treasury market

8/12/2019 Treasury Market

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Instruments

inTreasury Market


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Treasury Market


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As per RBI definitions A market for short terms financialassets that are close substitute for money, facilitatesthe exchange of money in primary and secondarymarket.

The money market is a mechanism that deals with the(less than one year). lending and borrowing of shortterm funds

A segment of the financial market in which financialinstruments with high liquidity and very shortmaturities are traded.

What is Money Market?


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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.

Continued.


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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 placeformal like stock exchange, only through oral

communication, relevant document and written

communication transaction can be done.

Features of Money Market?


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Transaction have to be conducted without the helpof brokers.

It is not a single homogeneous market, it comprisesof several submarket like call money market,acceptance & bill market.

The component of Money Market are thecommercial banks, acceptance houses & NBFC(Non-banking financial companies).

Continued..


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1. To provide a parking place to employ short termsurplus funds.

2. To provide room for overcoming short term deficits.

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

Objective of Money Market?


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Money Market consists of a number of sub-

markets which collectively constitute the

money market. They are,

1. Call Money Market

2. Commercial bills market or discount market

3. Acceptance market4. Treasury bill market

Composition of Money Market?


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Now, in addition to the above the following newinstrument are available:

Commercial papers.

Certificate of deposit.

Banker's Acceptance

Repurchase agreement

Money Market mutual fund

New instrument


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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.

CALL MONEY MARKET


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Continued..

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.


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1. Scheduled commercial banks

2. Non-scheduled commercial banks

3. Foreign banks4. State, district and urban, cooperative banks

5. Discount and Finance House of India (DFHI)

6. Securities Trading Corporation of India(STCI).

Participants in the call money market


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The rate of interest paid on call loansis 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 RATES


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CALL RATE IN INDIA has reached as high a levelas30% in December 1973.

It is an alarming level for any short-term rate ofinterest to reach, and as bank defaulted in amajor way in respect of cash and liquidityrequirements at that time due to theprohibitively high cost of call money, it becamenecessary to regulate call rates within reasonable

limits. Indian Banks Association (IBA) in 1973 fixed a

ceiling of 15% on the level of call rate.

CALL RATE IN INDIA


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Continued

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.


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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 andexpenditure.


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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 T-

bills and is known as discount. TDS is not applicable on T- bills.


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Features of T- Bills

1. They are negotiable securities;

2. They are highly liquid as they are of short

tenure and there is apossibility of interbank

repos in them;

3. There is an absence of default risk;

4. They have an assured return, low transactioncost, and eligible for inclusion in the

securities for SLR purpose.


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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

364days T- bills.

The 91 days T- bills are auctioned by the RBI

every Friday and the 364 day T-bills everyalternate Wednesday., i.e. the Wednesday

preceding the reporting Friday.


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Types of T- Bills

1. On Tap Bills

2. Ad hoc Bills

3. Auctioned Bills


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Participants in T- Bill Market

1. RBI

2. Mutual Funds

3. Financial Institutions

4. Primary Dealers

5. Provident Fund

6. Corporate

7. Foreign Banks

8. FII


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91- Days T- Bills

These T- bills are sold on tap since 1965throughout 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.


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182- Days T- Bills

The 182- day T- bills were introduced inNovember 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 Fridaysof scheduled commercial banks.

These bills could not be rediscounted with RBI.


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364- Days T- Bills

In April 1992, the 364 day T- bills wereintroduced to replace the 182- day T- bills.

In case of the 364- day bills, a multiple priceauction 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.


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Commercial Paper (CP) is an unsecured

money market instrument issued in the form

of a promissory note.

It was introduced in India in 1990with a view

to enabling highly rated corporate borrowers/

to diversify their sources of short-term

borrowings and to provide an additionalinstrument to investors.

COMMERCIAL PAPER


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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.


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The aggregate amount of CP from an issuershall be within the limit as approved by itsBoard of Directors or the quantum indicatedby the Credit Rating Agency for the specifiedrating, 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 instrumentsviz., term money borrowings, term deposits,certificates of deposit and inter-corporatedeposits should not exceed 100 per cent of itsnet owned funds, as per the latest auditedbalance sheet.


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Only a scheduled bank can act as an provider for

issuance of CP.

Individuals, banking companies, other corporatebodies 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.

Continued..


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With a view to further widening the range ofmoney market instruments and give investorsgreater flexibility in deployment of their short-term surplus funds, Certificates of Deposit (CDs)were introduced in India in 1989.

Certificate of Deposit (CD) is a negotiable moneymarket instrument and issued in dematerialised

form of Promissory Noteagainst funds depositedat a bank or other eligible financial institution fora specified time period

CERTIFICATES OF DEPOSIT


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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

CDs can be issued by


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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 exceed100 per cent of its net owned funds, as per

the latest audited balance sheet.

AGGREGATE AMOUNT on CD

MINIMUM SIZE OF ISSUE AND


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Minimum amount of a CD should be Rs.1 lakh,i.e., the minimum deposit that could be acceptedfrom a single subscriber should not be less thanRs.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. Non-

Resident Indians (NRIs) may also subscribe toCDs, but only on non-repatriable basis, whichshould be clearly stated on the Certificate.

MINIMUM SIZE OF ISSUE AND

DENOMINATIONS


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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.

MATURITY

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