Fin Connect Page 1

BMSB

FIN -CONNECT

EDITOR Bikramaditya Ghosh, Asst. Prof.

EDITORIAL COMMITTEE- DR.Umashanker K / Ms. GAYATRI BHAT, Asst. Prof.

/ Mr. B.V.RAO /Mr. Keshava Murthy

Strictly for Internal Circulation

VOL.1 ISSUE-2

May 2014

Fin Connect Page 2

Content

Editorial By Mr. Bikramaditya Ghosh, Asst. Prof. Manipal

University P-3-3

USD Vs. EURO A comparative Study from INR perspective

By Tanya Singh 10A P-4-11

HSBC Scandal Case Study on Money Laundering

By Prapti Barman 9E P-12-21

An analysis of debt securities market in India

By Hardeep Singh Chawla 9D P-22-34

POVERTY An Economic Perspective

By Richa Prakash 9D P-34-43

Blog from a Senior Banker - Mr. Keshava Murthy P-44-49

-Mr. Bikramaditya Ghosh, Asst.

Prof. Manipal University P-49-52

Disclaimer- This magazine does not reflect any views of either BOB or Manipal Group.

This is a pure research endeavor by budding managers of tomorrow.

Fin Connect Page 3

Editorial

It has been a dynamic & eventful journey to discover the latent

talent hidden within the student fraternity by virtue of enhancing

their ideas in BFSI domain. The enthusiasm & ideas have come out

so far has been quite impressive. This is our second issue, and with a

promise that many more to come after that, we in BMSB are proud

to show case the work done by our students once again.

I would like to thank our Director Dr. Thammaiah, our Assoc. Dean

Mr. Rahul Aradhya, our HOD Mr. Ramaprasad, our own moving

encyclopedia (Wikipedia) Mr. Keshava Murthy, our Banking

Partner Mr. Ashok Bhatnagar (BOB) and countless colleagues &

students in coming up with such an unique endevour.

The journey in Fin Connect has been as enjoyable as the final

outcome. I invite more & more such Articles to us from the entire

student fraternity. Come up & Show case your talent my friends.

1

1 Swami Vivekananda Vol-1 Pg. 342

Fin Connect Page 4

USD Vs. EURO A comparative Study from INR perspective

By Tanya Singh 10A

Introduction

Foreign Exchange market forms a very important part of a economy.

The foreign exchange market (Forex, FX, or currency market) is a global

decentralized market for the trading of currencies. The main participants

in this market are the larger international banks. Financial centers around

the world function as anchors of trading between a wide range of

different types of buyers and sellers around the clock, with the exception

of weekends. Electronic Broking Services (EBS) and Reuters 3000 Xtra

are two main interbank FX trading platforms. The foreign exchange

market determines the relative values of different currencies.

The foreign exchange market works through financial institutions, and it

operates on several levels. Behind the scenes banks turn to a smaller

actively involved

in large quantities of foreign exchange trading. Most foreign exchange

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dealers are banks, so this behind-the-scenes market is sometimes called

kinds of financial firms are involved. Trades between foreign exchange

dealers can be very large, involving hundreds of millions of dollars

Because of the sovereignty issue when involving two currencies, Forex

has little (if any) supervisory entity regulating its actions. A bank has to

have a sound Forex trading policy and at the same time it's important

for every banker to understand the basic idea of foreign exchange and

how our currency is linked to other currency or what is the major

relation between the important or top currencies. Now the Forex

segment of Bank of Baroda deals in majorly 6 currencies i.e.

Australian Dollar

Japanese Yen

US Dollar

Swiss Franc

Canadian Dollar

Euro

The article here tries to throw light on the relation between two of the

currencies mentioned above i.e. USD and EURO. The US$ being one of

the very important currency of the world in which not only majority of

trades take place world over but also it is considered as reserve currency.

Thus one would find that our Forex reserves are quoted in $ terms. Any

major change in US$ rates brings about a big impact in Indian economy

and many other economies. On the other hand Euro is the common

currency of whole of European zone or European countries which

include Germany, France, Austria etc. which are big countries. Thus

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establishing a relation between these currencies and their movements

would help us understand them better.

Calculation

As a part of the comparison here data was taken from past 3 years which

comprised of 622 observations each of US$ as well as Euro rate to see if

there exists a relation or not. For the same purpose the open, closing

position, last traded price, low, high positions were all taken into

account. Afterwards correlation and regression analysis have been

performed to assess the relationship between the two.

SUMMARY OUTPUT

Regression Statistics

Multiple R- 0.9539

R- 0 .9100

Adjusted R is 0.909

020406080

100

0 50 100 150

Y

Sample Percentile

Normal Probability Plot

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Interpretation

On the basis of the above linear regression model used we can make

the several interpretations which help is making us understand

whether does a relation between US$ and Euro currency exists and if

yes than how can it affect the exchange rates etc.

the regression analysis is basically used to establish relation that

how much change in independent variable can affect our

dependent variable

the R or R square tells about the forecasting of our regression

model i.e. it tells that it can correctly predict up to 91 % of

forecasting or variation in the level of USD due to change in the

EURO rate

this calculation has been made on the basis of 622 observations

which have been taken over the period of past 3years.

T Stat along with P Value teaches us that the phenomenon did not

happened by chance.

T Stat of +- 10 means the extreme ends of the distribution curve.

There if P Value is zero, that will signify that the distribution curve

do not have a long tail in either side.

On the contrary it has zero value in both the Tails, so the

distribution is concentrated straight & long.

-10

-5

0

5

0 20 40 60 80

Re

sid

ua

ls

X Variable 1

X Variable 1 Residual Plot

Fin Connect Page 8

This further means that confidence level of occurrence of that

event is very high.

So, the Null Hypothesis stands rejected.

Aside from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a

country's relative level of economic health. Exchange rates play a

vital role in a country's level of trade, which is critical to most

every free market economy in the world. For this reason, exchange

rates are among the most watched, analyzed and governmentally

manipulated economic measures. But exchange rates matter on a

smaller scale as well: they impact the real return of an investor's

portfolio. Here we look at some of the major forces behind

exchange rate movements.

Overview

Before we look at these forces, we should sketch out how

exchange rate movements affect a nation's trading relationships

with other nations. A higher currency makes a

country's exports more expensive and imports cheaper in foreign

markets; a lower currency makes a country's exports cheaper and

its imports more expensive in foreign markets. A higher exchange

rate can be expected to lower the country's balance of trade, while

a lower exchange rate would increase it.

Numerous factors determine exchange rates, and all are related to

the trading relationship between two countries. Remember,

exchange rates are relative, and are expressed as a comparison of

the currencies of two countries. The following are some of the

principal determinants of the exchange rate between two countries.

Note that these factors are in no particular order; like many aspects

of economics, the relative importance of these factors is subject to

much debate.

As a general rule, a country with a consistently lower inflation rate

http://www.investopedia.com/terms/i/interestrate.asphttp://www.investopedia.com/terms/i/inflation.asphttp://www.investopedia.com/terms/e/exchangerate.asphttp://www.investopedia.com/terms/e/export.asphttp://www.investopedia.com/terms/i/import.asphttp://www.investopedia.com/terms/b/bot.asphttp://www.investopedia.com/terms/c/currency.asphttp://www.investopedia.com/terms/e/economics.asp

Fin Connect Page 9

exhibits a rising currency value, as its purchasing power increases

relative to other currencies. During the last half of the twentieth

century, the countries with low inflation included Japan, Germany

and Switzerland, while the U.S. and Canada achieved low inflation

only later. Those countries with higher inflation typically see

depreciation in their currency in relation to the currencies of their

trading partners. This is also usually accompanied by higher

interest rates.

Interest rates, inflation and exchange rates are all highly correlated.

By manipulating interest rates, central banks exert influence over

both inflation and exchange rates, and changing interest rates

impact inflation and currency values. Higher interest rates offer

lenders in an economy a higher return relative to other countries.

Therefore, higher interest rates attract foreign capital and cause the

exchange rate to rise. The impact of higher interest rates is

mitigated, however, if inflation in the country is much higher than

in others, or if additional factors serve to drive the currency down.

The opposite relationship exists for decreasing interest rates - that

is, lower interest rates tend to decrease exchange rates.

The current account is the balance of trade between a country and

its trading partners, reflecting all payments between countries for

goods, services, interest and dividends. A deficit in the current

account shows the country is spending more on foreign trade than

it is earning, and that it is borrowing capital from foreign sources

to make up the deficit. In other words, the country requires more

foreign currency than it receives through sales of exports, and it

supplies more of its own currency than foreigners demand for its

http://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/c/currentaccount.asp

Fin Connect Page 10

products. The excess demand for foreign currency lowers the

country's exchange rate until domestic goods and services are

cheap enough for foreigners, and foreign assets are too expensive

to generate sales for domestic interests.

Countries will engage in large-scale deficit financing to pay for

public sector projects and governmental funding. While such

activity stimulates the domestic economy, nations with large public

deficits and debts are less attractive to foreign investors. The

reason? A large debt encourages inflation, and if inflation is high,

the debt will be serviced and ultimately paid off with cheaper real

dollars in the future.

In the worst case scenario, a government may print money to pay

part of a large debt, but increasing the money supply inevitably

causes inflation. Moreover, if a government is not able to service

its deficit through domestic means (selling domestic bonds,

increasing the money supply), then it must increase the supply of

securities for sale to foreigners, thereby lowering their prices.

Finally, a large debt may prove worrisome to foreigners if they

believe the country risks defaulting on its obligations. Foreigners

will be less willing to own securities denominated in that currency

if the risk of default is great. For this reason, the country's debt

rating (as determined by Moody's or Standard & Poor's, for

example) is a crucial determinant.

A ratio comparing export prices to import prices, the terms of trade

is related to current accounts and the balance of payments. If the

price of a country's exports rises by a greater rate than that of its

http://www.investopedia.com/terms/b/bond.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/s/sp.asphttp://www.investopedia.com/terms/b/bop.asp

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imports, its terms of trade have favorably improved. Increasing

terms of trade shows greater demand for the country's exports.

This, in turn, results in rising revenues from exports, which

provides increased demand for the country's currency (and an

increase in the currency's value). If the price of exports rises by a

smaller rate than that of its imports, the currency's value will

decrease in relation to its trading partners.

Foreign investors inevitably seek out stable countries with strong

economic performance in which to invest their capital. A country

with such positive attributes will draw investment funds away from

other countries perceived to have more political and economic risk.

Political turmoil, for example, can cause a loss of confidence in a

currency and a movement of capital to the currencies of more

stable countries.

Conclusion

Our regression model above is able to portray a very accurate

picture more than 90% of times. The two exchange rates are very

strongly and positively correlated which can be construed as a

movement in one will result in strong positive movement in the

other currency too. Similarly the regression model explains us that

a movement/change in the independent variable i.e. Euro will

strongly affect dependent variable i.e. US Dollar in the similar

direction, i.e. if there is appreciation in the value of Euro then we

will see appreciation in the movement of USD too. Also if we will

plot the values on the normal distribution curve, it will be a

standard bell shaped curve with no tail as all the observations are

concentrated uniformly near the center.

Fin Connect Page 12

References

1. http://www.xe.com/currencycharts/?from=USD&to=INR

2. http://www.xe.com/currencycharts/?from=USD&to=EUR

3. http://www.xe.com/currencycharts/?from=INR&to=EUR

4. http://en.wikipedia.org/wiki/Reuters_3000_Xtra

5. http://en.wikipedia.org/wiki/Electronic_Broking_Services

6. http://en.wikipedia.org/wiki/Currency

HSBC Scandal Case Study on Money Laundering

By Prapti Barman 9E

What is Money Laundering?

legitimate

income so as to lose the trail of illegal transactions, it appears to be

http://www.xe.com/currencycharts/?from=USD&to=INRhttp://www.xe.com/currencycharts/?from=USD&to=EURhttp://www.xe.com/currencycharts/?from=INR&to=EURhttp://en.wikipedia.org/wiki/Reuters_3000_Xtrahttp://en.wikipedia.org/wiki/Electronic_Broking_Serviceshttp://en.wikipedia.org/wiki/Currency

Fin Connect Page 13

white or legitimate money. Money laundering is a relative term and its

interpretation varies from situation to situation. For instance, in some

places tax evasion may be considered as a form of money laundering

while it may not be so in some other places. Basic process of money

laundering constitutes three different stages which are placing the

money in a legal channel; layering or camouflaging the money source

through series of complicated transactions and the final step is

integrating the funds acquired through illegal transactions. Further

elaboration on this topic is beyond the scope of this article. Money

laundering is a serious crime although it may appear that nobody is

victimized. As per recent statistics, it counts for over $500 billion

annually.

HSBC AML Policy

-

money laundering practice in all markets and jurisdictions in which it

operates and to comply with both specific provisions and the spirit of all

relevant laws and regulations. This

policy applies not only to money

laundering but also to terrorist

financing as mentioned in HSBC

Group Money Laundering

Deterrence Global Policy and

Principles. This policy reflects the

Money Laundering and 9 special recommendations to counter terrorist

financing. According to these recommendations that were published in

October 2004, any financial institution must maintain customer due

diligence and maintain record, monitoring and reporting of suspicious

Fin Connect Page 14

transactions, other measures to deter money laundering and terrorist

financing, regulation and supervision, etc.

HSBC Global policy has provisions

Key elements of the policy include:

a) Customer Due Diligence :

i) Obtaining and verifying identity of a prospective customer

using reliable, independent document/ electronic source

material. Steps to be taken to ensure no customer is using

fake identity.

ii) Appropriate KYC information (personal, business and

financial details and source of funds) before starting a

relationship. Proper risk analysis using all accounting and

other banking tools available.

b) Identification and Reporting of suspicious transactions :

Appropriate scrutiny and monitoring of transactions and account

activity of customers using a risk based approach with increased

suspicious activity noted by any business unit should be reported to

a Central Money Laundering Reporting Office Function who will

validate the suspicions and report to relevant authorities.

c) Maintaining records for at least 5 years after the relationship with

customer has ended or after the date of transaction as required by

local law or regulation.

d) Screening of payment against any sanctions/ lists issued by UN or

other competent local authorities.

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e) Training of all employees to ensure all of them are aware and

laundering deterrence.

Figure 1 : Five steps of HSBC Global Anti Money Laundering Policy

HSBC USA Money Laundering Events :

In 2005 Bloomberg Markets magazine accused HSBC of money-

laundering for drug dealers and state sponsors of terrorism. CEO

and wholly irresponsible

subsequent investigation indicated that the accusation was accurate

and proved that the bank was involved in money laundering

throughout Mexico.

HSBC Mexico which had inadequate money laundering controls,

shipped $7billion to HSBC US operations between 2007-08. Drug

traffickers used HSBC Mexico as conduit to ship US dollars from

Mexico to US thereby fooling the anti money laundering measures.

Evidence indicated bulk travellers cheque worth millions of dollars

and resistance to closing account linked to suspicious activities. The

bank categorized Mexico as low risk zone thereby weakening risk

monitoring policy. Mexican traffickers used boxes specifically

designed to the dimensions of an HSBC Mexico teller's window to

deposit cash on a daily basis.

Risk Assessment

of customers

Low Medium

- High

Obtaining

KYC

information

Transaction

monitoring

using risk

based

approach

Report of

suspicious

transaction

s

Maintaining

records

Fin Connect Page 16

Although it is prohibited by US laws to deal with individuals or

organizations deemed dangerous, HSBC US carried on about 28000

such sensitive transactions worth about $19.7 billion between 2001 -

07 majority of which involved Iran. Other countries were Libya,

Sudan, Cuba, Burma and Korea.

HSBC also had business tie up with Al Rajhi Bank, biggest financial

institution of Saudi Arabia. After suspected tie of US 9/11 terrorist

attack with Al Rajhi Bank, HSBC US cut off all ties with the bank

after 2001. But when Al Rajhi began to threaten to withdraw global

ties with HSBC, HSBC US resumed business transaction with the

bank after 2006.

Between 2005 and 2008, HSBC US cleared $290million worth of US dollar travellers' cheques which were being presented at a Japanese

bank. Further investigation proved that the origin of said transactions

were from Russia which is flagged as high risk zone in terms of

money laundering activities.

In 2008, the federal prosecutor in Wheeling, West Virginia, began investigating allegations that a local doctor used the bank to launder

money from Medicare fraud.

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Fin Connect Page 18

Permanent Subcommittee on Hearing HSBC Money laundering

Case

US Senate permanent Subcommittee started its investigation since

February 2012.

Location: Room 106, Dirksen Senate Office Building

Time: July 17, 2012 09:30AM

Members

CHAIRMAN - Carl Levin D

RANKING COMMITTEE

MEMBER - Tom Coburn R

David S. Cohen

Leigh H. Winchell

David Bagley

Paul Thurston

Michael Gallagher

Christopher Lok

Panel 1

Panel 2

Panel 3

Panel 4

Irene Dorner

Stuart A. Levey

Thomas J. Curry

Grace E. Dailey

Daniel P. Stipano

Fin Connect Page 19

Violations:

Bank Secrecy Act (BSA) by failing to maintain an effective anti-money

laundering program and to conduct appropriate due diligence on its

foreign correspondent account holders.

International Emergency Economic Powers Act (IEEPA) and the

Trading with the Enemy Act (TWEA) by illegally conducting transactions

on behalf of customers in Cuba, Iran, Libya, Sudan and Burma.

HSBC appeal:

Since 2009 it increased its investment in AML policy nine times and

also withdrew from various business transactions.

Paul Thurston, HSBC Chief of Retail and Wealth Management, said the

bank 'took wrongdoing seriously' and provided evidence for the same

Senate Report:

From 2001 to 2007, HSBC affiliates sent almost 25,000 transactions

involving Iran worth over $19billion (12billion) through HBUS and

other US accounts, while concealing any link with Iran in 85 per cent of

-called bearer share

accounts, in which ownership of shares and the income they incur can be

passed from person to person in secrecy.

In 2010, one disgusted top compliance official threw up his hands and

quit after less than a year on the job, according to the report.

At the heart of HSBC's failings was the fact that it served as a hub for

smaller financial firms needing access to the global banking system, the

report said.

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HSBC continued to do business with one client Sigue Corp that admitted

to U.S. law enforcement that it had failed to maintain an effective anti-

money laundering system.

Outcome:

Deferred Prosecution Agreement with US Department of Justice.

HSBC US Money laundering aftermath

The settlement is the third time in a decade that HSBC has been

penalized for lax controls and ordered by U.S. authorities to improve its

monitoring of suspicious transactions. Previous directives by regulators

to improve oversight came in 2003 and in 2010.

HSBC agreed to money laundering charges of $881 million.

HSBC Holdings Plc agreed to pay $1.92 billion as penalty for various

accusations of insufficient money laundering charges placed upon them

by US authorities.

The penalty includes $665 million civil penalties to regulators including

to the Office of the Comptroller of the Currency, the Federal Reserve,

and the Treasury Department.

Bonuses would be delayed for top executives of the organization and

would be removed from some current and former executives who had

particular involvement in the wilful breach of U.S. regulations.

HSBC agreed that it had neglected to maintain due diligence with some

of their accountholders and agreed to strengthen their AML policy and

monitor compliance to every step of KYC policy. More number of staff

to be employed for monitoring every step.

Fin Connect Page 21

It a

in compliance of Bank Secrecy Act

period of 5 years.

Justice or Economy at large ?

The judgment not to prosecute HSBC for such serious accusations and to

avoid criminal proceedings in exchange of $1.92 billion fine leaves us

with a question. Whether justice was delivered?

It is true that this is not the first time that US authorities have warned

HSBC regarding their insufficient AML policy. They have still not

updated their framework to stop their channels from being used by

money launderers. In this regard, they should have been given

punishment more severe than penalty charges.

On the o

national economy of US would greatly suffer if justice would have been

served and license to HSBC US would have been withdrawn by Office

of Comptroller. All employees of HSBC US branch would suffer from

unemployment which would ultimately tip the scale of inflation further.

The judgement created outrage amongst mass. Many senators and

advocates voiced their revulsion for this decision openly. The utilitarian

view support the judgement as it provides greater benefit of the society

at large. US government avoided retribution to protect the already

struggling economy. Justice was served from the point of view of greater

good. However this vulnerability has provided nothing but leeway to

such banking giants. We can only hope that such incidents would not be

repeated in the future and these monetary penalties would be enough to

deter such organizations from using such inefficient AML policy.

Fin Connect Page 22

REFERENCES

www.google.co.in

http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-

settlement-over-money-laundering/?_r=2

http://www.marketoracle.co.uk/Article38132.html

http://www.bibliotecapleyades.net/sociopolitica/sociopol_globalbanking

286.htm

http://en.wikipedia.org/wiki/HSBC

http://www.bbc.co.uk/news/business-18880269

http://www.reuters.com/article/2012/12/11/us-hsbc-probe-

idUSBRE8BA05M20121211

http://sevenpillarsinstitute.org/case-studies/hsbc-money-laundering-case-

too-big-to-fail-does-not-mean-too-big-to-jail

http://www.google.co.in/http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-settlement-over-money-laundering/?_r=2http://dealbook.nytimes.com/2012/12/10/hsbc-said-to-near-1-9-billion-settlement-over-money-laundering/?_r=2http://www.marketoracle.co.uk/Article38132.htmlhttp://www.bibliotecapleyades.net/sociopolitica/sociopol_globalbanking286.htmhttp://www.bibliotecapleyades.net/sociopolitica/sociopol_globalbanking286.htmhttp://en.wikipedia.org/wiki/HSBChttp://www.bbc.co.uk/news/business-18880269http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211http://sevenpillarsinstitute.org/case-studies/hsbc-money-laundering-case-too-big-to-fail-does-not-mean-too-big-to-jailhttp://sevenpillarsinstitute.org/case-studies/hsbc-money-laundering-case-too-big-to-fail-does-not-mean-too-big-to-jail

Fin Connect Page 23

An analysis of debt securities market in India

By Hardeep Singh Chawla 9D

(Scenario before 1993)

The market for debt instruments remained under developed due to

various constraints. Some of these are:

Requirement of long term debt by corporate sector was provided

by financial institutions and commercial banks in the form of term

loans

Restrictions on the interest rate payable on these instruments

The principal buyers of debenture issued by companies were

investment institutions. The institutions were bought with a view to

hold them till maturity.

(Scenario from 1993)

The changes that enlightened the debt market since the middle of 1993.

Debt market now poises for substantial growth due to following reasons:

Fin Connect Page 24

Nowadays term loans are being provided lesser to industrial

projects by financial institutions

Now corporate enjoy complete independence in designing debt

instruments

These days there is no ceiling on interest rate

To monitor the performance of various debt instruments various

credit rating agencies have been established

Volatilities present in equity markets has stimulated the investor to

invest in debt securities

Govt Securities Government Securities are securities issued by the Government for

raising a public loan or as notified in the official Gazette. They consist

of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held

in Bond Ledger Account. They may be in the form of Treasury Bills or

Dated Government Securities.

Features of Government Securities

Issued at face value

No default risk as the securities carry sovereign guarantee.

Ample liquidity as the investor can sell the security in the secondary market

Interest payment on a half yearly basis on face value

No tax deducted at source

Can be held in Demat form.

Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the

security like FRBs - Floating Rate Bonds).

Redeemed at face value on maturity

Maturity ranges from of 2-30 years.

Fin Connect Page 25

The dated Government securities market in India has two segments:

1. Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include

Commercial Banks, Primary Dealers, Financial Institutions,

Insurance Companies & Co-operative Banks. RBI also has a scheme

of non-competitive bidding for small investors.

2. Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident

Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of

India. Even Corporate and Individuals can invest in Government

Securities. The eligibility criterion is specified in the relative

Government notification.

Auctions: Auctions for government securities are either multiple- price

auctions or uniform price auction - either yield based or price based.

G-Sec Auction details

(Number of auctions)

Year Uniform

Price

1 2010-

11Q4

15

2 2011-

12Q1

30

3 2011-

12Q2

34

4 2011-

12Q3

37

5 2011-

12Q4

39

Fin Connect Page 26

6 2012-

13Q1

48

7 2012-

13Q3

0

8 2012-

13Q4

0

9 2013-

14Q1

8

Yield Based

In this type of auction, RBI announces the issue size or notified amount

and the tenor of the paper to be auctioned. The bidders submit bids in

term of the yield at which they are ready to buy the security. If the Bid is

more than the cut-off yield then its rejected otherwise it is accepted

Price Based

In this type of auction, RBI announces the issue size or notified amount

and the tenor of the paper to be auctioned, as well as the coupon rate.

The bidders submit bids in terms of the price. This method of auction is

normally used in case of reissue of existing Government Securities. Bids

at price lower, then the cut off price are rejected and bids higher, then

the cut off price are accepted. Price Based auction leads to a better price

discovery then the Yield based auction.

Underwriting in Auction

One day prior to the auction, bids are received from the Primary Dealers

(PD) indicating the amount they are willing to underwrite and the fee

expected. The auction committee of RBI then examines the bid on the

basis of the market condition and takes a decision on the amount to be

underwritten and the fee to be paid. In case of devolvement, the bids put

in

deciding the amount of devolvement and in case the auction is fully

subscribed, the PD need not subscribe to the issue unless they have bid

Fin Connect Page 27

for it.

State Development Loans State Development Loans (SDLs) are issued by the State Governments

and RBI coordinates the actual process of selling these securities. Each

state is allowed to issue securities up to a certain limit each year.

Generally, the coupon rates on State Development Loans are marginally

higher than those of GOI-Secs issued for the same maturity.

The State Development Loans are normally sold through the auction

process. All the auctions are multiple price auctions, through

competitive bidding, conducted by Reserve Bank of India and allotment

procedure is similar to that for GOI-Secs. Non-competitive bidding has

been introduced in the auction of SDL. State Development Loans also

qualify for SLR status. Interest payment frequency is half yearly and

other modalities are similar to GOI-Secs. They are issued in

dematerialized form. State Government Securities can be issued in the

physical form (in the form of Stock Certificate) on separate request and

are transferable. Like in the case of G-Secs no stamp duty is payable on

transfer of State Development Loans also.

State Development Loans are eligible securities for Liquidity

Adjustment Facility (LAF)-Repos. Schedule Commercial

Bank(excluding RRBs) and Primary Dealers can offer State

Development Loans as eligible securities to the RBI under LAF Repo

Treasury bills

Treasury Bills are short term (up to one year) borrowing instruments of

the Government of India which enable investors to park their short term

surplus funds while reducing their market risk.

They are auctioned by Reserve Bank of India at regular intervals and

issued at a discount to face value. On maturity the face value is paid

to the holder.

Fin Connect Page 28

The rate of discount and the corresponding issue prices are

determined at each auction. When liquidity is tight in the economy,

returns on Treasury Bills sometimes become even higher than

returns on bank deposits of similar maturity.

Any person in India including Individuals, Firms, Companies,

Corporate bodies, Trusts and Institutions can purchase Treasury

Bills. Treasury Bills are eligible securities for SLR purposes.

Treasury Bills are available for a minimum amount of Rs. 25,000

and in multiples of Rs. 25,000 thereafter. They are available in both

Primary and Secondary Market.

Treasury Bills are issued in the form of SGL - entries in the books of

Reserve Bank of India to hold the securities on behalf of the holder.

The SGL holdings can be transferred by issuing a SGL transfer form

Treasury Bills are also being issued under the Market Stabilization

Scheme (MSS)

Type of Treasury Bills

At present, RBI issues T-Bills for three different maturities:

91 days

182 days

364 days.

The 91 day T-Bills are issued on weekly auction basis while 182 day T-

Bill auction is held on Wednesday preceding Non-reporting Friday and

364 day T-Bill auction on Wednesday preceding the Reporting Friday

Treasury Bills are Money Market instruments to finance the short term

requirements of the Government of India. These are discounted

Fin Connect Page 29

securities and thus are issued at a discount to face value. The return to

the investor is the difference between the maturity value and issue price

Treasury Bills or T-Bills as they are known are issued by the

Government of India to meet their short-term requirement. T-Bills are

issued for 91-day, 182-day and 364-day maturities. T-Bills are issued at

a discount to their face value and redeemed at par.

364-day T-Bills forms part of the government borrowing programme.

There are three types of Treasury Bills:-

91-day T-bill - maturity is in 91 days. Its auction is weekly on every

Wednesday.

182-day T-bill - maturity is in 182 days. Its auction is on every

alternate Wednesday other than a reporting week.

364-Day T-bill - maturity is in 364 days. Its auction is on every

alternate Wednesday in a reporting week.

Features of T-Bills auction

All T-Bills auctions are Price-based.

All T-Bills are auctioned on Multiple-Price basis.

The RBI auctions 91-day T-Bills every Wednesday, 182-day T-Bills on

every alternate Wednesday and 364-day T-Bills on the Wednesday of

the reporting Friday week.

A new segment called the wholesale debt market (WDM) was

established at the NSE to report the trading volume of the Govt of India

debt market.

Trade volumes

Fin Connect Page 30

Value (Rs crore)

Year G-Sec SDL T-Bills

2011-

12Q1

511027 7012 89055

2011-

12Q2

774209 8136 96302

2011-

12Q3

825093 13241 74675

2011-

12Q4

990322 15824 87838

2012-

13Q1

1155405 21143 116493

2012-

13Q2

1335305 26026 162450

2012-

13Q3

1175013 32694 120507

2012-

13Q4

2254019 38103 150879

2013-

14Q1

3655640 43834 161131

Fin Connect Page 31

Share (%)

Year G-Sec SDL T-Bills

2011-

12Q1

84.2 1.2 14.7

2011-

12Q2

88.1 0.9 11.0

2011-

12Q3

90.4 1.5 8.2

2011-

12Q4

90.5 1.4 8.0

2012-

13Q1

89.4 1.6 9.0

2012- 87.6 1.7 10.7

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

G-Sec

SDL

T-Bills

Fin Connect Page 32

13Q2

2012-

13Q3

88.5 2.5 9.1

2012-

13Q4

92.3 1.6 6.2

2013-

14Q1

94.7 1.1 4.2

Looking at the quarterly report it can be clearly seen that government

securities continued to be market favorites compared to treasury bills

and state development loans. However being short term securities these

two securities were traded less. This clearly indicates the trust and

confidence the investors have in government securities. They are ready

to hold long positions in the market and are assured of the fact that their

0

10

20

30

40

50

60

70

80

90

100

G-Sec

SDL

T-Bills