2 Review

OneT of the major silver lining amidst the global economic slowdown Short Term Interest Rates (April) GDP in the last three years, has been the falling interest rates. Inflation in percent Growth under control and stability of the international financial system Developed Countries 2000 2002 2003 2003 enabled many governments to reduce interest rates to revive economic growth and momentum in the capital markets. Short- Australia 4.88 4.62 4.77 3.0 Britain 5.25 4.13 3.56 2.0 term interest rates in a large number of developed and emerging Canada 4.43 2.38 3.19 2.8 economies have seen a dramatic decline in the last three years (see Denmark 5.32 3.70 2.70 1.4 table). Developed economies uniformly made major reduction in Japan 0.02 0.03 0.02 0.8 interest rates with the United States announcing a rate cut almost Sweden 4.01 4.28 3.43 1.6 every month in the year 2002. Among the emerging economies, Switzerland 3.19 1.59 0.29 0.6 barring a few exceptions such as Brazil, Egypt, Israel, and South United States 4.17 1.82 1.16 2.2 Africa, many resorted to rate cuts that are sizeable and significant. Euro Area 4.78 3.40 2.48 1.1 In India, short term interest rates in the last three years fell by Emerging Economies about 3 percentage points, but there are several other countries, Hong Kong 4.20 2.05 1.41 3.0 which made much deeper cuts. For instance, interest rates in Mexico India 7.71 5.84 4.94 5.1 during this period fell by almost 750 basis points, and so as in Malaysia 3.30 3.25 3.10 5.0 some eastern European transitional economies, where they fell by South Korea 5.90 4.79 5.51 5.0 about 6 to 7 percentage points. The accompanying article gives in Thailand 2.50 2.25 1.75 4.2 brief the impact of interest rates on corporate performance and Brazil 16.29 18.40 26.32 2.8 Chile 3.42 4.32 2.52 3.1 the experience of a few emerging economies on the impact of Mexico 13.25 5.72 5.82 2.3 interest rates on their respective domestic economic growth. Egypt 9.11 7.20 12.29 3.0 This issue also carries an article on interest rate swaps, which assumes Israel 5.25 2.73 5.82 0.5 significance among the fixed income derivatives. With introduction South Africa 10.70 11.20 13.75 2.8 Czech Republic 5.01 4.27 2.47 1.9 of interest rate futures around the corner, corporates and financial Hungary 11.30 8.45 6.50 3.6 institutions will now have greater opportunities in managing Poland 17.14 10.18 5.63 2.6 interest rate risk. Excerpts from the RBI monetary policy, trends in Russia 25.00 23.00 18.00 4.0 net inwards equity markets flows in emerging economies etc., are others presented in this issue. Editor THE STOCK EXCHANGE REVIEW INVITES ARTICLES ON CAPITAL MARKETS AND FINANCIAL MARKETS

UTHORS The Stock Exchange Review invites articles on capital markets and financial markets covering major market segments such as securities industry, banking, money markets, debt, derivatives, mutual funds, insurance and infrastructure finance. Articles should be original and in the realm of relevant areas such as

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3 Domestic Economy Domestic Economy 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Gross Domestic Product (% change yoy) 4.8 6.5 6.1 4.4 5.6 4.4 (est.) Value Added in Agriculture (% change yoy) -2.4 6.2 0.3 -0.4 5.7 -4.4 Industry 4.3 3.7 4.8 6.6 3.3 4.9 Services 9.8 8.3 10.1 5.6 6.8 7.0 Exports $ mn 35049 33211 36760 44147 43708 52000 Imports $mn 41535 42379 49799 50056 51261 60000 Money Supply (M3) (% change yoy) 18.0 19.4 14.6 16.8 14.2 14.0 WPI (% change yoy) 4.4 5.9 3.3 7.1 3.7 2.5 Capital Issues (Rs. bn) 487 437 663 492 458 394 Equity (Rs. bn) 177 117 249 142 62 59 Debt (Rs. bn) 317 320 410 348 395 334 GDRs/ADRs $mn 291 70 822 480 495 131 FDI $mn 3562 2480 2167 2342 3905 Portfolio Flows $mn 1828 -68 3024 2760 2020 NRI Deposits $mn 1125 960 1540 2317 2754 ECB $mn 4010 4367 333 4016 -1144 Total Foreign Capital Flows $mn (net) 9226 8042 10184 8997 9545 Aggregate Deposits (SCBs) (% change yoy) 18.4 19.3 19.3 16.2 11.5 14.0 Non-food Credit (% change yoy) 15.1 13.0 21.9 14.1 9.4 15.5 Gross Fiscal Deficit (% of GDP) 5.8 6.5 5.4 5.6 6.1 Monthly Indicators Particulars Apr02 May02 Jun02 Jul02 Aug02 Sep02 Oct02 Nov02 Dec02 Jan03 Feb03 Mar03 Apr03 IIP 4.1 4.1 4.5 7.1 6.2 6.2 6.6 3.6 4.9 6.0 Exports (% change yoy) 21.8 3.6 2.6 20.3 18.8 15.1 13.9 5.8 34.3 8.7 12.9 14.6 Imports (% change yoy) 1.6 -0.4 0.2 -5.0 11.1 29.9 35.4 22.6 24.3 23.9 17.8 24.5 Forex reserves $bn 52.1 52.9 54.7 56.7 58.3 59.7 61.2 63.6 67.0 69.9 69.1 71.1 Non-food credit 13.4 25.0 25.3 25.2 25.5 25.3 24.8 26.2 25.5 27.2 27.8 24.9 WPI 1.5 1.5 2.4 2.8 3.3 3.6 3.1 3.4 3.2 4.1 5.4 5.5 Trade Balance $mn -367 -897 -337 -551 -526 -812 -1309 -1318 -709 -638 -441 -776 Markets Particulars Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 Govt. borrowings (Rs. bn) 190.7 187.9 45.9 142.9 31.4 43.4 96.1 57.2 81.7 90.1 124.43 - - Agg. deposits (% change yoy) 14.5 19.15 17.76 18.02 18.30 17.20 18.17 18.09 17.59 18.57 17.76 16.06 16.47 Bank credit (% change yoy) 15.41 25.21 24.91 24.25 24.16 23.19 23.10 24.22 23.10 23.84 23.32 23.0 23.01 Public Issues (Rs. cr) 18.81 59.00 511.08 310.35 609.65 254.95 555.00 2126.00 237.00 766.59 424.59 350.00 0.00 Rights Issues (Rs. cr) 0.00 245.63 0.00 7.83 0.00 0.00 0.00 0.39 49.22 0.00 79.66 29.52 1.96 Private Placements (Rs. cr) 821.00 3189.63 1423.51 7344.59 2212.30 1505.11 2164.99 2019.86 3234.10 3197.66 2161.63 3299.56 611.29 Overseas Floatations (Rs. cr) 0.00 0.00 0.00 48.31 0.00 242.67 0.00 198.07 0.00 71.65 0.00 72.50 0.00 Assets under management MFs. (Rs. cr) 102831 102231 100703 102393 107621 106929 113153 121393 122600 121805 87190 79464 - Corporate Debt Floatations (Rs.cr) 500 3136 1068 7600 1925 1475 2562 2594 3222 3494 2122 3630 565 Rates, Ratios, Returns Particulars Mar03 Apr 03 Mar03 Apr 03 Mar03 Apr 03 Bank Rate 6.25 6.0 CRR 4.75 4.50 PE Ratio : SENSEX 13.74 13.21 Savings bank rate 3.50 3.5 SLR 25 25 Price to Book Value 2.14 2.06 Term deposit rate 5.50-6.25 5.50-6.25 Credit Deposit Ratio 55.92 55.36 Dividend Yield 2.28 2.37 PLR 10.75-11.50 10.75-11.50 Re/US$ 47.55 47.27 Call Money rate 5.50 4.50 Re/Euro 51.40 52.56 PE Ratio : NIFTY 13.85 13.20 91 day T-Bills 5.89 4.94 Re/Yen 0.4009 0.3956 Price to Book Value 2.23 2.12 CDs 5.25-7.10 5.00-7.10 Premium on Forward Markets(3mUS$) 2.03 1.52 Dividend Yield 2.69 2.97 CPs 6.00-7.75 5.05-9.85 Avg. Yield on Govt. securities (10 yrs) 6.31 5.92 International Economy April Particulars Austrl U K France Germany Italy Japan U S Euro China Malay Korea Taiwan Mexico Brazil S.Africa Russia G D P 3.0 2.3 1.5 0.5 1.0 2.8 2.1 1.3 9.9 5.6 6.8 4.2 1.9 3.4 3.0 4.3 Interest Rates* 4.82 3.59 - - - 0.02 1.21 2.53 - 3.10 4.54 1.35 6.73 26.32 13.75 18.00 Consumer Prices** 3.4 3.1 2.6 1.1 2.7 -0.1 3.0 2.1 0.9 0.7 3.7 -0.2 5.6 16.7 12.5 14.8 PLR (%) - 3.75 - 2.5 - 1.375 4.25 ------Forex reserves ($bn)~ ------309.2 33.8 123.8 168.6 52.0 38.4 6.1 51.8 Currency Units/$ 1.60 0.63 0.90 0.90 0.90 119 - 0.90 8.28 3.80 1215 34.8 10.29 2.89 7.3 31.1 Year ago 1.86 0.68 1.10 1.10 1.10 127 - 1.10 8.28 3.80 1289 34.7 9.44 2.36 10.6 31.2 Stock Index current 2970.9 3926.0 2953.7 2942.04 17726.0 7863.29 8480.09 634.22 3305.9 630.7 599.35 10202.2 6509.88 12556.7 7510.40 422.37 A month ago 2848.6 3613.3 2618.5 2520.84 16085.0 7972.71 8145.77 479.17 3556.2 635.7 535.7 4148.07 5896.47 11265.2 7679.88 360.33 Year high 3049.6 4009.5 3210.27 3157.25 18323.0 8790.92 8842.62 664.53 3559.8 643.07 666.71 4321.22 6509.88 12677.9 9579.52 446.82 Year Low 2673.3 3287.0 2403.04 2202.96 15125.0 7607.88 7524.06 514.35 2879.5 619.22 515.24 5078.80 5745.66 9994.89 7361.15 336.08 Record high 3440.0 6930.2 6922.3 8064.97 - 38915.9 11722.9 - - 1314.16 1138.75 4139.50 8319.67 18951.5 - - PE ratio 19.4 15.5 13.5 11.0 15.1 31.9 21.7 - 8.8 12.4 10.8 19.9 15.4 11.8 8.3 10.6

Sources: Center for Monitoring Indian Economy, The Stock Exchange, Mumbai, Reserve Bank of India, Financial Times, The Asian Wall Street Journal, The Economist, London. 1. Closing rates; 2. Last auction rates of 91 TBs.; 3. Forecasts of GDP Growth by The Economist; 4. Short term interest rates; 5. Stock market indices ; Australia: All Ordinaries; Brazil: Bovespa; China: Shanghai B: France: CAC40; Germany: XETRA Dax; Italy: Mibtel General; Japan: Nikkie 225; Britain: FTSE.100; United States: Dow Jones Industrials; Malaysia: KLSE Comp; Mexico: IPC; Russia: RTS; South Africa: JSE All Share; South Korea: KoreaCmpEx; Taiwan: WeightedPr. Latest data available for the month; 6. Year 2003.

4 PortfolioPortfolio

THE BIG PICTURE Real interest rate is the effective difference between the nominal Real Interest Rates for Borrowers, interest rate and the inflation rate of a Depositors and Central Government in India particular year. The weighted average 17.0 lending rate of SCBs has fallen from 15.0 15.0 percent in 1990-91 to 13.9 13.0 percent in 2001-02. But the manufacturing price index has 11.0 decreased at a much greater rate from 9.0 8.4 percent to 1.8 percent in the same 7.0 % period which pulled up the real 5.0 interest rate for borrowers from 6.6 3.0 percent to 12.1 percent. Similarly, the 1.0 real interest rate for the depositors fell by two basis points from 6 percent to -1.0 91-92 92-93 93-94 94-95 95-9696-97 97-98 98-99 99-00 00-01 01-02 4 percent. But for the Central -3.0 Government, the overall movement -5.0 of the real interest rate shows a -7.0 moderate trend. Borrowers Central Govt. Depositors Source : Reserve Bank of India CURRENT NEWS COMMENT Dow Jones Index announced the expansion of Dow Jones Islamic Market index by adding the “The most important thing that a global Dow Jones Islamic Market Titans 100 and DJ U.S. Islamic Titans 50, the DJ Europe Board of Directors should do is Islamic Titans 25 and DJ Asia/Pacific Titans 25 determine the elements that must be The Taiwan Stock Exchange plans to launch Exchange Traded Funds in the first half of 2003. embedded in the company’s moral Norway’s VPS, the Central Depository Organisation is the world’s first depository to privatize DNA, as one might call it. The Board through a public offering. must devote continuing effort to the evaluation and understanding of their SEBI has initiated a proposal to introduce full fungibility between Depository Receipts and the underlying domestic shares, without any restrictions on allowing Indian residents to convert their own group dynamic and the way that shareholdings into DRs to the extent DRs have been converted into equity shares. affects their decision-making process.” SEBI has announced new guidelines on investments by mutual funds, permitting them to invest William H. Donaldson, Chairman, up to 10% of their net assest in foreign securities. U.S. Securities and Exchange Government of India is planning a series of measures to attract FDI. These includes setting up an Commission suggesting a few investment facilitation fund, an overseas investment promotion office to help target putting share fundamentals on Corporate investors and strike deals and appointing a ombudsman. Governance. BSE NEWS

Shri R. Ravimohan, Managing Director, Credit Rating Information Services India Ltd., delivering the valedictory address at the Certificate Programme on Capital Markets (CPCM), conducted by BSE jointly in association with Jamnalal Bajaj Institute of Management Studies.

5 BSE nowledge CKenter Capital Market Training. Information. Publications.Forums. Skill Tests Capital Market Training from BSE. BSE Training Institute 21st Floor, P.J. Tower, Dalal Street, Mumbai. Tel:2272 1126-27, 2272 1233-34, Fax:2272 3250, Email:[email protected] CALENDER FOR MAY AND JUNE 2003 Programme Dates Fees Programme Dates Fees Mutual Funds May 9-10 Rs. 2,500 Advanced Derivatives June 6-7 Rs. 3,000 Finance for Non-Finace May 10 Rs. 3,000 Prog. on Stock Markets June 9-12 Rs. 3,250 Executives Prog. on Debt Market June 13-14 Rs. 3,000 Investor Awareness Prog May 21-22 Rs. 1,200 Programme on June 18 Rs. 2,000 Commodity Trading Basic Programme May 23 - 24 Rs. 2,250 Basic Programme on June 20-21 Rs. 2,250 on Derivatives Derivatives Equity Portfolio May 24 Rs. 2,000 Certificate Programme June 23 Rs. 10,500 Structuring and on Capital Market Stock Picking Foreign Exchange Risk June 27-28 Rs. 3,000 Interest Rate Futures May 30-31 Rs. 12,000 Institute Training 2002-03, BSE In conducted 130 programmes attended by 4200 participants. Management l Any Student or a group of minimum 20 persons shall attract a discount of 25%. l Corporates nominating 5 participants for the programme can nominate the 6th person free of cost. l FINTECH ANALYSIS ADVANTAGE – Registration for both Fundamental and Technical Analysis at the same time will attract a discount of’ Rs. 450/-. l DERIVATIVE ADVANTAGE – Registration for both Basic & Advance Derivatives same time will attract a discount of Rs. 750/-. l The course fees are inclusive of study materials (Lunch, Tea/Coffee for full day’s courses only) l DD/broker member’s cheque may please be made in the name of “The Stock Exchange, Mumbai”, the same should be payable at Mumbai. CERTIFICATE PROGRAMME ON CAPITAL MARKETS A 3- month part-time programme conducted jointly with Jamnalal Bajaj Institute of Management Studies, under which successful participants are awarded certificates from the University of Mumbai CPCM Next Batch Commencing on 23rd June 2003. Course Fee: Rs.10,500 FOR CERTIFICATION IN e-LEARNING Stock Markets PLATFORM Debt FOR A WIDE RANGE Derivatives OF Demat & Depositories COURSES ON CAPITAL On-line examination conducted in MARKETS about 50 centers in India www.bti.bseindia.com

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6 Market INWARD PORTFOLIO EQUITY FLOWS TO DEVELOPING COUNTRIESTrends The net inward portfolio equity flows to all developing countries showed gradual rise to reach the peak at US$ 33.6 bn in 1996. East Asian crises, reversed the trend taking down the flows to a level of US$ 7.4 bn in 1998, but thereafter momentum gained with the equity flows reaching a high of US$ 26.0bn in the year 2000. The slump in the stock markets that began in the year 2000 reduced the pace of the flows, hitting the bottom at US$ 6.0bn. in 2001. Last year, the flows recovered a bit, and as per World Bank’s Global Development Finance, the inward portfolio equity flows are expected to jump 40 percent, to US$ 13.0 bn. by 2003. East Asia and China once gain garnered a large share of these inflows. For instance, of the US$ 26 billion equity inflows in the year 2000, as much as 74 percent went to East Asia, with a much larger chunk going into China. At the peak, equity inflows to India were at US$4 billion ( as compared to US$ 21.4 billion in case of China), which fell to 0.9billion in 2002. Last year( year 2002) out of 19 major emerging economies, net inward portfolio equity flows were positive in 13 countries, negative in 3 countries and nil in three countries. Net Inward Portfolio Equity Flows to Developing Countries, 1995-2003 in bn $ 1995 1996 1997 1998 1999 2000 2001 2002 e 2003 f All developing countries 20.2 33.6 26.7 7.4 15 26 6 9.4 13 East Asia and Pacific 9.1 10.1 0 -2.8 4.6 19.3 2.9 5.4 7 China 3.3 4.1 9.3 1.4 3.8 21.4 3 4 Indonesia 1.5 1.8 -5 -4.4 -0.8 -1 0.2 0.2 Malaysia 2.2 0.8 -7.8 -0.4 0.1 -1.9 -0.7 1 Philippines 2.1 -0.4 0.3 0.5 -0.2 0.4 0.3 Thailand 2.1 1.2 3.9 0.3 0.9 0.9 0 0 Europe and Central Asia 1.7 4.3 4 4 2 1.2 0.3 1.4 2 Czech Republic 1.2 0.6 0.4 1.1 0.1 0.6 0.6 0.5 Hungary 0 0.4 1 0.6 1.2 -0.4 0.1 0.2 Poland 0.2 0.7 0.6 1.7 0 0.4 -0.3 -0.1 Russian Federation 0 2.2 1.3 0.7 -0.3 0.2 0.5 1 Turkey 0.2 0.2 0 -0.5 0.4 0.5 -0.1 0.1 Latin America and the Caribbean 4.8 12.2 13.3 -2.1 -3.6 -0.4 2.3 1 2 Argentina 1.1 1 1.4 -0.2 -10.8 -3.2 -0.1 -0.6 Brazil 2.8 5.8 5.1 -1.8 2.6 3.1 2.5 1.2 Chile -0.2 0.7 1.7 0.6 0.5 -0.4 -0.2 -0.1 Mexico 0.5 2.8 3.2 -0.7 3.8 0.4 0.2 0.5 Venezuela 0.3 1.3 1.4 0.2 0.4 -0.5 -0.1 0 Middle East and North Africa 0.1 0.5 0.8 0.3 0.7 0.2 -0.1 0 -1 Egypt 0 0.2 0.5 -0.2 0.7 0.3 0 0 South Asia 1.6 4.1 2.9 -0.6 2.4 1.7 1.6 0.8 2 India 1.6 4 2.6 -0.6 2.3 1.6 1.7 0.9 Sub-Saharan Africa 2.9 2.4 5.5 8.6 8.9 4 -1 0.7 1 South Africa 2.9 2.3 5.5 8.6 9 4.2 -1 0.7 Source : World Bank e=estimate f=forecast

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7 Compiled from various sources

The stock exchanges, financial services trade associations and financial institutions gathered in the NewYork city to announce the legal formation of Financial Services Sector Coordinating Council. This Council was created in June 2002 with the purpose to help protect America’s financial infrastructure. The Council has focussed its activities on four primary areas: l Effective and rapid information dissemination to and from the government, l Crisis management and response coordination to manage and communicate disaster crisis, l Outreach and organizational engagement to ensure understandability of industry’s infrastructure and homeland security objectives, l Knowledge sharing and best practices to improve security and business continuity. Some of the major founders of the Council include American Bankers Association, NASDAQ, Bank Administration Institute.

AMERICAN STOCK EXCHANGE MAY BE SOLD American Stock Exchange was started in 1700s and once was one of the nation’s largest and most respected exchanges. It got merged with NASDAQ Stock Market in 1998 and developed some popular exchange-traded funds such as Nasdaq-100 and QQQ. Now the exchange is expected to being sold for about $100m in cash to a Chicago based private –equity firm GTCR Golder Rauner.

US OPTIONS EXCHANGES IMPLEMENT THE ELECTRONIC INTER-MARKET LINKAGE SYSTEM The five US options exchanges have implemented the electronic inter-market linkage system. It will enable exchanges to electronically communicate with each other for the first time in the history of the US options market. The Options Clearing Corporation, which issues and settles all listed options contracts, will operate the linkage hub.

EXCHANGE REVENUES Despite difficult market conditions Exchanges like Deutsche Borse and Euronext achieved higher profits. Increased trading in derivatives has driven Deutsche Borse’s profit. Whereas, Euronext’s growth in profit was contributed from both cash and derivatives market. The exchange, to remain competitive, did not increase its fees and granted rebates linked to cash migration, which is an important cost savings for clients.

GLOBAL E CONOMY REBOUNDING SOON The global economy is most likely to rebound in the second half of 2003 as the risk of an adverse impact of the war in Iraq on global economy are diminishing. The worst-case scenarios such as hike in the oil price did not materialize. The overall impact of the conflict remained contained. According to IMF’s MD Horst Koehler, many countries have strengthened their fundamentals in recent years, and are now better equipped to handle external shocks.

INDIA

REGIONAL LISTING NOT NECESSARY Listing on bourses in regions where companies are headquartered is no longer compulsory. Pratip Kar Committee on delisting had recommended that companies be allowed to decide where to list.

INTEREST RATE DERIVATIVES ONLY FOR HEDGING The Reserve Bank of India has made it clear that scheduled commercial banks, primary dealers and financial institutions participating in interest rate derivatives can do so only for hedging. They will not be allowed to take any trading positions.

SEBI NEWS SEBI has signed a multilateral Memorandum of Understanding with the International Organisation of Securities Commission (IOSCO) for mutual assistance and exchange of information for the purpose of enforcing and securing with the respective laws and regulations of the jurisdiction of members. SEBI issued a circular for the introduction of Exchange Traded Interest Rate Derivative Contracts in the Indian Securities Market. The trading will begin with future contracts on Notional Government Security with a 10-year maturity (Long Bond Future) and a Notional Treasury Bill (Notional T-Bill Futures) with a maturity of 91 days. SEBI has by Order issued under Section 11 of the Securities Contracts (Regulation) Act, 1956, [SC (R) A] superseded the Board of Directors of the Pune Stock Exchange Ltd, with effect from April 04, 2003 and have appointed Shri B.D. Banerjee as the Administrator of the Exchange to exercise and perform all the powers and duties of the Board.

8 BSEBSE SSTREAMLINESTREAMLINES MMEMBERSHIPEMBERSHIP SSERVICESERVICES

The Membership Services Department Feedback from our Esteemed Members formed in 2001-02, is the single point The members of the Exchange have whole-heartedly welcomed the interface for interacting with the Exchange formation of the department. Earlier they had to approach various Administration to address members’ issues. departments and officials for resolving their problems. In the absence The department has pioneered the unique of knowledge of who is the relevant officer handling a certain matter, concept of ‘Account Manager’ for the first a member wasted lot of time and energy running from pillar to post. time in the Exchange’s history, whereby a Now a member knows that he only has to approach his account single Executive is responsible for providing Manager and things will be taken care of. Most of the problems are comprehensive services to a set of members resolved on the spot and in case the problem is such that it takes time, Sunil Vichare concerned. The Account Manager builds the member gets regular update on the progress. The members have General Manager, strong personal relationship with the appreciated the role being played by the department at various forums. Membership&Marketing members whereby besides speedily resolving Future Plans member issues from time to time, he also adopts a proactive approach in identifying members’ training requirements in terms of Exchange’s For the coming year, the department is planning to aggressively pursue products and services and fulfilling the same. a programme to increase the membership base of the Exchange across the country with a view to bringing in increased volumes and liquidity. Major Initiatives in the Year Besides this, the department has already set up Regional Hub at The department has been very active in complaint resolution and Delhi and is in process of setting up Regional Hubs at Kolkata and providing services to the members in the past year. Some of the major subsequently at other important regional centres so as to provide initiatives taken by the department in 2002-03 were : - improved connectivity options to our members at locations outside l Executives of the department visited numerous centres in the states Mumbai. The department is also taking steps to streamline processes of Punjab, Haryana, Kerela and Rajasthan and interacted with the and systems within, so as to further improve the quality of services brokers, sub-brokers and their clients in those regions. The Executives offered to our esteemed members, and in this regard, is in an advanced explained the various products of the Exchange as well as resolved stage for obtaining ISO 9001 certification. the queries and issues of the local populace. l The department organized and conducted various derivatives Ms Deena Mehta retired from the training programmes for the members and their employees/sub- brokers both in Mumbai and outside and also conducted BCDE Governing Board of The Stock st examinations so as to enable more members to trade on the Exchange, Mumbai on 31 Derivatives segment. March, 2003. She is one of the l The department took steps to activate the membership of the most respected professionals in the subsidiaries of Delhi, Hyderabad and Inter-Connected Stock Indian Capital Market who is held Exchanges along with the membership of the Derivatives Segment in high esteem for her competence, of ASE Capital Markets. skills and knowledge. She l The Exchange opened two Regional Centres at Delhi and Kochi embodies what a woman of during the year. The Membership Services Department has stationed substance means and the potential its Executives at both these centres to offer personalized and prompt Smt. Deena Mehta services to members in the local areas. of the women. Her biggest l During the year, numerous visits were conducted to various accomplishment is rising at a rapid pace in a profession, which Regional Stock Exchanges (RSEs) across the country with a view is conventionally a male bastion. But she rose to become the to developing a closer relationship between the Exchange and the president of the India’s premier stock exchange and was one of RSEs. the most respected and knowledgeable members of its l The Department actively co-ordinated with the members in order governing board. She is also the chairperson of the Securities to ensure timely completion of all formalities for payment of SEBI turnover fees. Association of India, a federation of 22 stock exchanges of l The Executives of the Department conducted two ‘Roadshows’ India. Another important achievement of hers is that she is the at Kolkata and Hyderabad during the year in order to popularise founder member of the South Asian Federation of Exchanges. the Exchange’s products among the brokers in the local area. The She is a visiting faculty at premier institutions such as Indian Exchange Executives received tremendous response to the Institute of Management, Ahmedabad and UTI Institute of Roadshows at both the centres. Capital Markets. A PostGraduate in Finance from Bombay l Coordinated a ‘Strategy’ meeting of Top 30 members with members University, and an Associate member of the Institute of of Governing Board, Governing Council and Trustees on the eve Chartered Accountants of India, she has been an outstanding of Dassera to seek their feedback and commitment towards increasing volumes on the Exchange student and a professional throughout. She was actively l The Department brought out two publications during the year - involved in achieving several landmarks in the Stock Exchange, “Frequently Asked Questions (FAQs) on BSE’s Products and in introduction of the Online Trading System, geographic Services” and “Guidance Manual for BSE’ Members” in order to expansion throughout the country, clearing operations, present the Exchange’s products before the laypersons in a simple introduction of depository and derivatives trading. She was and lucid format. actively associated with The Stock Exchange, Mumbai for last six years and retired from the board on the completion of her stipulated tenure on 31st March, 2003.

9 INTEREST RATES Cover SOUTHWARD AND SOFTSIDE eature On April 22nd 2003, US President George Bush indicated that he interest rates of a few countriesF selected as a sample for the study would support the reappointment of Alan Greenspan as the The monetary policy in India has been actively pursuing softer Chairman of the US Federal Reserve, which will make him one of interest rate regime, the momentum of which was picked up in the longest serving Chairman of the Fed (the record is now held by the recent years. Between March of 2001 and 2003, the Bank William Mc Chesney Martin, Chairman of the Fed between 1951 Rate has been brought down by a full 100 basis points, following and 1970). Alan Greenspan is well known for monetary policy which the prime lending rates of banks too got adjusted. Yield management, in particular exercising greater control on the rates on Government Securities too fell rapidly during this period. decisions on interest rate changes. The most remarkable feat has Overall interest rate scenario has softened significantly (see Table been the lowering rate of Fed funds rates almost every month last 1) and the recent announcements of the Reserve Bank of India year, which brought it to a 40 year low. indicate its continuance further. World economy which has been growing at a fairly rapid pace The falling interest rates has been a blessing to many segments of throughout the decade of 1990s suddenly started sputtering owing the economy. Market for the home mortgages shot up sizeabley to the burst of the internet bubble, slowdown in investments in taking advantage of the lower interest rates and coupled with tax technology, sharp drop in corporate profits and several accounting reliefs. Personal loan segment too experienced a massive jump. deviations that surfaced in some leading international corporations. For corporates, the falling interest Table 1 Trends in Interest Rates % per annum rates have been particularly beneficial. Interest Rates 30-Mar-01 11-Jan-02 29-Mar-02 10-Jan-03 30-Apr-03 Several companies showed massive rise Bank Rate 7.0 6.5 6.5 6.25 6.0 in profit after tax owing to reduced IDBI 1 12.5 12.5 12.5 12.5 12.5 interest rates. A recent report in the PLR 2 11.0-12.0 11.0-12.0 11.0-12.0 10.75-11.50 10.75-11.50 Economic Times, shows that Deposit Rate (>1yr.) 3 8.50-10.0 7.50-8.50 7.50-8.50 5.50-6.50 5.50-6.25 companies such as Reliance Capital, Call Money (Borrowings) Indian Aluminium, Kamat Hotels, Su Low/High 4 6.80/13.50 4.54/7.30 5.00/19.00 3.50/7.00 3.00/5.50 CDs 6.30-11.50 6.20-9.50 5.00-10.03 4.71-6.50** 5.00-7.10 # Raj Diamonds, Simplex Castings CPs 8.75-11.25 7.40-9.75* 7.41-10.25 5.70-7.50*** 5.05-9.85 showed hefty rise in profit after tax 91 days T-Bills 8.5 6.83 6.13 5.39 4.53 due to fall in interest rates. Interest as 364 days T-Bills 8.96 7.0 6.16 5.41 4.88 a percentage of PBDIT fell from 23.5 Notes : 1. Minimum Term Lending Rate 2. Prime Lending Rate relates to five major banks. 3. Deposit rate relates to major banks for term deposits of more than one year maturity. 4. Data cover 90-95 percent of total transactions reported by participants * Relates to Jan 15 percent in 2001-02 to 19.5 percent 2002 ** Relates to December 27, 2002 *** Relates to Jan 15,2003 # Relates to Mar 21, 2003. Source : Economic Survey

Interest rates have been used as an effective instrument to revive INTEREST RATES AND ECONOMIC GROWTH the economy and restore its pace, though with limited success. 1A ARGENTINA 1B ARGENTINA On January 3rd 2001, when the Federal Reserve announced the 24 24 20 20 rend Interest Rate first of its rate cuts, NASDAQ rose by 19 percent, and S&P 500 Interest Rate 16 % per y 1 16

12 % per y jumped up by 5 percent, reinforcing greater faith in the monetary om HP T .08 0 8 ear 12

.04 GDP % of -1 8 policy. But that sentiment could not prevail for long when after 4 ear -2 three months (March 23) markets actually fell following another .00 GDP 4 % Deviation fr % Deviation -3 Net Exports rate cut and since then markets continued the slippage despite -.04 -.08 -4 several rate cuts and fiscal reliefs. 1994 1995 1996 1997 1998 1999 1994 1995 1996 1997 1998 1999 2A KOREA 2B 12 12 KOREA With world’s two largest economies, the US and Japan experiencing 10 Interest Rate 10 Interest Rate

rend economic slowdown and the European Union not coping up 8 % per year 20 8

% per year .08 6 15 6 well, there was a concerted initiative to revive growth with interest om HP T .04 4 10 4 5 rate cuts being major policy options. Following this, several .00 GDP 2 GDP % of 2 0 developed and developing nations to announced significant and -.04 % Deviation fr % Deviation -5 -.08 Net Export sizeable rate cuts. -.12 -10 1994 1995 1996 1997 1998 1999 2000 1994 1995 1996 1997 1998 1999 A recent study by Pablo A. Neumeyer and Fabrizio Perri, in their 3A 3B MEXICO 20 20 article “ Business Cycles in Emerging Economies: The Role of MEXICO 16 16 Interest Rates” New York University show that interest rates in Interest Rate Interest Rate 12 rend 12

4 % per year emerging economies leads business cycles. Increase in the interest .08 8 % per year 2 8 rates are associated with downturns in economic activity and om HP T .04 4 0 4 .00 increases in the trade surplus. The study found a strong negative % OF GDP -2 -.04 GDP -4 Net Exports

correlation between GDP growth rate and interest rates whereas a fr % Deviation -.08 -6 strong positive correlation exists between exports growth and 1994 1995 1996 1997 1998 1999 2000 1994 1995 1996 1997 1998 1999 2000

10 Table 2 Lending and Deposit Rates by Banks Interest Rate and Corporate Performance 4A SALES 4B Corporate Tax Year Call Term Deposit Rates Lending 40 Money Rates 35 30 30 Rates 1-3 years 3-5years Above 5 years PLR (SBI) 25 20 20 % % 1970-71 6.38 6.00-6.50 7.00 7.25 7.00-8.50 15 10 10 0 71-72 5.16 6.00 6.5 7.25 8.5 94-95 95-96 96-97 97-98 98-99 99-00 00-01 5 72-73 4.15 6.00 6.5 7.25 8.5 -10 0 94-95 95-96 96-97 97-98 98-99 99-00 00-01 73-74 7.83 6.00 7.00 7.25 8.50-9.00 -20 74-75 12.82 6.75-8.00 7.75-9.00 8.00-10.00 9.00-13.50 Indian Private Sector Foreign Private Sector Indian Private Sector Foreign Private Sector 75-76 10.55 8.00 9.00 10.00 14.00 4C 4D 40 PAT 76-77 10.84 8.00 9.00 10.00 14.00 80 35 77-78 9.28 6.00 8.00 9.00 13.00 30 60 78-79 7.57 6.00 7.5 9.00 13.00 25 Interest Payment 40 20 % 20 79-80 8.47 7.00 8.5 10.00 16.5 15 % 0 80-81 7.12 7.50-8.50 10.00 10.00 16.5 10 5 -20 94-95 95-96 96-97 97-98 98-99 99-00 00-01 81-82 8.96 8.00-9.00 10.00 10.00 16.5 0 -40 82-83 8.78 8.00-9.00 10.00 11.00 16.5 -5 94-95 95-96 96-97 97-98 98-99 99-00 00-01 -60 -10 83-84 8.63 8.00-9.00 10.00 11.00 16.5 84-85 9.95 8.00-9.00 10.00 11.00 16.5 Indian Private Sector Foreign Private Sector Indian Private Sector Foreign Private Sector 85-86 10.00 8.50-9.00 10.00 11.00 16.5 5 86-87 9.99 8.50-9.00 10.00 11.00 16.5 7000 Growth of Personal Loans 87-88 9.88 9.00-10.00 10.00 10.00 16.5 6000 88-89 9.77 9.00-10.00 10.00 10.00 16.5 89-90 11.49 9.00-10.00 10.00 10.00 16.5 5000 90-91 15.85 9.00-10.00 11.00 11.00 16.5 91-92 19.57 12.00 13.00 13.00 16.5 4000 92-93 14.42 11.00 11.00 11.00 19.00 3000 93-94 6.99 10.00 10.00 10.00 19.00 94-95 9.40 11.00 11.00 11.00 15.00 2000 95-96 17.73 12.00 13.00 13.00 16.5 96-97 7.84 11.00-12.00 12.00-13.00 12.50-13.00 14.5 1000 97-98 8.69 10.50-11.00 11.50-12.00 11.50-12.00 14.00 0 98-99 7.83 9.00-11.00 10.50-11.50 10.50-11.50 12.00-14.00 99-00 9.00 8.50-9.50 10.00-10.50 10.00-10.50 12.00 00-01 8.00 8.50-9.50 9.50-10.50 9.50-10.50 11.00-12.00 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 5.50 7.25-8.50 8.00-8.75 8.00-8.75 11.00-12.00 Loans for Consumer Durables Loans for Housing 02-03 4.75 - - - 10.75-11.50 Other Personal Loans The Pace of the Rate Cut Response of Banks “The Bank Rate has been reduced from 11% to 6%, i.e., The banks have reduced their deposit rates. The term by 500 basis points in the last five years. This is the deposit rates of public sector banks over one year sharpest reduction in the Bank Rate since independence. maturity have declined from a range of 8-10 percent in August 2000 to 6-8 percent now. This fall in Unless the domestic and international circumstances interest rates in the recent period has been in change, the policy bias in regard to the Bank Rate is consonance with the monetary policy stance of a to keep it stable until the mid-term Review of soft and a flexible interest rate regime. Despite the October’03.” fall in deposit rates, depositors have received positive real interest rates of close to 2 percent in Dr. Bimal Jalan, Governor, Reserve Bank of India the second half of the 1990s, which is much higher than the real return on deposits during the first half in 2002-03. Interest 6 Loans for Housing of the 1990s. payments have been Annual Growth Rate (%) On the other hand, lending rates of the banks have not come down as much. While banks have reduced on a continuous 60.0 decline and as their prime lending rates (PLRs) to some extent and 50.0 are also extending sub-PLR loans, effective lending compared to the 40.0 rates continue to remain high. It is estimated that corporate taxes; the 30.0 the average lending rate of scheduled commercial decline in interest banks has declined from a peak of about 17 percent 20.0 rate has been much in 1995-96 to about 14 percent by 2001-02. Hence, 10.0 rapid. while nominal interest rates have come down, they 0.0 have not fallen as much as the inflation rate. 95-96 96-97 97-98 98-99 99-00 00-01 Consequently, the effective real lending rate continues to remain high. This development has

250 Rise in PAT due to fall in interest rate % 7 adverse systemic implications, especially in a country 200 like India where interest cost as a proportion of sales 150 of corporates are much higher as compared to many 100

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11 MMACROPRUDENTIALACROPRUDENTIAL IINDICATORSNDICATORS Policy SSALIENTALIENT FFINDINGSINDINGS otes The Mid-term Review of Monetary and Credit Policy of October liabilities and hence, maturityN mismatch is unlikely to exert any 2000 had indicated that a half-yearly financial stability review major pressure on the liquidity-adjustment-induced changes in using macroprudential indicators (MPIs) would be prepared. In the interest rate. this regard, an inter-departmental Group was constituted and a Interest Spread pilot review of MPIs was prepared for the half-year ended March 2000 followed by regular half-yearly reviews from September The trend in interest spread (net interest income to total assets), 2000 onwards. The salient findings of the review for the second which has witnessed a declining trend over the past few years, half of 2001-02 are given below. continued during 2001-02. This trend reflects the possible impact of greater competition among banks. In this context, the share of Capital Adequacy (CRAR) interest income to non-interest income assumes importance. If The CRAR of the banking system improved over the period ending non-interest income can meet operating expenses, then the March 2001 to March 2002. This improvement in CRAR reflected constraint imposed by higher operating cost on reducing the spread the impact of higher growth in capital than the growth in risk- can be mitigated. weighted assets. The faster growth in capital was made possible Investments in non-SLR Securities because of the surge in profits of the banking system as a whole and the mobilisation of equity capital by a couple of banks. Investments in non-SLR securities include investments in CPs, bonds and debentures, debt-oriented mutual funds, Central Non-Performing Assets (NPAs) Government recapitalisation bonds, etc. Investments in non-SLR The gross NPAs (to gross advances) as well as net NPA (to net securities exhibited a higher growth during 2001-02 as against advances) position of the banking system witnessed an that registered in the previous year. This was largely on account of improvement by end-March 2002 vis-à-vis its position in end- capital injection to one PSB and the merger in the new private March 2001. The containment in NPAs in the current year, viewed bank segment. Excluding the latter, the growth in non-SLR in the context of slowdown in industrial activity, seems significant securities was less as compared to the previous year. owing to the substantial reductions effected. Credit Concentration Profitability-Return on Assets and Return on Equity For the banking system as a whole, the degree of credit The profitability indicators of the banking system showed major concentration (in terms of credit extended to top 20 corporates as improvement, with both return on asset and return on equity percentage to total credit) appeared to be significant. In respect of rising considerably in relation to the previous year. The foreign banks, the degree of concentration was large, which appears improvement in profitability for PSBs, in particular, stemmed from to be a source of vulnerability in their local operations and also a reduction in staff expenses. This was also made possible by cause for relatively high NPA ratios of the smaller foreign banks. significant profits on securities trading, which has witnessed a Exposure of the banking system to sensitive sectors, particularly marked increase in 2001-02. Return on equity also turned out to to capital market and real estate, continued to remain modest. be the highest in the last few years. Source: Report on Trend and Progress of Banking in India Liquidity 2001-02, RBI An assessment of the liquidity position of the banking system suggests that their short-term assets were in excess of short-term Chose Review to Advertise The Stock Exchange Review is read by a wide range of professionals in the Indian and International financial markets. For details call 9122 2272 1046/Fax:2272 1334

12 MSCI Market EMF INDEX Hitesh Porwal riefing Index Cell, BSE B What is MSCI EMF Index? As of March 31, 2003, the country weights in MSCI EMF Index The MSCI EMF (Emerging Markets Free) Index is a free float- were: adjusted market capitalization index that is designed to measure Country % weight Country % weight equity market performance in the global emerging markets. It is in Index in Index the most well-known international benchmark for emerging markets and is widely used by global fund managers for making Korea 18.9 Poland 1.2 allocations to emerging markets. The index is currently comprised South Africa 13.6 Indonesia 1.1 of 26 emerging market country indices. As of March 31, 2003, Taiwan 13.4 Turkey 1.1 the MSCI EMF Index contained 676 securities with a total market Mexico 7.9 Argentina 0.6 capitalization of over USD 490 billion. Brazil 7.7 Czech Republic 0.6 The word Free denotes that the index reflects investable China 7.0 Peru 0.6 opportunities for global investors by taking into account local Malaysia 6.0 Philippines 0.5 market restrictions on share ownership by foreigners. These India 4.9 Morocco 0.3 restrictions can assume several forms: (1) specific classes of shares Russia 4.9 Pakistan 0.3 may be excluded from foreign investment; (2) specific securities or classes of shares for an individual company may have limits for Israel 3.8 Egypt 0.2 foreign investors; (3) the combination of regulations governing Thailand 1.9 Jordan 0.2 qualifications for investment, repatriation of capital and income, Chile 1.7 Colombia 0.1 and low foreign ownership limits may create a difficult investment Hungary 1.3 Venezuela 0.1 environment for the foreign investor; and (4) specific industries, or classes of shares within a specific industry, may be restricted to MSCI then constructs its indices by targeting for index inclusion foreign investors. In other words, the market capitalization of a 85% of the free float adjusted market capitalization in each industry constituent company is not only adjusted for free-float but further group, within each country. By targeting 85% of each industry modified by the foreign ownership limits placed by the respective group, the MSCI Country Index captures 85% of the total companies. The more restrictive of the two is applied. For example, country market capitalization while simultaneously reflecting the if the free-float of a company is say 35% and the foreign ownership economic diversity of the market. limit of the same company is say 25%, then only 25% of the market capitalization would be considered for index calculation as Currently, 53 companies are part of MSCI India Standard Index the foreign ownership limit is more restrictive than its free-float. (which is one of the 26 country indices forming part of MSCI EMF index). In its latest recast announced on April 29, 2003, Since MSCI EMF is an aggregate of 26 emerging market country indices, it is important to understand the construction methodology MSCI has decided that w.e.f. May 30, 2003 GAIL will be added for these country indices. To construct an MSCI Country Index, while 7 companies – IDBI, Dabur, Pfizer, NIIT, EIH, HFCL and every listed security in the market is identified. Securities are free Silverline Industries will be removed from the MSCI India Standard float adjusted, classified in accordance with the Global Industry Index taking the new list to 47. Classification Standard (GICS), and screened by size and liquidity.

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13 INTEREST RATE SWAPS Product Ashish Ghiya Manager, Global Markets Group, ICICI Bank ROFILE Interest Rate Swaps and Its Development In India the liquidity, and swapping theP short term interest rate into a long term interest rate, thereby converting the same into a long term In India, we are gradually seeing the advent of derivatives in the borrowing by actually borrowing in the short term markets. All fixed income and forex markets after the equity markets. It has these and more are done through effective use, timing and structure primarily been the swaps, which have dominated the derivatives of the interest rate swaps. The growth of interest rate swap markets market. Several other derivatives like currency options, interest rates in India has been characterized by multiple benchmarks, i.e. fixed options and credit derivatives are still in the pipeline. The growth of to floating rate benchmarks. However, two benchmarks which the swaps markets goes back to mid 1990s when currency swaps, in have seen prominent growth have been the daily call rates linked a limited form, were allowed, for corporates to hedge, primarily, its floating rate, called as Overnight Indexed Swaps (OIS) and the External Commercial Borrowings currency risk, especially as the implied rupee forward rate derived by a combination of LIBOR long term forward premia markets were absent. Subsequently, the and Forward Premia, called MIFOR. RBI, through its July 1999 circular allowed Indian banks to trade and allow hedge products through interest rate swaps. The growth of the OIS markets is more so as banks use call rates very frequently to manage its daily cash mismatches and even to fund Interest Rate swap, as it suggests is a custom-tailored bilateral their medium term balance sheet. Also, the call markets are extremely agreement, in which two counter-parties agree to exchange specified liquid with daily turnovers of Rs. 12000 – 14000 cr. ($ 2.5 – 3.0 cash flows at periodic intervals over a pre-determined life of the billion). This makes the call based benchmark, OIS, very easy to swap, without exchanging the principal. That means that it allows comprehend by the markets. Few other emerging or even developed counter-parties to take pure interest rate views only, without economies have OIS benchmark curve developed beyond a year. actually committing cash to it and exchanging principal amounts. India, becomes one of the few countries, where OIS benchmarked The growth of the interest rate swaps markets has been exponential swaps extend upto 5 years and in some instances even 10 years. in the last 2 years with the number of inter-bank and corporate Riding on similar reasons, of liquidity and need for the underlying counterparties on the increase. It is a perfect tool to decouple markets, the MIFOR benchmarked swaps also grew into funding and interest rate, i.e. corporates can borrow at the time prominence. Forward premia markets are very liquid with an average and place cash is available without worrying much about the daily turnover of $ 1.0 – 1.5 billion daily. Foreign banks used interest rates, which can be swapped into the currency and risk MIFOR benchmarked swaps to hedge their interest rate risk, while profile that the corporate wants. For e.g. corporate can borrow in corporates used the same to hedge the falling forward premia. rupees, especially with the rupee liquidity excess in the banking system, and convert the same into U.S. dollar borrowing through Further, development of various other benchmarks like CP a swap, taking advantage of the low U.S. interest rates and the benchmarked swaps (which became popular with corporates) and exchange rate appreciation. Similarly, a relatively lower long term Government of India Securities benchmarked swaps (which rated corporate can effectively borrow short term, thereby managing became popular with banks and Primary Dealers as they could HIGHLIGHTS OF THE MONETARY AND CREDIT POLICY FOR 2003-04 - RBI to give backstop refinance at reverse repo rate or 2% over repo rate. “Our view for the economy is one Money Market Measures of confidence and we have - Non-banks can lend only 75% of 2000-01 lending in call money market from June 14, 2003. reiterated our soft interest rate - Banks must report all call deals on NDS within 15 minutes of stance. My expectation is that striking the deal the market and banks will see - OTC interest rate rupee options to start as stage-I of Rupee that we are not in favour of any Derivatives. Banks, PDs, FIs can buy/sell rupee options; tightening in interest rates.” companies can only sell options - Banks can invest in guaranteed CPs subject to regulatory ceilings - CBLOs exempt from CRR; SLR status for unused gilt collateral. - RBI to permit banks to issue long term bonds. Dr. Bimal Jalan - Tier-II capital up to 100% of Tier-I capital to count for CAR Governor, Reserve Bank of India Forex Market Major Policy Measures - General approval for mutual funds to invest up to US$1billion Economy in forex debt/equity till further notice - Conditional approval to companies/residents investing in bonds l GDP growth for 2003-04 projected at 6%. of listed overseas companies. l Average WPI inflation was 3.3% in 2002-03 (3.6% in 2001-02) - Forward cover allowed for rupee-settled forex deals subject to l Inflation expected to be in the range of 5-5.5% for 2003 04 conditions Monetary Measures - NRIs can book cross currency forwards for their FCNR(B) - Bank Rate cut by 0.25% to 6.00% from 6.25% from deposits but cannot re-book cancelled cross currency forwards April 30,2003 Interest Rate Policies - CRR cut to 4.50% from 4.75% from June 14, 2003. - Banks must link PLR to cost of funds, expenses, capital charge - RBI to pay interest on CRR balances on monthly basis from - Tenor-linked prime lending rate system to be scrapped May 2003 - Fresh NRE deposits must be for 1-3 years; 6-month NRE deposits stopped 14 easily hedge their Government Securities holdings inventory price are traded in the OIS and MIFOR benchmarks. This actually risk), also aided to the popularity of interest rate swaps in the makes Indian interest rate swaps market as one of the most liquid Indian scenario. Corporates increasingly took advantage of the in Asia, with the South Korean Won interest rate swaps dealing falling interest rates by issuing fixed rate debt and swapping it approximately $ 300 million. Hence, the faster drop in the rates into floating rate through interest rate swaps. Another clear trend along with growing volumes was an evidence of the popularity witnessed amongst corporates was to swap their rupee debt into and growth of interest rate swaps in India. U.S. dollar based debt. Through this, the corporates not only took Apart from the falling interest rates, the Indian fixed income and advantage of the lower relative U.S. interest rates but also the foreign exchange markets have undergone a structural shift. The depreciating U.S. dollar globally. The popularity of the interest heavy government borrowing no longer exerts the pressure on rate swaps can be further gauged by the drop in the swap rates interest rates as it happened when the interest rates were deregulated and its spreads, i.e. the spread between the interest rate swaps and in 1993-94. With the slow domestic growth and major developed the risk free Government security yields. Analyzing the two popular countries fighting deflation, the demand for money has grown at benchmarks, i.e. OIS and MIFOR swaps, the swap rates have a pace slower than the supply. Given the slower growth and dropped by 2.00% for the OIS swaps and 4.25% for the MIFOR growing interest rate differential between Indian and international benchmarked swaps, as against 1.25% of the 10 year benchmark interest rates, the Indian foreign exchange reserves grew by almost Government of India securities, in the last one year. This also led $ 26 billion over last year, as deposit poured in. Along with this to the spreads between the respective swap rates (which are inter- the Indian current account balance turned from deficit to surplus, bank rates) and the Government of India securities (which is a risk and the global U.S. dollar depreciation, added to the surge in free rate and hence should technically be below the inter-bank foreign exchange reserves and exchange rate expectations. Such a rate), to narrow by 1.00% for the OIS benchmark and 3.25% for phenomenon meant that the forward premia crashed and a direct the MIFOR benchmarked swap, over the same period. This means beneficiary of the same was the MIFOR swap benchmark. Similar, that both the popular swap benchmarks are actually priced below was the phenomenon in South Korea, where the interest rate the risk free Government securities curve. Such a discount of the swap was at a discount led by the huge influx of foreign money. swap curve over the Government Securities curve is not an unknown phenomenon, especially in the emerging markets like South Korea, With the RBI already announcing progressive steps in terms of where, the swap curve traded upto 1.80% below the risk free introducing over-the-counter interest rate options, swaptions, caps, rates, and even Singapore where the swap curve trades at close to floors and collars, the popularity and the need for interest rate the risk free rates. In the developed U.S. interest rate swaps markets swaps would only grow. Also, with increasing number of banks the comparable spreads are 0.35%-0.40% over the risk free wanting to hedge their interest rate risk of the Government treasuries, and they are the most liquid markets, with daily trading securities holdings at these low levels of interest rates, the need for volumes exceeding $ 25 billion. Comparing the volumes to the plain vanilla and structured swaps is increasing. There are some Indian markets, the average daily turnover has increased from structural problems, which are acting as market growth irritants Rs. 200 cr. ($ 50 million approximately) of average daily volume like the absence of big nationalized banks and the agreement of to Rs. 1000-1500 cr. ($ 200 - 300 million approximately) of legal contracts before executing swap transactions, but same are average daily volume in the last one year, as compared to the only being marginalized due to requirements. All in all, interest Government of India securities daily average traded volume of Rs. rate swaps markets have been one of the fastest growing niches in 3700 cr. (approximately $ 750 – 775 million). This is spanning the Indian fixed income area. across various benchmarks of which almost 95% of the volumes

- Rates on FCNR/NRE deposits must be in line with global/ Fiscal Consolidation domestic rates - Fiscal consolidation and substantially lower fiscal deficits, should Money Supply Indicators be medium-term aim according to RBI - Money supply (M3) grew 15% in 2002-03 (14.2% in 2001 02) - Fiscal consolidation needed for efficient monetary and debt - Currency ith public grew 12.5% in 2002-03 (15.2% in 2001-02) management - Bank deposits grew 16.1% in 2002-03 (14.6% in 2001-02) - Cut in fiscal deficit required to release resources for infrastructure, industry Credit Delivery SLR Holdings - No interest charge on deferred interest in drought-hit areas - Ceiling on co-op banks’ unsecured lending raised; 33% of - Banks gilt holdings stood at 39% of NDTL (against the 25% deposit cap stays SLR norm) - Co-op banks must introduce concurrent audit with immediate effect - Need for banks to build Investment Fluctuation Reserve (IFR) - Co-op banks must not give loans to its directors, affiliates reiterated. Banks can build 10% investment reserve for portfolio Bank Credit with boards’ approval. IFR to be treated as Tier-II capital. - Non-food credit rose 26.2% in 2002-03 (13.6% in 2001-02) Interest Rate Structure - Total flow of funds to commercial sector rose 24.5% in 2002-03. - Rise in number of banks with PLRs at 11.50% or below and - Total capital flow to commercial sector in 2002-03 was Rs.1.88 spreads of 400 bps over PLR. trillion as compared to Rs.1.42 trillion in 2001-02. - 10-year gilt spread over 91-day T-bill fell to 32 bps in March 2003 Government Borrowing vs 123 bps in March 2002. - Government borrowing in 2002-03 overshot budget estimate by Rs.82.59 - Corporate bond yields fell more sharply than gilt yields in billion but below the revised estimate by Rs.87.47 billion. 2002-03 - Interest rates stayed steady in 2002-03 despite higher External Sector government borrowing - World economy grew 3.0% in 2002 vs 2.8% IMF estimate - Low food loan demand, CRR cut, forex inflows kept rates - IMF estimate of 3.2% growth in world economy while world steady in 2002-03 trade volume to rise 4.3% in 2003 vs 2.9% in 2002 - RBI bought Rs.361.75 billion of government bonds in 2002-03 - Banks asked to monitor unhedged corporate forex positions - RBI sold Rs.537.80 billion of gilts through OMO in 2002-03

15 Key tatistics ofof TheThe StockStock Exchange,Exchange, MumbaiMumbai SParticulars Jan-03 Feb-03 Mar-03 Apr-03 Apr-02 Apr-01 1 Volume of Turnover i) Specified Shares (A Group) (Cr. Rs.) 28106.39 21399.34 18066.58 18949.02 21917.16 23270.55 ii) B1 Group Securities (Cr. Rs.) 2448.46 1921.87 2113.41 1812.38 6627.22 258.70 iii) B2 Group Securities (Cr. Rs.) 336.39 133.02 74.93 54.97 322.47 95.88 iv) F - Group Securities (Debt) (Cr. Rs.) 4.97 4.73 5.85 5.08 5.67 2.75 v) G - Group Securities (Cr. Rs.) 0.65 0.31 0.49 0.26 vi) Demat Group Securities (Cr. Rs.) - - - - - 247.90 vii) Z- Group Securities (Cr. Rs.) 1.26 1.67 3.46 0.87 1.98 0.45 2 Total Turnover (i - vi) (Cr. Rs.) 30898.12 23460.94 20264.72 20822.58 28874.50 23876.23 (Bn. Rs.) 308.98 234.61 202.65 208.23 288.75 238.76 (USD Bn.) 6.45 4.92 4.25 4.39 5.90 5.10 Cumulative from Jan (Cr. Rs.) 30898.12 54359.06 74623.78 95446.36 122334.10 285322.26 (Bn. Rs.) 308.98 543.59 746.24 954.46 1223.34 2853.22 (USD Bn.) 6.45 11.39 15.66 20.14 25.01 60.99 3 Average Daily Turnover (Cr. Rs.) i) Specified Shares (A Group) 1222.02 1126.28 903.33 947.45 996.23 1224.77 ii) B1 Group Securities 106.45 101.15 105.67 90.62 301.24 13.62 iii) B2 Group Securities 14.63 7.00 3.75 2.75 14.66 5.05 iv) F - Group Securities 0.22 0.25 0.29 0.25 0.26 0.14 v) G - Group Securities 0.03 0.02 0.02 0.01 vi) Demat Group Securities - - - - - 13.05 vii) Z- Group Securities 0.05 0.09 0.17 0.04 0.09 0.02 4 Total Average Daily Turnover (i to vi) (Cr. Rs.) 1343.40 1234.79 1013.24 1041.13 1312.48 1256.64 (Bn. Rs.) 13.43 12.35 10.13 10.41 13.12 12.57 (USD Bn.) 0.28 0.26 0.21 0.22 0.27 0.27 Cumulative from Jan (Cr. Rs.) 1343.40 1294.26 1203.61 1163.98 1456.36 3479.54 5 Turnover for the month (Cr. Rs.) High 1947.47 2018.51 1346.35 1691.56 1766.61 1827.95 Low 918.37 968.72 545.02 762.03 1011.40 765.09 6 No. of Shares Traded (in Crs) i) A Group (Total) 131.60 101.77 83.90 103.64 108.74 122.87 ii) B1 Group (Total) 39.29 31.20 32.50 31.48 48.37 8.15 iii) B2 Group (Total) 22.60 10.22 9.60 6.21 26.03 6.14 iv) Demat - - - - 2.38 v) Z- Group Securities 0.23 0.14 0.65 0.09 0.14 0.10 Total Shares Traded (I to v) 193.72 143.33 126.65 141.42 183.28 139.64 vi) No. of Debentures traded (in Crs) 0.04 0.02 0.01 0.01 0.12 0.01 vii) G Group 0.01 0.00 0.00 0.00 7 V-SAT Turnover (incl. in item no II) (Cr. Rs.) 11707.00 9214.73 7835.03 8041.81 17476.00 12237.82 8 No. of Trades (in ‘000s) 13019.39 9533.26 8506.01 9620.86 13500.50 9535.48 Cumulative from Jan 13019.39 22552.65 31058.66 40679.52 51262.32 52375.48 9 Deliveries (Monthly) a) No. of Shares i) Specified Shares (A Group) 31.39 25.46 22.14 24.01 29.69 N.A. ii) B1 Group Securities 15.08 12.18 15.67 17.87 19.44 N.A. iii) B2 Group Securities 14.31 6.84 8.25 4.81 17.44 N.A. iv) G Group Securities 0.00 0.00 0.00 0.00 N.A. N.A. Total No. of Shares (in Crs) 60.78 44.48 46.06 46.69 66.57 59.46 Cumulative from Jan 60.78 105.26 151.32 198.01 237.10 355.17 b) Value i) Specified Shares (A Group) 5043.12 4364.10 3889.48 3823.13 5265.43 N.A. ii) B1 Group Securities 611.51 443.37 533.73 510.07 1347.30 N.A. iii) B2 Group Securities 181.30 63.55 53.99 31.47 195.29 N.A. iv) G Group Securities 0.36 0.29 0.45 0.23 N.A. N.A. b) Value (Cr. Rs.) 5836.29 4871.31 4477.65 4364.90 6808.02 6299.40 Cumulative from Jan 5836.29 10707.60 15185.25 19550.15 26340.10 51039.29 10 Debenture Deliveries (Monthly) a) No. of Debentures (in Crs) 0.00 0.00 0.00 0.00 0.00 0.01 Cumulative from Jan 0.00 0.00 0.00 0.00 0.01 0.09 b) Value (Cr. Rs.) 0.00 0.00 0.00 0.00 0.00 2.42 Cumulative from Jan 0.00 0.00 0.00 0.00 3.36 10.61 11 Market Capitalisation (Estimated) i) A Group (Cr. Rs.) 512510 520966 480318 475153 444290 440792 ii) B1 Group (Cr. Rs.) 62173 69872 63714 68727 146433 93923 iii) B2 Group (Cr. Rs.) 20473 12639 12463 12756 17415 25749 iv) Z Group (Cr. Rs.) 16316 16396 15703 15889 17449 7265 BSE (i-iv) (Cr. Rs.) 611472 619873 572197 572526 625587 567729 (Bn. Rs.) 6114.72 6198.73 5721.97 5725.26 6255.87 5677.29 (USD Bn.) 127.58 129.87 120.11 120.84 127.88 121.36

16 Particulars Jan-03 Feb-03 Mar-03 Apr-03 Apr-02 Apr-01 12 No. of Trading Days 23 19 20 20 22 19 Cumulative from Jan 23 42 62 82 84 82 13 No. of Companies Listed Newly Listed 3 0 5 2 4 6 Delisted 2 4 2 8 2 1 Cumulative from Jan 5651 5647 5650 5644 5784 5874 14 Newly listed securities of existing companies 49 36 25 37 35 18 Cumulative from Jan 49 85 110 147 197 146 15 Capital Listed During the Month - Existing Companies (Cr. Rs.) 917.54 689.39 730.70 1766.95 217.27 340.76 - Newly Listed Companies (Cr. Rs.) 34.73 0.00 149.64 10.50 81.44 520.82 Total (Cr. Rs.) 952.27 689.39 880.34 1777.45 298.71 861.58 (Bn. Rs.) 9.52 6.89 8.80 17.77 2.99 8.62 (USD Bn.) 0.20 0.14 0.18 0.38 0.06 0.18 16 Amount offered thro’ equity (prospectus) a) Total No. of Issues 0 1 0 0 0 0 b) Par Amount (Cr. Rs.) 0.00 3.20 0.00 0.00 0.00 0.00 c) No. of Issues (premium) 0 1 0 0 0 0 d) Premium Amount (Cr. Rs.) 0.00 38.46 0.00 0.00 0.00 0.00 e) Total amount (b+d) 0.00 41.66 0.00 0.00 0.00 0.00 17 Amount offered thro’ other instruments (Prospectus) f) Total No. of Issues 1 1 2 0 0 0 g) Amount (Cr. Rs.) 400.00 400.00 750.00 0.00 0.00 0.00 18 Total amount offered thro’ prospectus Total No. of Issues (a+f) 1 2 2 0 0 0 Amount (e+g) (Cr. Rs.) 400.00 441.66 750.00 0.00 0.00 0.00 19 Amount offered thro’ equity by existing listed companies a) Total No. of Issues 0 1 2 1 0 0 b) Par amount (Cr. Rs.) 0.00 15.60 13.30 1.51 0.00 0.00 c) No. of Issues (premium) 0 0 1 1 0 0 d) Premium Amount (Cr. Rs.) 0.00 0.00 21.09 0.45 0.00 0.00 e) Total amount (b+d) 0.00 15.60 34.39 1.96 0.00 0.00 20 Amount offered thro’ other instruments by existing listed companies f) Total No. of Issues 0 0 0 0 0 0 g) Amount (Cr.Rs.) (Cr. Rs.) 0.00 0.00 0.00 0.00 0.00 0.00 21 Total amt offered by existing listed companies Total No. of Issues (a+f) 0 1 2 1 0 0 Amount (e+g) (Cr. Rs.) 0.00 15.60 34.39 1.96 0.00 0.00 22 Total amount offered thro’ all offer documents (XVIII+XXI) Total No. of Issues 1 3 4 1 0 0 Cumulative from Jan 1 4 8 9 14 24 Amount (Cr. Rs.) 400.00 457.26 784.39 1.96 0.00 0.00 Cumulative from Jan (Cr. Rs.) 400.00 857.26 1641.65 1643.61 3769.81 1846.70 (Bn. Rs.) 4.00 8.57 16.42 16.44 37.70 18.47 (USD Bn.) 0.08 0.18 0.34 0.35 0.77 0.39 23 BSE Sensitive Index (30 Scrips) (1978-79=100) High 3390.12 3322.17 3277.27 3215.24 3512.55 3605.01 Low 3219.88 3223.41 3048.72 2924.03 3301.21 3183.77 Average 3327.66 3278.85 3155.70 3036.66 3435.13 3480.94 Closing (Month End) 3250.38 3283.66 3048.72 2959.79 3338.16 3519.16 24 BSE TECk Index (2nd April 2001=1000) High 917.32 861.64 833.03 817.29 1010.96 N.A. Low 800.17 805.51 748.44 597.48 932.66 N.A. Average 864.39 831.65 794.99 686.53 969.45 N.A. Closing (Month End) 832.15 833.03 748.44 616.97 955.36 N.A. 25 BSE 100 Index (1983-84=100) High 1672.69 1641.99 1623.63 1590.10 1752.97 1729.09 Low 1593.15 1590.58 1500.72 1452.40 1651.01 1472.93 Average 1642.07 1622.58 1559.54 1504.62 1715.11 1638.51 Closing (Month End) 1600.87 1628.72 1500.72 1470.31 1671.63 1682.01 26 BSE 200 Index (1989-90 = 100) High 399.43 391.44 389.31 380.04 411.77 375.60 Low 380.68 379.38 359.12 350.98 389.90 321.61 Average 391.85 387.01 372.82 361.48 402.97 355.96 Closing (Month End) 382.87 389.27 359.12 355.07 396.69 364.73 27 The Dollex-200 (1989-90 = 100) High 138.63 136.60 136.00 133.52 140.14 133.54 Low 132.34 131.97 125.87 123.41 132.53 114.19 Average 136.11 134.98 130.28 126.99 137.15 126.72 Closing (Month End) 133.36 135.95 125.87 124.85 134.87 129.58 28 BSE 500 Index (1989-90=100) High 1193.05 1168.97 1162.38 1137.38 1222.54 1105.54 Low 1137.34 1131.18 1071.45 1055.03 1161.96 949.24 Average 1171.31 1155.57 1111.59 1084.11 1196.04 1048.20 Closing (Month End) 1143.43 1161.63 1071.45 1068.03 1182.01 1072.62

17 Particulars Jan-03 Feb-03 Mar-03 Apr-03 Apr-02 Apr-01 29 P/E Ratio (Month Averages) BSE SENSEX based scrips (30) 14.43 14.22 13.74 13.21 16.83 18.06 BSE 100 Index based scrips (100) 12.04 12.06 11.76 11.40 14.69 17.29 30 Price to Book Value (Month Averages) BSE SENSEX based scrips (30) 2.25 2.22 2.14 2.06 2.47 2.58 BSE 100 Index based scrips (100) 1.82 1.81 1.76 1.70 1.77 1.87 31 Dividend Yield % (Month Averages) BSE SENSEX based scrips (30) 2.17 2.20 2.28 2.37 1.93 1.70 BSE 100 Index based scrips (100) 2.98 2.98 3.07 3.18 2.33 1.72 32 No. of Registered FIIs + 495 500 502 507 491 527 33 No. of Registered Foreign Brokers + 38 38 38 38 38 38 34 FIIs Purchases in Secondary market in BSE (Cr. Rs.) 1585 1323 781 1317 1910 1998 Cumulative from Jan (Cr. Rs.) 1585 2908 3689 5006 8206 11803 (Bn. Rs.) 15.85 29.08 36.89 50.06 82.06 118.03 (USD Bn.) 0.33 0.61 0.77 1.06 1.68 2.52 35 FIIs Sales in Secondary market in BSE (Cr. Rs.) 1297 1122 817 1311 1949 1308 Cumulative from Jan (Cr. Rs) 1297 2419 3236 4547 7067 6857 (Bn. Rs.) 12.97 24.19 32.36 45.47 70.67 68.57 (USD Bn.) 0.27 0.51 0.68 0.96 1.44 1.47 36 Net FIIs Investments in Secondary market in BSE (Cr. Rs.) 288 201 -36 6 -39 690 Cumulative from Jan (Cr.Rs) 288 489 453 459 1139 4946 (Bn. Rs.) 2.88 4.89 4.53 4.59 11.39 49.46 (USD Bn.) 0.06 0.10 0.10 0.10 0.23 1.06 37 FIIs Purchases in Secondary market (Equity) (All-India) + (Cr. Rs.) 5074 3235 3361 5043 4491 4599 Cumulative from Jan (Cr. Rs.) 5074 8308 11670 16713 18642 25012 (Bn. Rs. ) 50.74 83.08 116.70 167.13 186.42 250.12 (USD Bn.) 1.06 1.74 2.45 3.53 3.81 5.35 38 FIIs Sales in Secondary market (Equity) (All-India)+ (Cr. Rs.) 4186 2855 2950 4613 4479 2829 Cumulative from Jan (Cr. Rs.) 4186 7041 9991 14604 15850 15504 (Bn. Rs.) 41.86 70.41 99.91 146.04 158.50 155.04 (USD Bn.) 0.87 1.48 2.10 3.08 3.24 3.31 39 Net FIIs Investments in Secondary Market (Equity) (All-India)+ (Cr. Rs.) 888 379 411 430 12 1770 Cumulative from Jan (Cr.Rs.) 888 1267 1678 2109 2793 9508 (Bn. Rs.) 8.88 12.67 16.78 21.09 27.93 95.08 (USD Bn.) 0.19 0.27 0.35 0.45 0.57 2.03 40 FIIs Purchases in Secondary market (Debt) (All-India)+ (Cr. Rs.) 241 236 930 835 618 481 Cumulative from Jan (Cr. Rs.) 241 477 1407 2242 1753 2227 (Bn. Rs. ) 2.41 4.77 14.07 22.42 17.53 22.27 (USD Bn.) 0.05 0.10 0.30 0.47 0.36 0.48 41 FIIs Sales in Secondary market (Debt) (All-India)+ (Cr. Rs.) 143 187 379 273 743 272 Cumulative from Jan (Cr. Rs.) 143 330 709 982 1294 1900 (Bn. Rs.) 1.43 3.30 7.09 9.82 12.94 19.00 (USD Bn.) 0.03 0.07 0.15 0.21 0.26 0.41 42 Net FIIs Investments in Secondary market (Debt) (All-India)+ (Cr. Rs.) 97 50 551 562 -125 209 Cumulative from Jan (Cr. Rs.) 97 147 698 1260 460 327 (Bn. Rs.) 0.97 1.47 6.98 12.60 4.60 3.27 (USD Bn.) 0.02 0.03 0.15 0.27 0.09 0.07 43 Capital raised through Euro Issues No. of Issues * 1 0 1 0 0 1 Cumulative from Jan 1 1 2 2 0 1 Amount Raised (Cr. Rs.) 71.65 0.00 72.50 0.00 0.00 619.08 Cumulative from Jan (Cr. Rs.) 71.65 71.65 144.15 144.15 0.00 619.08 (Bn. Rs.) 0.72 0.72 1.44 1.44 0.00 6.19 (Source - CMIE) (USD Bn.) 0.01 0.02 0.03 0.03 0.00 0.13 44 Members 711 712 712 712 711 710 Individuals 212 212 212 212 215 217 Corporate (Unlimited Liability)Clause (4) A 2 of Securities Contracts (Regulation) Rules, 1957 Indian Companies 479 480 480 480 474 468 Foreign Institutional Investors 20 20 20 20 22 23 Financial Corporations 0 0 0 0 0 0.00 45 Dollar Re. Exchange Rate (I USD - Rs.) 47.9300 47.7300 47.6400 47.3800 48.9200 46.78 46 Scrips Listed 7403 7355 7363 7338 7394 9912

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