money market session6

39
Lecture 4 Money Markets Instruments, Participants in India

Upload: piyush-khemka

Post on 10-Apr-2018

223 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 1/39

Lecture 4

Money Markets Instruments,

Participants in India

Page 2: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 2/39

2

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

Page 3: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 3/39

3

Money Market Instruments in India

Treasury Bills

CBLO

Commercial Papers Certificate of deposits

Bankers acceptance

Repurchase Agreement

Page 4: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 4/39

4

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.

Page 5: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 5/39

5

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

Page 6: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 6/39

6

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.

Page 7: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 7/39

7

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.

Page 8: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 8/39

Page 9: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 9/39

9

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.

Page 10: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 10/39

10

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.

Page 11: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 11/39

11

Negotiated Dealing System

Clearing & settlement of Market trades in

Government securities managed by CCIL

(Clearing Corporation of India Ltd.)

Page 12: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 12/39

12

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.

Page 13: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 13/39

13

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.

Page 14: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 14/39

Page 15: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 15/39

15

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.

Page 16: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 16/39

16

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

Page 17: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 17/39

Page 18: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 18/39

Page 19: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 19/39

19

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).

Page 20: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 20/39

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.

20

Page 21: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 21/39

Page 22: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 22/39

22

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.

Page 23: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 23/39

23

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.

Page 24: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 24/39

Page 25: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 25/39

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

Page 26: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 26/39

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

Page 27: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 27/39

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 ?

Page 28: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 28/39

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.

Page 29: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 29/39

Page 30: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 30/39

30

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 

Page 31: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 31/39

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

Page 32: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 32/39

32

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.

Page 33: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 33/39

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)

Page 34: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 34/39

34

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

Page 35: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 35/39

35

Certificate of Deposit

Issued to individuals, corporations, trusts,

funds and associations

Can be issued at a discount or at a floating

rate basis.

Page 36: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 36/39

36

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.

Page 37: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 37/39

Page 38: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 38/39

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 

Page 39: Money Market Session6

8/8/2019 Money Market Session6

http://slidepdf.com/reader/full/money-market-session6 39/39

39

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