Call money market & T bills~1.PPT

8/20/2019 Call money market & T bills~1.PPT

1/37

Call money market is a market for veryshort term funds repayable on demand

with maturity period varying between oneday to a fortnight.

Until march 1978,transaction in the call

money market were usually eectedthrough brokers. !"# has prohibited banks paying brokerage

on operations in the call money market.


2/37

$he seasonal nature of the call money

market would be re%ected in two indicators&1. ' decline in money at call and short

notice should be greater in the slackseason than in the busy season of the

given year.(. 'n increase in money at call and short

notice should be greater in busy season

than the slack season.


3/37

$he need for call money borrowings is thehighest around march every year)

1.withdrawals of deposits in march tomeet year end ta* payments.

(.withdrwal of funds by +nancial

institutions to meet their statutoryobligations.

Call money borrowings tend to increase

when there is an increase in C!!.


4/37

Call oney- means deals in overnight funds

-otice oney- means deals in funds for ( ) 1/days

-0ortnight- shall be on a reporting 0riday basisand

mean the period from aturday to the second

following 0riday, both days inclusive -"ank2 or 3banking company- means a banking

company or a -corresponding new bank-,-tate "ank of #ndia- or -subsidiary bank3 and

includes a -co)operative bank-


5/37

3cheduled bank2 means a bank included in theecond chedule of the !eserve "ank of #ndia'ct, 194/

-5rimary 6ealer- means a +nancial institution

which holds a valid letter of authoriation as a5rimary 6ealer issued by the !eserve "ank, interms of the -uidelines for 5rimary 6ealers inovernment ecurities arket3

-Capital 0unds- means the sum of the $ier # and $ier ## capital as disclosed in the latest auditedbalance sheet of the entity


6/37

's per !"# de+nitions 3 ' market for shortterms +nancial assets that are closesubstitute for money, facilitates the

e*change of money in primary andsecondary market2.

$he money market is a mechanism thatdeals with the lending and borrowing ofshort term funds less than one year:.

' segment of the +nancial market in which+nancial instruments with high li;uidity and

very short maturities are traded.


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Commercial banks and co operative

banks are the participants


8/37

5articipation of foreign banks as borrowerhas increased to meet C!! re;uirements.

'fter 197= "# has been regularlyparticipating in this market, a ma>orlender but a small borrower.

's per latest !"# policy


9/37

#n '5!#< 1991 !"# announced thatlenders should provide evidence to !"#

about)bulk lend able resources and nooutstanding borrowings from banks.

$hey will be re;uired to observe a

minimum sie of operations of !s (= Crper transactions.

5articipate with prior permission of !"#

and only through 60?#.


10/37

!"# has permitted four primary dealers toparticipate as both lenders and

borrowers. utual funds as lenders.


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arket for very short term funds, known asmoney on call

$he rate at which funds are borrowed inthis market is called @Call oney rateA

$he sie of the market for these funds in#ndia is between !s B=,=== million to !s7=,=== million

f which public sector banks account for8=D of borrowings

0oreign banksEprivate sector banks

account for the balance (=D


14/37

$otal call loans in #ndia increased from !s 9.4 Crin 19FF)FB to !s 7,1/7 Cr in 199F)9B and to !s

4B=94 Cr in (==4. $otal turnover borrowings: in the following

years& years !s. in "illion:

1991)9( 1B,/F=

1994)9/ ((,F1=

199/)9F 17,=4=

199F)9B (=,98=

199B)97 1F,/F=


15/37

$he daily average borrowings by all banksand 56s were !s 9,/BF Cr in 199B and !s

1=,(=4 Cr in 1997. 0oreign banks daily average "orrowings

were !s (,F41 Cr in 199B and !s 4,8=7 in

1997. $he cumulative turnover borrowings and

landings: was !s 1,/99 billion in 199F)9B

and !s (,7/4 billion in 199B)97


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17/37

#n U there are two markets which can besaid to form the call money markets&

0ederal funds market& $ransactions betweenbanks involving borrowing or lending ofbanks deposits at federal reserve banks forone day at a speci+ed rate of interest.

Call money market proper& $he call loans

represent short term loans by banks tosecurity brokers and dealers for the purposeof +nancing their customers to purchasecommon stock.


18/37

#n UH the call money market consist ofthree parts&

Clearing banks loans to discount houses

#nter bank loans obiliation of surplus money by discount

houses among themselves before theyapproach the bank of Ingland for +nancial

accommodation. I*istence of an intermediary in the form of

discount houses in between "ank ofIngland and commercial banks is apeculiar feature of "ritish money market:


19/37

$he sie of call market in #ndia has beenmuch smaller than that of the U and UHbecause of some factors&

) $he bill market in #ndia isunderdeveloped.

) Unlike in the UH, discounting facilities

available to banks in #ndia. )


20/37

"orrowers and lenders contact each other overtelephone.

$he borrowers and lenders arrive at a dealspecifying the amount of loan and the rate of

interest. 'fter the deal is over, the lender issues 0"<

che;ue in favour of the borrower.

$he borrower in turn issues call moneyborrowing receipt.

Ghen the loan is repaid with interest, the lenderreturns the duly discharged receipt


21/37

$he deal can be directly negotiated by routing it through the

6iscount and 0inance ?ouse of #ndia 60?#:. $he borrowers and lenders inform the 60?# about their fund

re;uirement and availability at a speci+ed rate of interest.

nce the deal is con+rmed, the 6eal ettlement 'dvice is

e*changed. #n case the 60?# borrows, it issues a call deposit receipt to

the lender and receives !"# che;ue for the money borrowed. $he reverse takes place in the case of lendings by the 60?#.

$he duly discharged call deposit receipt is surrendered atthe time of settlement.

Call loans can be renewed upto a ma*imum period of 1/days only and such renewals are recorded on the back of thedeposit receipt by the borrower


22/37

$reasury "ills are money market instrumentsto +nance the short term re;uirements of theovernment of #ndia.

$hese are discounted securities and thus areissued at a discount to face value.

$he return to the investor is the dierencebetween the maturity value and issue price.


23/37

$ypes of $reasury bills based on the maturityperiod and utility of the issuance like, ad)hoc

$reasury bills, 4 months, 1(months $reasury

bills etc. #n #ndia, at present, the $reasury"ills are the 91)days 18( days and 4B/)days $reasury bills.


24/37

$)bills are sold through an auction processannounced by the !"# at a discount to its facevalue. !"# issues a calendar of $)bill auctions

#t also announces the e*act dates of auction,the amount to be auctioned and paymentdates. $)bills are available for a minimumamount of !s. (F,=== and in multiples of !s.

(F,===. "anks and 56s are ma>or bidders in the $)bill

market.

"oth discriminatory and uniform price auction

methods are used in issuance of $)bills.


25/37

Currently, the auctions of all $)bills aremultipleEdiscriminatory price auctions, where the successfulbidders have to pay the prices they have actually bid for.

on)competitive bids, where bidders need not ;uote the

rate of yield at which they desire to buy these $)bills, arealso allowed from provident funds and other investors.

!"# allots bids to the non)competitive bidders at theweighted average yield arrived at on the basis of the yields;uoted by accepted competitive bids at the auction.

'llocations to non)competitive bidders are outside theamount noti+ed for sale. oncompetitive bidders thereforedo not face any uncertainty in purchasing the desiredamount of $)bills from the auctions.


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arket related yields #deal matching for funds management

particularly for short term tenors of less than1F days.

$ransparency in operations as thetransactions would be put through !eserve"ank of #ndiaKs < subsidiary generalledger: or ClientKs ilt account only

$wo way ;uotes oered by primary dealersfor purchase and sale of treasury bills. Certainty in terms of availability, entry L e*it


29/37

$he auction of treasury bills is done only at !eserve "ankof #ndia, umbai.

"ids are to be submitted on 6 egotiable 6ealingystem: by (&4= 5 on Gednesday. #f Gednesday

happens to be a holiday then bids are to submitted on $uesday.

"ids are submitted in terms of price per !s 1==. 0ore*ample, a bid for 91)day $reasury bill auction could befor !s 97.F=.

'uction committee of !eserve "ank of #ndia decides thecut)o price and results are announced on the same day.

"ids above the cut)o price receive full allotmentN bidsat cut)o price may receive full or partial allotment and

bids below the cut)o price are re>ected.


30/37

ultiple 5rice "ased or 0rench 'uction

Uniform 5rice "ased or 6utch auction


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35/37

$)bills are issued at a discount and areredeemed at par. $he implicit yield in the $)bill is the rate at which the issue price

which is the cut)o price in the auction:has to be compounded, for the number ofdays to maturity, to e;ual the maturityvalue.

Oield, given price, is computed using theformula&

P 1==)5rice:Q4BF:E 5rice Q o of days to

maturity:


36/37

imilarly, price can be computed, givenyield, using the formula&

P 1==E1RyieldD Q o of days to

maturityE4BF::


37/37

A treasury bill maturing on 28-Jun-2002 is trading in the market on 3-

Jul-2001 at a price of Rs. 2.818.

!hat is the discount rate inherentin this price"

2. !hat is the price at #hich atreasury bill maturing on 23rd$arch 2002 #ould be %alued on July

13 2001 t i ld f ' 820()"

Documents

Call money market & T bills~1.PPT