Money Market Instruments
1. Call/Notice Money
A segment of the money market where SCBs etc. lend/borrow on call (i.e. overnight/lone day) or at short notice (i.e. for period up to 14 days) to manage the day-to-day surpluses and deficits in their cash flows. This is the core of the Indian money market structure, centralized primarily in Mumbai, but with sub markets in Delhi, Kolkatta, Chennai and Ahmedabad. The activities are confined generally to inter bank business, predominantly on an overnight basis, although a small amount of business known as short notice money, transacted side by side with call money with a maximum period of 14 days.
The players are SCBs, Co-operative bank and prime dealers can borrow and lend MFs Fls Corporate entities (Minimum 5 Crores per transaction through per transaction through primary dealer only) / can participate in the money market. Interest rate in the market is market driven and is highly sensitive to the forces of demand and supply. The call money rate has been fluctuating widely going up to 70% and dropped to around 3%.
2. Inter Bank Participation Certificate:
The IBPCs are short-term instruments to even-out the short-term liquidity within the banking system. The IBPC can be issued by SCBs and can be subscribed to by any CB. It is issued against an underlying advance. During the currency of participation, the outstanding balance in account should cover the aggregate amount of participation
The participation can be issued in two type's viz. with or without risk to the lender. Participation without risk can be issued for a period not exceeding 90 days while with risk for a period up to 180 days. The aggregate amount of IBPCs at the time of issue should not exceed 40% of the outstanding in the account. The interest rate on IBPC is freely determined in the market. The lender bank issues the IBPCs. It becomes one sort of consortium. The certificates are neither transferable nor prematurely redeemable by the issuing bank. In the case of the bank issuing IBPC with risk, the aggregate amount of participation would be reduced from the aggregate advance outstanding; the participating bank would show the aggregate amount of such participation as part of its advances. In case when risk has materialized, both banks will share the 1055 proportionately. In without risk sharing management, the issuing bank will show the amount of participation as borrowing while the participating bank will show the same under the advance to banks. In case of any loss, it is bear by the issuing bank only. The scheme is beneficial both to the issuing bank and participating bank. The issuing bank can secure funds against advances; while for participating bank it provides and opportunity to deploy the short term supply funds in a secured and profitable manner.
3. Treasury Bills
TBs are short term Promissory Notes issued by GOI at a discount for 14 days to 364 days on auction basis. The amount to be auctioned will be pre-announced and cut-off rate of discount and the corresponding issue price will be determined in each auction. The discretion to accept non-competitive bids fully or partially rest with RBI. The amount to be accepted at the auctions and the cut-off price are decided by RBI on the basis of Public Debt Management Policy, the conditions in money market and the monetary policy. T-Bills have a primary as well as a secondary market. In the primary market, RBI auctions T-bills. In secondary market, banks, financial institutions and mutual funds trade in the already issued T-bills. The yield on TBs can be calculated as follows:
(Face Value -Issue Price /Issue Price)×(365 /Period) × 100
Bids are submitted through NOS. Bids are submitted in terms of price per Rs. 100. The auction committee of the RBI decides the cut-off price and results are announced on the same day. Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut, off price are rejected. There are two types of auctions for T-bills. (i) Multiple price base or French auction method- bidders have to obtain the T-bills at the price quoted by him. This method is followed in the case of 364 days T-bills. (ii) Uniform price based or Dutch Auction Method- all the bids accepted at the cut-off level. The bidder obtains the T-bills at the cut-off price and not-the price quoted by him.
Any person, firm, company or Institutions can purchase TBs. The TBs are extremely important among money market instruments. Government can raise funds for short term to meet the temporary mismatch in cash flows and mop up excess liquidity in the system.
4. Commercial Bills
The commercial bill is an instrument drawn by seller of goods or services on a buyer: Bills financing is the core component of meeting working capital needs of corporate in developed countries. Commercial bank can discount with approved institutions, the bills that were originally discounted by them provided that the bills should have arisen out of genuine commercial trade transactions. The interest rate on re-discounting of bills was deregulated in May 1989. Commercial bills re-discounting Is a safe and highly liquid instrument have advantage to both borrower and lender and can be better used for management of temporary mismatch in cash flows.
5. Certificate of Deposit
Negotiable term deposit accepted by CB from bulk depositors at market related rate. It can be issued by SCBs at a discount to face value for a period from 3 Months to one year. It can be issued for minimum amount of Rs. 5 Lakhs to a single investor CDs above Rs. 5 Lakhs should be in multiple of Rs. 1 lakhs. The discount of CDs is deregulated and is market determined. The CDs can be negotiated on or after 45 days from the date of issue to the primary investor. Banks are prohibited from granting loan against CDs.. CDs were introduced in June 1989 with the primary objective of providing a wholesale resource base to banks at market related rates.
6. Commercial Paper
It has its origin in the financial markets of America and Europe, started in India in 1990. At present it provides the cheapest source of funds for corporate sector and has caught the fancy of corporate sector and banks. It is an unsecured debt instrument in the form of a Promissory Note issued by' highly rated borrowers for tenors ranging between 15 days and one year. It is generally issued at a discount freely determined by the market to major institutional investors and corporations either directly or via dealer bank.
The instrument is instantly advantageous to the issuer and the investor. The issue of CPs does not involve bulky documentation and its flexibility with the opportunities can be tailored to meet the cash flow of the issuer. A highly rated company can raise cheaper funds. Compulsory .credit rating imparts inherent strength to the issuer's ability to meet the obligations on maturity. Minimum credit rating has been prescribed for issue of CPs. It would be freely negotiable by endorsement and delivery. Maturity date cannot go beyond the validity period of its credit rating.
A corporate can issue CPs if its tangible net worth as per the latest audited balance sheet is not less than Rs. 4 Crore. The issue requires prior approval of RBI. The entire approved quantum of CP can be issues on a single date or in parts on different dates, within 2 weeks of the RBI's approval, subject to the condition that the entire amount of issue matures on the same date. Each CP issue (including roll over) has to De treated, as a fresh issue has to seek permission of RBI. CP issue cannot be underwritten. The minimize of CP issue will be Rs. 25 Lakhs in the denomination of Rs. 5 lacs or multiple thereof. Maximum size of issue will be equal to 100% of the issuer's working capital limit.
Effective Cost of CP =
((Face Value - Net Amount Realized)/Net Amount Realized)* (365 or 360/ Period) * 100
7. Repo
In recent time, Repo (Repurchase Options) transaction has gained tremendous importance due to their short tenure and flexibility to suit both lender and borrower. Under these transactions the borrower places with lender certain acceptable securities against funds received and agrees to reverse this transaction on a pre-determined future date at prefixed price. Repose is' usually arranged with short-term maturity-overnight or a few days. However, the minimum period of Repose in India is fixed at 1 day. RBI determines repo rate.
In India, Repo is a sale of RBI-approved securities by a bank to another bank or STCI or DFHI, MFs, with a commitment to repurchase the same at an agreed future date at prefixed price. Under a repo transaction, there are two counter parties; a lender and a borrower. The borrower in a repo borrows cash and pledges' securities. The lender lends cash and purchases the securities and is said to enter into a reverse repo transaction. In other words, when such transaction is viewed from the perspective of the seller of securities (the party acquiring funds) is called a Repo and reverse repo when viewed from the perspective of the buyer of securities (the supplier of funds).
Thus, whether a given agreement is termed a Repo or a Reverse Repo depends largely on which part initiated the transaction. Repo interest income is calculated on sale price i.e. + accrued interest (if any) at prescribed rate for the specified periods Consideration receivable (borrowed money) is calculated on the basis of sale price + accrued interest (if any) till the date of transaction. Accrued interest is calculated on face value of securities. We may call it as Repo price.
Consideration payable at the time of repurchase will be = Borrowed money calculated as above' + Repo interest income.
Repurchase price will be = Repo price calculated as above + repo interest income of lender - accrued interest till the date of reversal.
Accrued interest on the security is ignored for the pricing of the security. All transferable G-Sec and T-bills are the eligible securities for repo auctions. Bids are received for a minimum amount of Rs. 5 crore and in' multiples of Rs. 5 crore thereafter. Apart from inter-bank repose, the RBI has been using this instrument effectively for its liquidity management, both for absorbing liquidity (Repo auctions) and also for injecting funds into the system (Reverse Repo auctions) ..
8. Money Market Mutual Funds
One of the recent developments in the sphere of money market is the establishment of MMMFs. It can be set up/sponsored by the banks and Public Financial Institutions. MMMFs are primarily intended for individual investors to enable them to participate in the money market, including NRI's who may invest on a non-repatriable basis.
The setting up of a MMMF required the prior authorization of the RBI. They are set up as trusts. The sponsoring institution should appoint a Board of Trustees to manage it. The day-to-day management of the scheme under the fund, as may be delegated by the Board of Trustees, should be looked after by a full time executive trustee or by a separate fund manager.
MMMFs are free to determine the minimum size of the investment by a single investor. There is no guaranteed minimum rate of return. The resources mobilized by MMMFs should be invested exclusively in various money market instruments as prescribed by RBI. In addition to money market instruments, they are permitted to invest in rated corporate bonds/debentures with residual maturity period up to one year. MMMFs had to make a clear statement of the investment objectives and policies besides the terms and conditions of the scheme.'
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