Money Market Session6
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Transcript of Money Market Session6
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Lecture 4
Money Markets Instruments,
Participants in India
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Definition and Purpose of Money
Markets
The Money Markets are associated with theissuance and trading of short-term (less than 1year) debt obligations of large corporations, FIs andgovernments
Only High-Quality Entities can borrow in the MoneyMarkets and individual issues are large
Investors in Money Market Instruments includecorporations and FIs who have idle cash but are
restricted to a short-term investment
horizon The Money Markets essentially serve to allocate the
nation¶s supply of liquid funds among major short-term lenders and borrowers
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Money Market Instruments in India
Treasury Bills
CBLO
Commercial Papers Certificate of deposits
Bankers acceptance
Repurchase Agreement
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Treasury Bills Treasury Bills,, are short term borrowing
instruments of the Central Government of theCountry issued through the Central Bank (RBIin India).
T-Bills can not be issued by StateGovernments.
They are zero risk instruments, and hencethe returns are not so attractive.
It is available both in primary market as wellas secondary market.
Issued at a discount to Face value.
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T-Bills in India
In India, at present, the Treasury Bills are
issued for the following tenors 91-days,
182-days and
364-days
Treasury bills.
T-Bills are issued in multiples of
Rs.25000/-
Primary T-Bill Market
Secondary T-Bill Market
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Primary Issuance of T-Bills
While 91-day T-bills are auctioned every weekon Wednesdays, 182-day and 364-day T-billsare auctioned every alternate week on
Wednesdays. The Reserve Bank of India issues a quarterly
calendar of T-bill auctions which is available atthe Banks¶ website.
RBI announces the exact dates of auction, theamount to be auctioned and payment dates byissuing press releases prior to every auction.
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T-Bill Auction
T-Bill Auction
Bidders can place Competitive/Non CompetitiveBid.
T-Bill Auction Data T-bills auctions are held on the Negotiated
Dealing System (NDS) and the memberselectronically submit their bids on the system..
Non-competitive bids are routed through therespective custodians or any bank or PD which is an NDS member.
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YTM Calculation
T-Bill YTM Calculation: The yield of a Treasury Billis calculated as per the following formula:
(100-P)*365*100
Y = ------------------ P*D
Wherein Y = discounted yield , P= Price, D=
Days to maturity For treasury bills the day count is taken as 365
days for a year.
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More on Non-competitive Bid:
Provident funds can participate in all T-billauctions either as competitive bidders or as non-competitive bidders.
Participation as non-competitive bidders wouldmean that provident funds need not quote theprice at which they desire to buy these bills.
RBI allots bids to the non-competitive bidders atthe weighted average price of the competitivebids accepted in the auction.
Allocations to non-competitive bidders are inaddition to the amount notified for sale.
In other words, provident funds do not face anyuncertainty in purchasing the desired amount of T-bills from the auctions.
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Negotiated Dealing System
Clearing & settlement of Market trades in
Government securities managed by CCIL
(Clearing Corporation of India Ltd.)
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Secondary Trading of T-Bills
Secondary Trading of T-Bills
A cooperative bank wishes to buy
91 Days Treasury Bill Maturing onDec. 6, 2002 on Oct. 12, 2002.The rate quoted by seller is Rs.99.1489 per Rs. 100 face values.
Calculate the YTM.
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Primary Dealers
The system of Primary Dealers (PDs) in theGovernment Securities Market was introducedby Reserve Bank of India in 1995 to strengthenthe market infrastructure of Government
Securities and put in place an improved, efficientsecondary market trading system.
This was to encourage holding of GovernmentSecurities on large scale and make the market
more vibrant and liquid. In 2006-07, RBI gaveBanks the option to undertake PrimaryDealership business departmentally.
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T-Bills
Treasury bills are different from treasury
notes and treasury bonds in that they offer
the shortest term. Treasury notes mature
between one and ten years, while treasury
bonds mature in more than 10 years.
In India, longer maturity papers are known
as ³G-Secs´ or Government Securities.
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Call/Near /Term Money Market
Call Money: Money lent for one day
Notice Money: Money lent for a period
exceeding one day Term Money: Money lend for 15 days or
more in Inter-bank market
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CBLO
Collateralized Borrowing & Lending Obligations: A money market instrument as approved by RBI, is a
product developed by CCIL for the benefit of the entities
± who have either been phased out from inter bank callmoney market
± or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and
± who do not have access to the call money market.
CBLO is a discounted instrument available in electronic
book entry form for the maturity period ranging from oneday to ninety Days (can be made available up to oneyear as per RBI guidelines).
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CBLO
In order to enable the market participantsto borrow and lend funds, CCIL providesthe Dealing System through:
Indian Financial Network (INFINET), aclosed user group to the Members of theNegotiated Dealing System (NDS) whomaintain Current account with RBI.
Internet gateway for other entities who donot maintain Current account with RBI.
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CBLO Members & Securities
Membership to CBLO segment is extended to entitieswho are RBI- NDS members viz. Nationalized Banks,Private Banks, Foreign Banks, Co-operative Banks,Financial Institutions, Insurance Companies, Mutual
Funds, Primary Dealers etc. Associate Membership to CBLO segment is extended to
entities who are not members of RBI- NDS viz. Co-operative Banks, Mutual Funds, Insurance companies,NBFC's, Corporates, Provident/ Pension Funds etc.
Eligible securities are Central Government securitiesincluding Treasury Bills, as specified by CCIL from timeto time.
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REPO
Repurchase transactions, called Repo or Reverse Repo are transactions or shortterm loans in which two parties agree tosell and repurchase the same security.They are usually used for overnightborrowing.
Repo/Reverse Repo transactions can bedone only between the parties approvedby RBI and in RBI approved securities viz.GOI and State Govt Securities, T-Bills,PSU Bonds, FI Bonds, Corporate Bondsetc.
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Repo, Reverse Repo & RBI
Repo (Repurchase) rate is the rate at
which the RBI lends shot-term money to the
banks.
When the repo rate increases borrowing
from RBI becomes more expensive.
If RBI wants to make it more expensive for
the banks to borrow money, it increases the
repo rate; similarly, if it wants to make it
cheaper for banks to borrow money, it
reduces the repo rate.25
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Reverse Repo
Reverse Repo rate is the rate at which RBI
borrows money or banks park their short-term
excess liquidity with the RBI. The RBI uses this
tool when it feels there is too much moneyfloating in the banking system.
An increase in the reverse repo rate means that
the RBI will borrow money from the banks at a
higher rate of interest. As a result, banks wouldprefer to keep their money with the RBI
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RBI, Repo & Reverse Repo
RBI raises repo rate by 0.25%, reverse
repo rate by 0.5% ( July 27 2010).
Why ?
What would it be its impact ?
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RBI, Repo & Reverse Repo
On July 27, 2010, The RBI lifted the repo rate, at which it
lends to banks, by 25 basis points to 5.75%, which was
in line with expectations, but raised the reverse repo
rate, at which it absorbs excess cash from the system,
by 50 basis points to 4.50%. A CNBC-TV18 poll had
predicted a 25 bps hike in the repo and reverse repo
rate.
The (RBI) raised interest rates more forcefully thanexpected on Tuesday in the face of inflation that has
held stubbornly above 10% for the past five months.
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Commercial Paper
Commercial Papers are short termborrowings by reputed Corporates, FIs,PDs.
Issued subject to minimum of Rs 5 lakhsand in the multiples of Rs. 5 Lacthereafter.
Commercial Papers are issued in the form
of discount to the face value. Maturity is 15 days to 1 year
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Commercial Papers
Unsecured and backed by credit of the issuing
company
Eligibility Criteria: Any private/public sector
company wishing to raise money through the CP
market has to meet the following requirements:
Tangible net-worth not less than Rs 4 crore - as
per last audited statement
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Commercial Paper Should have Working Capital limit sanctioned by
a bank / FI.
Credit Rating not lower than P2 or its equivalent- by Credit Rating Agency approved by RBI.
Board resolution authorizing company to issueCPs
FIMMDA has issued operational anddocumentation guidelines, in consultation with RBI on Commercial Paper for market.
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CP Rating
CRISIL has also reaffirmed its ratings on Dabur 's fixeddeposit programme, and short-term bank facilities andcommercial paper programme, at 'FAAA/Stable/P1+'.
Rs.200 Million Non-Convertible Debenture Programme - AAA/Stable (Upgraded from ' AA+/Stable')
Fixed Deposit Programme - FAAA/Stable (Reaffirmed)
Rs.600 Million Commercial Paper Programme - P1+(Reaffirmed)
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Certificate of Deposit
CDs are short-term borrowings by banks in the form of Promissory Notes having a maturity of not less than 15 days up to a maximum of one year.
They are like bank term deposits accounts. Unlike
traditional time deposits these are freely negotiableinstruments and are often referred to as NegotiableCertificate of Deposits
Features of CD
All scheduled banks (except RRBs and Co-operativebanks) are eligible to issue CDs
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Certificate of Deposit
Issued to individuals, corporations, trusts,
funds and associations
Can be issued at a discount or at a floating
rate basis.
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Banker¶s Acceptance
Banker 's Acceptance:A banker 's
acceptance is also a short-term
investment plan that comes from a
company or a firm backed by a guaranteefrom the bank.
It is an money market instruments created
by non-financial institutions by guaranteedby a bank.
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Banker¶s Acceptance
A time draft payable to a seller of goods with
payment guaranteed by a bank
Arise from international trade transactions and
are used to finance trade in goods that have yetto be shipped from a foreign exporter (seller) to
a domestic importer (buyer)
Foreign exporters prefer that banks act as
guarantors for payment before sending goods to
importer
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International Aspects of Money
Markets
±
While U.S. money markets are the largest,
the international market is growing
± U.S. securities bought/sold by foreign
investors
± foreign money market securities
Euro money market instruments
± Eurodollar deposits, Eurodollar CDs, Euronotes, Euro CP
London Interbank Offered Rate (LIBOR)
± the rate paid on Eurodollars