systems:

What are the details and amount of unpaid interest warrants (warrant wise,
scheme wise, region wise)?

What are the number and nature of investor complaints (scheme wise, region
wise, type of complaint wise) and the time taken for resolving the same?

What are the number, case wise details and status of suit filed accounts (region
wise)?

What are the number and reasons for SGL bouncing (SGL account holder
wise)?

What is the nature of frauds (amount of fraud, region wise, scheme wise, type
of fraud wise)?
Variables to be tracked
The key variables that are required in answering these questions are:

Details of each government loan like type of security (t-bills, dated securities
etc.) coupon rate, tenure, date of maturity, PDO wise holding, type of holdings
(in stock certificate form, bond ledger account, SGL form), issuer wise, etc. on
a daily basis.

Securities transactions (secondary market, LAF, OMO, devolvement on RBI
etc.) on a daily basis
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
Details of collections of Small Savings Schemes, Relief Bonds scheme, Gold
bonds scheme etc. (Agency bank wise, branch wise, PDO wise, Investor wise
details for relief bonds) on a quarterly basis.
Constraints faced

Presently CDD, where the central loan ledger is maintained and issue and
management commissions are claimed, is not computerized and the data is not
available in soft form. However, centralized PDO project implementation is
under way, which is likely to assist in the functioning of PDO. As the project
is under implementation and design document was not made available (at the
time of source system study), the scope of the technical source system study is
restricted to the existing systems. However, it was expressed by CDD that all
the details regarding securities transactions, details of each government
borrowings, relief bonds, gold bonds etc. could be sourced from the PDO
project, once it is implemented. It was also clarified by DIT that even the past
data would also be migrated into the new system.

In case of relief bonds, gold bonds, PPF schemes, Agency Banks submit only
consolidated information about the collections (viz., number of applications,
amount collected - designated branch wise). The analysis can be carried out
after aggregating such data with data relating to collections under the
corresponding schemes, at PDO’s. If broad investor category-wise details are
also required for analysis, the reporting system of Agency Banks will have to
be suitably modified.
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2.15
Banking services to the Government
Introduction
RBI plays the role of banker to the Central Government (imposed by statute) and to
the State Governments by virtue of agreements entered into with them. The Bank
provides a range of banking services to these Governments and the same includes
acceptance of monies on Government account, payment / withdrawal of funds and
collection and transfer of funds by various means throughout India.
Banking Services
WMA
& OD
Revenue
Collections
Cost of Agency
Bank transactions
Remittances
Scheme
Analytical requirements
The broad analytical requirements that evolved during user requirement survey are
mainly operational and are centered around




Monitoring and reporting utilization of WMA and OD
Tracking revenue receipts of the Government
Turnover cost on account of Agency Bank transactions
Functioning of RBI RFS
Some of the significant analyses in the above areas that evolved from the user
requirement survey and validated during seminar on ‘Banking Functions of RBI’
held in September 2000 are discussed below.
i)
WMA & Overdrafts:
Over the years, the mismatch between Government expenditure and revenue
has resulted in a persistent and seemingly unsustainable gap in resources. As
the Governments (Central or State) resort to utilization of WMA for a major
part of the year, it is giving rise to severe fiscal stress and making the
management of Government Finances very difficult. Analysis of the trends of
WMA and Overdrafts of Central and particularly State Governments thus
becomes an important area of focus.
Analytical Issues
Analysis of WMA and OD across time helps RBI in addressing the following critical
issues:
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






How often and how many days each State Government resorted to utilization
of WMA and Overdrafts?
What has been the peak level of utilisation of WMA and OD by each State
Government as against limits sanctioned?
What are the average (monthly) utilizations (of normal WMA, special WMA,
OD) by each Government?
What is the intra-month pattern in WMA and OD utilizations for deciding
strategy for dealing with short-term surplus / deficit?
What is the State Wise yearly WMA to Average receipts and payments ratio?
How many times State Governments have resorted to 100 percent OD and
how many days, they have taken to clear the same.
What are the trends of surplus in Government accounts and whether investing
in alternative avenues can optimise returns.
Variables to be tracked
The key variables that are of interest in answering these questions are:








ii)
Minimum balances (separately fixed for week days and Fridays / last working
day of March and June) – Source: CAS
Investments in intermediate treasury bills (in case of surplus balances on daily
basis) – Source: CAS
Normal WMA limit and utilized (Source: CAS, Frequency: Daily)
Special WMA limit and utilized (Source: CAS, Frequency: Daily)
Overdrafts limit and utilized (Source: CAS, Frequency: Daily)
Actual balance in the account (Source: CAS, Frequency: Daily)
Interest earned by the Governments on account of surplus invested (Source:
CAS)
Interest paid by the Governments on WMA and Overdraft (Source: CAS)
Revenue Collections
The revenue for Government of India principally comprises the collections from
direct and indirect taxes. Direct taxes mainly constitute corporation tax, income tax,
wealth tax etc. The indirect taxes include collections from excise, customs and sale of
narcotics. Given the importance of the subject, the respective government
departments track the area of revenue collections on a daily basis. DGBA submits the
position and performance of revenue collections vis-à-vis budgets to top management
on a weekly basis.
Analytical Issues
Analysis of revenue collections across time helps in answering critical issues like:



What is the seasonal pattern of revenue collections?
What is the circle wise pattern of revenue collections?
What are the Agency Bank (branch wise) wise revenue collections?
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Variables to be tracked
The key variables that are of interest in answering these questions are:




Direct taxes (break up of corporation tax, income tax, wealth tax etc.)
Indirect taxes (break up of Excise, customs, sale of narcotics etc.)
Focal point branch wise collections (for mapping to circles)
Agency Bank wise and branch wise collection details
Presently, DGBA tracks the above variables on a quarterly basis. However, if the
Government account balances are made available on a daily basis to the Data
Warehouse, the above analysis may be carried out on a daily basis. This would also
help in giving the collection figures to the respective Government departments on a
daily basis.
iii)
Turnover cost on account of Agency Bank transactions
The rate of compensation paid to Agency Banks for conducting Government business
as agents of RBI is determined quinquennially. Presently, RBI compensates at the
rate of 11.80 paisa per Rs. 100 of Government business turnover handled by Agency
Banks. Agency Bank charges constituted around 22 percent of total RBI expenditure
during the year 1999-2000.4
Analytical Issues
Analysis of turnover of government transactions by Agency Banks across time helps
RBI in assessing the cost of delegation such as:





Which are the months / seasons when receipts / payments peak (or dip)?
How are Government Payments / Receipts (volume and value) distributed
geographically? (This also helps in identifying areas for rationalising Agency
Bank network to improve customer service).
What is the average float enjoyed by the Agency Banks?
What would be the turnover commission payable to Agency Banks?
What is the need for expanding the Agency Bank network for better customer
service? Whether there is a need to exclude some branches with negligible
transactions?
Variables to be tracked
The key variables that are of interest in answering these questions are:



4
Total payments and total receipts
Bank wise, branch wise, area wise details of turnover (receipts + payments)
handled
Agency commission paid
Source: RBI Annual Report 1999-2000
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iv)
RBI Remittances Facilities Scheme (RBI RFS)
RBI RFS facilitates transfer of funds between different centers in the country by
avoiding their physical transfer to secure most economical use of the available
financial resources.
Analytical Issues
Analysis of the suspense account is necessary for identifying the reasons and working
out alternative solutions. The analysis helps in answering certain important issues
such as:




What is the value and volume of entries outstanding in the suspense account
(DD’s paid prior to receipt of drawing schedules)?
Which are the issuing entities (entity wise, amount wise)?
What is the delay in receiving drawing schedules (entity wise, lag in days)?
What is the cost of RBI funds locked in RFS outstanding drawings?
Variables to be tracked
The key variables that are of interest in answering these questions are:



Value of Remittance, volume of transactions
Amount of outstanding Drawings
Details of issuing entities
Presently, DGBA does not undertake the above analysis. However, this had been
identified as a requirement during the User Survey. The availability of data can be
confirmed only after studying the new system being implemented at CAS.
Constraints faced
CAS consolidates the transactions relating to the above variables. The variables are
available in soft form. However, CAS works in shifts and completes the data
processing only on the following day. Hence, the above data is available with a day’s
time lag. A new system is under implementation presently at CAS. The analytical
requirements and availability of data stated above is based on the study of the existing
system (COBOL system) available at the time of User Requirement Survey. A new
RDBMS system has since been implemented.
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