Instruments in Treasury Market

Treasury Market

What is Money Market?

As per RBI definitions A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market.

The money market is a mechanism that deals with the (less than one year). lending and borrowing of short term funds
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

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It doesnt actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.

Features of Money Market?

It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only. In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

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Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

Objective of Money Market?

1. To provide a parking place to employ short term surplus funds. 2. To provide room for overcoming short term deficits.

3. To provide a reasonable access to users of shortterm funds to meet their requirement quickly, adequately at reasonable cost.

Composition of Money Market?

Money Market consists of a number of submarkets which collectively constitute the money market. They are, 1. Call Money Market 2. Commercial bills market or discount market 3. Acceptance market 4. Treasury bill market

New instrument
Now, in addition to the above the following new instrument are available:
Commercial papers. Certificate of deposit. Banker's Acceptance Repurchase agreement Money Market mutual fund

CALL MONEY MARKET

Call money market is that part of the national money market where the day to day surplus funds, mostly of banks are traded in. They are highly liquid, their liquidity being exceed only by cash. The loans made in this market are of the short term nature.

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Banks borrow from other banks in order to meet a sudden demand for funds, large payments, large remittances, and to maintain cash or liquidity with the RBI. Thus, to the extent that call money is used in India for the purpose of adjustment of reserves.

Participants in the call money market

1. 2. 3. 4. 5. 6. Scheduled commercial banks Non-scheduled commercial banks Foreign banks State, district and urban, cooperative banks Discount and Finance House of India (DFHI) Securities Trading Corporation of India (STCI).

CALL RATES
The rate of interest paid on call loans is known as call rate. Call rate is highly variable from day to day, often from hour to hour. It is very sensitive to changes in demand for and supply of call loans. Eligible participants are free to decide on interest rates in call/notice money market.

CALL RATE IN INDIA

CALL RATE IN INDIA has reached as high a level as 30% in December 1973. It is an alarming level for any short-term rate of interest to reach, and as bank defaulted in a major way in respect of cash and liquidity requirements at that time due to the prohibitively high cost of call money, it became necessary to regulate call rates within reasonable limits. Indian Banks Association (IBA) in 1973 fixed a ceiling of 15% on the level of call rate.

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The IBA lowered this ceiling of 15% to 12.5% in March 1976, 10 % in June 1977, and 8.6% in March 1978, and 10.0% in April 1980. And current call rate in India is 8%. There are now two call rates in India: one, the interbank call rate, and the other, the lending rate of DFHI.

Treasury Bills
Treasury bills are short term instruments issued by the Reserve Bank on behalf of the Government to tide over short term liquidity shortfalls. This instrument is used by the government to raise short term funds to bridge seasonal or temporary gaps between its receipts and expenditure.

 They form the most important segment in the money market not only in India but all over the world as well. T- bills are repaid at par on maturity. The difference between amount paid by the tenderer at the time of purchase (which is less than the face value) and the amount received at maturity represents the interest amount on Tbills and is known as discount. TDS is not applicable on T- bills.

Features of T- Bills
1. They are negotiable securities; 2. They are highly liquid as they are of short tenure and there is a possibility of inter- bank repos in them; 3. There is an absence of default risk; 4. They have an assured return, low transaction cost, and eligible for inclusion in the securities for SLR purpose.

 T- bills are available for a minimum amount of Rs. 25, 000 and in multiples thereof.
at present there are 91 days, 182 days, and 364 days T- bills. The 91 days T- bills are auctioned by the RBI every Friday and the 364 day T-bills every alternate Wednesday., i.e. the Wednesday preceding the reporting Friday.

Types of T- Bills
1. On Tap Bills 2. Ad hoc Bills 3. Auctioned Bills

Participants in T- Bill Market

1. 2. 3. 4. 5. 6. 7. 8. RBI Mutual Funds Financial Institutions Primary Dealers Provident Fund Corporate Foreign Banks FII

91- Days T- Bills

These T- bills are sold on tap since 1965 throughout the week to commercial banks and the public at a fixed interest rate of 4.6 percent. They were discontinued from April 1, 1997. In 1992- 93, a scheme for the issue of auctioned 91- days T- bills with a predetermined amount was introduced.

182- Days T- Bills

The 182- day T- bills were introduced in November 1986 to provide short term investment opportunities to financial institutions and others. These bills were periodically offered for sale on an auction basis by the Reserve Bank. Prior to July 1988, the auction were held every month. Since then, however, fortnightly auctions were held, synchronizing with reporting Fridays of scheduled commercial banks. These bills could not be rediscounted with RBI.

364- Days T- Bills

In April 1992, the 364 day T- bills were introduced to replace the 182- day T- bills. In case of the 364- day bills, a multiple price auction is conducted where successful bidders have to pay prices they actually bid. Initially, the auction of these bills was conducted on a fortnightly basis. The auction evoked a good response from investors. Since 1998- 99, the periodicity of auction has been changed to monthly against fortnightly. Not rediscountable with RBI.

COMMERCIAL PAPER
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

 Only company with high credit rating issues CPs CP is very safe investment because the financial situation of a company can easily be predicted over a few months. CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue.

 The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower. As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

 Only a scheduled bank can act as an provider for issuance of CP. Individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. Amount invested by single investor should not be less than Rs.5 lakh (face value). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India.

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CP will be issued at a discount to face value as may be determined by the issuer. The investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through service provider.

CERTIFICATES OF DEPOSIT
With a view to further widening the range of money market instruments and give investors greater flexibility in deployment of their shortterm surplus funds, Certificates of Deposit (CDs) were introduced in India in 1989. Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form of Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period

CDs can be issued by

Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Commercial bank and ais

AGGREGATE AMOUNT on CD
Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments, viz., term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

MINIMUM SIZE OF ISSUE AND DENOMINATIONS

Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh and in the multiples of Rs. 1 lakh thereafter. INVESTORS (I c- fat) CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. NonResident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate.

MATURITY
The maturity period of CDs issued by banks should be not less than 7 days and not more than one year. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.