MANAGEMENT DISCUSSION AND ANALYSIS

MACROECONOMIC REVIEW: 2014-15 Domestic Overview

The Indian economy grew at 7.30 per cent during 2014-15 as economic activity expanded at a faster pace in the March quarter, led largely by services and manufacturing sectors. The industrial sector shrugged off stagnation and grew for the second consecutive year this fiscal. The economy was relieved from the sub 5 per cent growth, persistent inflation, elevated fiscal deficit and oscillating value of the rupee.

Inflation retreated during the year in an environment of macroeconomic and political stability. Inflation in terms of the All India Consumer Price Index (CPI)-Combined (Rural + Urban) declined to 5.25 per cent in March, 2015 from a high of 8.25 per cent in March, 2014. The average CPI inflation stood at 5.96 per cent during 2014-15 compared to 9.84 per cent in 2013-14. Excluding food and fuel segments, the CPI inflation was around 6 per cent on account of the slump in the international crude oil prices feeding through into domestic prices of petrol and diesel that are included under the category transport and communication.

Forex Market

The Indian Rupee, after being more volatile and weak currency during most of the brvious fiscal, managed to lose only 4.35 per cent of its value against dollar this fiscal. The brdominant factor for the rupee movement has been robust capital flows that started from March, 2014. The sizeable jump of 24 per cent in foreign exchange reserves of RBI contained the volatility in the rupee.

The rupee which slipped to its yearly low of 63.75per USD on 2015, due to spillovers from the

Russian currency crisis, month end purchases by oil marketing companies, profit booking by Foreign Portfolio Investors and a weak reading on industrial output, regained its apbrciating bias by the second week of January, 2015. For the residual part of the year, the rupee traded in a narrow range with modest gains following the dovish comments from the Fed in March regarding the time frame for raising its policy rate. Rupee closed the FY 2014-15 at X 62.49 per USD as against brvious fiscal close of X 59.89 per USD.

Current Account Balance

India's current account deficit declined from 1.70 per cent of GDP in 2013-14 to 1.30 per cent of GDP in 2014-15 on account of an increase in inward remittances and FDI flows. Weak external demand and the softness in international commodity prices took a heavy toll as India's merchandise export growth weakened steadily since July, 2014 and entered into contraction from January through the end of the fiscal. The fiscal year ended with total exports of USD 310 billion, lower than the USD340 billion target. Imports on the other hand, contracted by a modest 0.59 per cent during the year, leaving a trade deficit of USD 137 billion, slightly higher than the brvious year's figure of USD 135 billion.

Government Borrowings

The Government reduced its market borrowing programme as a squeeze in expenditure limited the Government's requirement for additional funds. The gross borrowing during the year was Rs. 5, 92,000 crore as against budgeted estimate of Rs. 6,00,000 crore. In addition to this, State Governments also raised funds to the tune of Rs. 2,40,307 crore through market borrowings as against Rs. 1,96,660 crore during the brvious year.

Fiscal Deficit

The fiscal consolidation process, which had resumed in 2012-13 through mid-year course corrective measures, was continued in 2014-15. However the 3 per cent target has now been pushed back by a year to FY18. The government has contained the fiscal deficit at 4 per cent of GDP in 2014-15 against 4.1 percent by cutting down on its planned expenditure as tax revenues were less than budgeted and current expenditures proved too sticky.

Monetary Policy & Liquidity Situation

The Monetary policy stance was focused around achievement of CPI inflation target at or below 8 percent during the year. The RBI reduced the repo rate twice by 25 basis points each in view of significant reduced momentum of the retail inflation, a strong rupee relative to its peers and still-weak indicators of production.

Liquidity was comfortable in all segments; reflected by a pickup in turnover, softening of interestrates and apbrciating bias in the exchange rate of the rupee. During the year, an average daily net liquidity injection of Rs. 93,115 crore was seen through LAF, MSF, term repos and refinance facility.

Treasury Bill Market

During FY 2014-15, the borrowings through Treasury bills stood at Rs. 7, 68,000 crore higher than announced in the Annual Budget by Rs. 19, 000 crore. The yields on treasury bills in primary market eased significantly as comfortable liquidity persisted for most of the year. The cut-off yield on 91DTB eased from 8.94 percent in the beginning of the FY to 8.27 per cent in the end, cut-off yield on 182 DTB fell from 8.97 per cent in April beginning to 8.14 per cent in March and the cut-off yield on 364 DTB closed the year at 7.98 per cent against 9.02 per cent as on March 31, 2014.

Government Dated Securities

Primary Market

During FY 2014-15, the gross borrowings through dated issuances stood at Rs. 5,92,000 crore, while the net borrowings stood at Rs. 4,53,205 crore. The weighted average maturity of issuances stood at 14.69 years vis-a-vis 14.50 years in the brvious year. The weighted average yield of dated securities issued during FY 2014-15 remained the same as compared to FY 2013-14 at 8.51 per cent.

Secondary Market

During the year, amidst global liquidity and risk-on risk-off fluctuations in investor appetite, financial markets rallied strongly supported by improvement in domestic macroeconomic conditions. The government bond market specifically witnessed an uptrend throughout the year with the yield on ten-year benchmark falling by 106 basis points to close at 7.74 per cent. Buoyant investor sentiment conditioned by the ongoing weakening of inflation on domestic front and expectation of monetary policy easing helped the market to shrug off the impact of the Federal Reserve completely exiting Quantitative Easing in October. Softness in international crude oil prices and a fall in US treasury yields aided the decline in domestic yields.

COMPANY PERFORMANCE

Primary Market

In primary market, the Company continued to comply with all the regulatory requirements of bidding under Minimum Underwriting Commitments (MUC) and Additional Competitive Underwriting (ACU) for Primary Dealers. During the year, due to high demand of the government securities, the Company earned an underwriting commission of Rs. 1.42 crore as against brvious year's commission of Rs. 14.51 crore. In treasury bill auctions, during the first half, GOI raised Rs. 3,71,000 crore as against Rs. 3,92,000 crore in the corresponding period of last fiscal. In the second half, GOI raised another Rs. 3,77,000 crore through T-bills as against Rs. 2,99,000 crore raised in corresponding period of last fiscal. The company submitted bids aggregating to Rs. 80,674 crore against the commitment of Rs. 52,360 crore (being 7 per cent of notified amount). Out of this, bids amounting to Rs. 24,237 crore were accepted. Fulfilling its primary market commitment, Company achieved success ratio of 42.92 per cent and 49.60 per cent in H1 and H2 respectively of FY 2014-15 against RBI stipulation of 40 per cent in each half year.

Secondary Market

During FY 2014-15, total secondary market outright turnover stood at Rs. 4,70,845 crore as against Rs.3,08,978 crore in FY 2013-14 The total turnover during the current FY stood at Rs. 5,11,329 crore. The Central Government security segment recorded the maximum turnover of Rs. 4, 23,638 crore followed by Treasury bill segment which registered turnover of Rs. 22,056 crore. Company's total turnover ratio (secondary market) stands at 93 times for treasury bills and 508 times for government-dated securities as on March 31, 2015 against the minimum RBI stipulation of 10 times and 5 times respectively.

Portfolio Size and Composition

Portfolio size and composition is a function of arbitrage opportunities and tradability. Company maintained high holding of treasury bills in view of positive arbitrage and minimal risk. Daily average holding in Treasury Bills during the year stood at Rs. 1,831 crore whereas the peak holding in T-bills stood at Rs. 2,558 crore. Daily average holding of Central Government Security during FY 2014-15 stood at Rs. 1,132 crore as against Rs. 1,015 crore in FY 2013-14.

Liability Mix

During the year, the Company judiciously utilizeddifferent sources of borrowings viz. Call Money, Collateralized Borrowing and Lending Obligation, Repo, LAF, etc. for ative fund management. The average borrowings from all sources amounted to Rs. 3,234 crore as against Rs. 2,891 crore in FY 2013­14. The average leverage during the year was 4.60 times against 4.43 times in FY 2013-14, while the maximum leverage for the year stood at 6.11 times the NOR The average cost of funds during the fiscal through Call, CBLO, etc. stood at 8.04per cent, lower than 8.16 per cent during the last year and the same was about 9 basis points lower than the average NSE overnight MIBOR of 8.13 per cent during the year.

Trading Stance and Risk Management

During FY 2014-15, the yield on the benchmark ten year security decreased by 106 basis points and the Company posted trading income of Rs. 75.85 crore. Company maintained a balanced composition of securities with an aim to maximize arbitrage income and also to have better trading opportunities. Risk management is a critical element of Company's trading business. The Company's mid-office is primarily responsible for formulating and implementing the risk management policies. Value-at-Risk (VaR), PVBP limits, sensitivity analysis and cut-loss policies form the core of market risk management system. Counterparty exposure limits and instrument-wise exposure limits were the primary tools used for managing the credit risk in the business. Similarly, well-established systems and procedures provide adequate defense against the operational risk.

Financial Performance

During the year, the Company's Profit Before Tax rose to Rs. 133.89 crore as against Rs. 90.70 crore in the brvious year. The profitability was improved by judiciously taking advantage of arbitrage opportunities by the Company and improved trading performance. During the year, the Company registered trading income of Rs. 75.85 crore.

The Net Worth of the Company increased by nearly 8 per cent to Rs. 718.06 crore as on March 31, 2015 as against Rs. 662.53 crore in brvious year. The Company is adequately capitalized with Capital Adequacy Ratio of 65.07 per cent as on March 31, 2015, against RBI's minimum stipulation of 15 percent. Besides, robust risk management systems kept the Company's risk profile in check throughout the year.

Human Resource Development

Human resource development is given high weightage and company employs the best HR practices to ensure a healthy and motivating work environment for its employees. Employee skills are constantly upgraded by providing training suitable to individual requirements. Besides, ln-house lectures and workshops are also conducted on a regular basis to stimulate healthy exchange of ideas.

Internal Control Systems

The Company considers the internal control systems to be a very significant part of its Corporate Governance practices. Your Board has adopted the policies and procedures for ensuring the orderly and efficient conduct of its business, including adherence to the Company's policies, the safeguarding of its assets, brvention and detection of frauds etc. As a part of this control system, your Board appoints Internal Auditor as well. For the year 2014-15, the Board appointed M/s Ernst & Young LLP as the Internal Auditor of the Company. The scope of Internal Audit included audit of treasury transactions on a monthly basis and reporting to the Audit Committee of the Board that the company has operated within the limits of various risk parameters laid down by the Board, Reserve Bank of India and other statutory authorities. Besides, the said firm also audited and reviewed the related party transactions on monthly basis and key business processes, including IT systems of the Company on quarterly basis. All the reports of the Internal Auditors were submitted to the Audit Committee.

SWOT analysis Strengths and Weaknesses

The Company is the only listed Primary Dealer in the country and has consistently displayed strong financial health during brvious years. The profit for FY 2014-15 stood at Rs. 133.89 crores as against Rs. 90.70 crore in FY 2013-14 which is 48 per cent higher than the brvious year. The Capital Adequacy Ratio of the company is 65.07 per cent, more than the RBI stipulation of 15 per cent which reflects soundness and sustainability of the company over long term. The Company has robust risk management and research department responsible for monitoring, analysis and compliance. A strong compliance culture brvails across the organization, pursuant to its strategic goals of transparency and trust, among all its stakeholders.

The Company is actively involved in trading in government securities, corporate bonds and equity products; although its share of trading in corporate bonds, equity and equity derivatives is relatively lower.

Opportunities and Threats

Looking ahead, the macroeconomic environment in FY 2015-16 is expected to improve with fiscal policy gearing to an investment-led growth strategy and monetary policy using available room for accommodation. Large decline in commodity prices and the benign inflation outlook for the near term should provide a boost to growth. Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy; These factors shall further provide confidence to private investment and together with the conducive outlook on inflation, deliver real income gains to consumers and lower input cost advantages to corporates. Besides the fiscal outlook, other factors including private credit off-take, capital flows and the interest rate cycle impact the government market borrowing programme. The net market borrowing of the central government for FY 2015-16 has been budgeted at Rs. 4,56,406 crore, as against Rs. 4,53,205 crore during the last fiscal year. RBI's stance and the monetary policy expectations constitute the root of every strategy formulated to trade in bond markets. However, policy easing would be dependent on continuing disinflationary brssures, sustained high quality fiscal consolidation as well as steps taken to overcome supply constraints. The moderation in inflation may be hampered due to unseasonal rains, El Nino expectation, Shortfall in monsoon and increase in commodity prices. At the liquidity front, RBI shall ensure comfortable liquidity conditions through pro-active liquidity management, including fine-tuning operations on week days and access to the MSF. The company proposes to be nimble footed in trading and also look for more stable avenues of revenue to maintain consistency in the returns to the stakeholders.

On behalf of Board of Directors

 (Gauri Shankar)

Chairman

DIN:06764026

Date : June 27, 2015

Place: New Delhi