Analysis of Indian Debt Market

THE PROJECT REPORT ON:

ANALYSIS OF INDIAN DEBT MARKET

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT (PGDBM)

APPROVED BY AICTE

SUBMITTED BY:

ROSEMIN VIRJI

PGDBM (FINANCE)

BATCH 2012‐2014

UNDER THE GUIDANCE OF:

PROF. JYOTSNA ARYA

N.L DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH “SHRISHTI”, SECTOR‐I, MIRA ROAD (E), MUMBAI‐401104`


TABLE OF CONTENTS

Sr.No Particulars Page No.

1 Executive Summary 5

2 Introduction to Debt Market 6

3 History Of Indian Debt Market 8

4 Participants Of The Market 11

5 Secondary Market For Debt Instruments 14

6 Indian Money Market 20

7 Instruments Of Money Market 25

8 Review Of Indian Money Market 37

9 Conclusion 44

10 Webliography 45

2 N.L. DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH


CERTIFICATE

This is to certify that Ms. Rosemin Virji, student of N.L. Dalmia Institute of Management Studies and Research, has successfully carried out the project titled ANALYSIS OF INDIAN DEBT MARKET”, under my supervision and guidance in the partial fulfillment of the requirements of Post graduate Diploma in Business Management (PGDBM) course, AICTE Approved, Batch 2012‐2014.

______________________ _______________________

Prof. Jyotsna Arya Prof. A.N. Khedkar

Project Guide Director

Date:

Place: Mumbai



ACKNOWLEDGEMENT

No Significant Achievement can be a solo performance, especially when it comes to preparing a project of this nature. My project bears the imprint of many people. I believe that if it were not for the invaluable support, guidance, time, confidence and encouragement of these people, this report would look much different than it does today.

With immense pleasure, I would like to express my deepest and sincere thanks to my Project Guide, Prof. Jyotsna Arya, for her active support, valuable time and advice, whole‐hearted guidance, sincere cooperation and pains‐taking involvement during the study and in completing the assignment of preparing the said project within the time stipulated. It was for her direction and assistance that were paramount in making this endeavor a successful one.

I take this opportunity to express my deepest gratitude to all the staff and faculty members of N.L Dalmia Institute without whose consistent support, co‐operation, guidance, encouragement and understanding, this project would never have been successfully completed.

I would also like to express my sincere gratitude towards Prof. A.N. Khedkar, Director of N.L Dalmia Institute of Management Studies and Research, for his support and motivation to do well throughout the course.

Lastly, I am thankful to all those, particularly the various friends , who have been instrumental in creating proper, healthy and conductive environment and including new and fresh innovative ideas during the project, their help, it would have been extremely difficult for us to prepare the project in a time bound framework.

Rosemin Virji

PGDBM Finance

Batch 2012-2014



EXECUTIVE SUMMARY

The seventh largest and second most populous country in the world, India has long been considered a country of unrealized potential. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation.

India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise.

India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. These include a free and vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations.

Today, India is one of the most exciting emerging money markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition.

The average turnover of the debt market in India is over Rs. 30,000 crores daily. This is more than 3 percents of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 percent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even fraction of the daily trading in developed markets.



INTRODUCTION TO DEBT MARKET

Debt instruments are contracts in which one party lends money to another on pre-determined terms with regard to rate of interest to be paid by the borrower to the lender, the periodicity of such interest payment, and the repayment of the principal amount borrowed (either in installments or in bullet). In the Indian securities markets, we generally use the term ‘bond’ for debt instruments issued by the Central and State governments and public sector organisations, and the term ‘debentures’ for instruments issued by private corporate sector.

The principal features of a bond are:

a) Maturity

b) Coupon

c) Principal

In the bond markets, the terms maturity and term-to-maturity, are used quite frequently. Maturity of a bond refers to the date on which the bond matures, or the date on which the borrower has agreed to repay (redeem) the principal amount to the lender. The borrowing is extinguished with redemption, and the bond ceases to exist after that date. Term to maturity, on the other hand, refers to the number of years remaining for the bond to mature. Term to maturity of a bond changes everyday, from the date of issue of the bond until its maturity.

Coupon Rate refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond) and the coupons are stated upfront either directly specifying the number (e.g.8%) or indirectly tying with a benchmark rate (e.g. MIBOR+0.5%). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of a bond.

Principal is the amount that has been borrowed, and is also called the par value or face value of the bond. The coupon is the product of the principal and the coupon rate. Typical face values in the bond market are Rs. 100 though there are bonds with face values of Rs. 1000 and Rs.100000 and above. All Government bonds have the face value of Rs.100. In many cases, the name of the bond itself conveys the key features of a bond. For example a GS CG2008 11.40% bond refers to a Central Government bond maturing in the year 2008, and paying a coupon of 11.40%. Since Central Government bonds have a face value of



Rs.100, and normally pay coupon semi-annually, this bond will pay Rs. 5.70 as six- monthly coupon, until maturity, when the bond will be redeemed.

The term to maturity of a bond can be calculated on any date, as the distance between such a date and the date of maturity. It is also called the term or the tenor of the bond. For instance, on February 17, 2004, the term to maturity of the bond maturing on May 23, 2008 will be 4.27 years. The general day count convention in bond market is 30/360 European which assumes total 360 days in a year and 30 days in a month.

There is no rigid classification of bonds on the basis of their term to maturity. Generally bonds with tenors of 1-5 years are called short-term bonds; bonds with tenors ranging from 4 to 10 years are medium term bonds and above 10 years are long term bonds. In India, the Central Government has issued up to 30 year bonds.



HISTORY OF INDIAN DEBT MARKET

Indian debt markets, in the early nineties, were characterised by controls on pricing of assets, segmentation of markets and barriers to entry, low levels of liquidity, limited number of players, near lack of transparency, and high transactions cost. Financial reforms have significantly changed the Indian debt markets for the better. Most debt instruments are now priced freely on the markets; trading mechanisms have been altered to provide for higher levels of transparency, higher liquidity, and lower transactions costs; new participants have entered the markets, broad basing the types of players in the markets; methods of security issuance, and innovation in the structure of instruments have taken place; and there has been a significant improvement in the dissemination of market information.

There are three main segments in the debt markets in India, viz., Government Securities, Public Sector Units (PSU) bonds, and corporate securities. The market for Government Securities comprises the Centre, State and State-sponsored securities. In the recent past, local bodies such as municipalities have also begun to tap the debt markets for funds. The PSU bonds are generally treated as surrogates of sovereign paper, sometimes due to explicit guarantee and often due to the comfort of public ownership. Some of the PSU bonds are tax free, while most bonds including government securities are not tax-free. The RBI also issues tax-free bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free bonds in the market. Corporate bond markets comprise of commercial paper and bonds. These bonds typically are structured to suit the requirements of investors and the issuing corporate, and include a variety of tailor- made features with respect to interest payments and redemption. The less dominant fourth segment comprises of short term paper issued by banks, mostly in the form of certificates of deposit.

The market for government securities is the oldest and most dominant in terms of market capitalisation, outstanding securities, trading volume and number of participants. It not only provides resources to the government for meeting its short term and long term needs, but also sets benchmark for pricing corporate paper of varying maturities and is used by RBI as an instrument of monetary policy. The instruments in this segment are fixed coupon bonds, commonly referred to as dated securities, treasury bills, floating rate bonds, zero coupon bonds and inflation index bonds. Both Central and State government securities comprise this segment of the debt market.

The issues by government sponsored institutions like, Development Financial Institutions, as well as the infrastructure-related bodies and the PSUs, who make regular forays into the market to raise medium-term funds, constitute the second segment of debt markets. The



gradual withdrawal of budgetary support to PSUs by the government since 1991 has compelled them to look at the bond market for mobilising resources. The preferred mode of issue has been private placement, barring an occasional public issue. Banks, financial institutions and other corporates have been the major subscribers to these issues. The tax-free bonds, which constitute over 50% of the outstanding PSU bonds, are quite popular with institutional players.

The market for corporate debt securities has been in vogue since early 1980s. Until 1992, interest rate on corporate bond issuance was regulated and was uniform across credit categories. In the initial years, corporate bonds were issued with “sweeteners” in the form of convertibility clause or equity warrants. Most corporate bonds were plain coupon paying bonds, though a few variations in the form of zero coupon securities, deep discount bonds and secured promissory notes were issued.

After the de-regulation of interest rates on corporate bonds in 1992, we have seen a variety of structures and instruments in the corporate bond markets, including securitized products, corporate bond strips, and a variety of floating rate instruments with floors and caps. In the recent years, there has been an increase in issuance of corporate bonds with embedded put and call options. The major part of the corporate debt is privately placed with tenors of 1-12 years.

Information on the size of the various segments of the debt market in India is not readily available. This is due to the fact that many debt instruments are privately placed and therefore not listed on markets. While the RBI regulates the issuance of government securities, corporate debt securities fall under the regulatory purview of SEBI. The periodic reports of issuers and investors are therefore sent to two different regulators. Therefore, aggregated data for the market as a whole is difficult to obtain. The NSE provides a trading platform for most debt instruments issued in India.

The debt markets also have a large segment which is a non-securitized, transactions based segment, where players are able to lend and borrow amongst themselves. These are typically short term segments and comprise of call and notice money markets, which is the most active segment in the debt markets, inter-bank market for term money, markets for inter-corporate loans and markets for ready forward deals (repos).



Market Compositon

No. ofIssue Size* (` in

millions) Increase /

Securities as As on 28 As on 31 As on 31 As onDecrease in

Last one Yearon

Feb28,2014Feb,2014 Jan,2014 Dec,2013

Feb.28, 2013

Type of Security (%)

Govt. Bonds 125 28307446 28510182 28510182 27811534 1.78

State Govt. Bonds 1605 10487075 10300157 10023025 8861250 18.35

Treasury Bills 52 3425756 3427776 3584352 3061868 11.88

State Enterprise Bonds 1071 3627491 3544219 3517690 2974691 21.95Financial Institutions /

Bank Bonds 967 3727673 3736852 3773450 3797974 (1.85)

Corporate Debt 2027 2911667 2924663 2883054 2572522 13.18Supra Institutional Bonds 0 0 5000 5000 5000 (100.00)

Local Bodies 19 30088 30088 30088 30178 (0.30)

Total 5866 52517196 52478937 52326841 49115017 6.93Source: NSE India

Market Capitalisation as on February 28, 2014

Security Type No. of Mkt Capitalisation % of TotalSecurities (Rs Mn.)

Govt Securities 125 27166192.33 52.98PSU Bonds 1071 3575809.70 6.97State Loans 1605 10533055.04 20.54Treasury Bills 52 3333382.68 6.50Local Bodies 19 30193.46 0.06Fin Inst. 498 1569780.42 3.06Bank Bonds 469 2144651.07 4.18Supranational Bonds 0 0 -Corporate Bonds 2027 2924319.66 5.70Total 5866 51277384.36 100.00

Source: NSE India



PARTICIPANTS OF THE MARKET

Debt markets are pre-dominantly wholesale markets, with dominant institutional investor participation. The investors in the debt markets concentrate in banks, financial institutions, mutual funds, provident funds, insurance companies and corporates. Many of these participants are also issuers of debt instruments. The smaller number of large players has resulted in the debt markets being fairly concentrated, and evolving into a wholesale negotiated dealings market. Most debt issues are privately placed or auctioned to the participants. Secondary market dealings are mostly done on telephone, through negotiations. In some segments such as the government securities market, market makers in the form of primary dealers have emerged, who enable a broader holding of treasury securities. Debt funds of the mutual fund industry, comprising of liquid funds, bond funds and gilt funds, represent a recent mode of intermediation of retail investments into the debt markets, apart from banks, insurance, provident funds and financial institutions, who have traditionally been major intermediaries of retail funds into debt market products.

The market participants in the debt market are:

1. Central Governments, raising money through bond issuances, to fund budgetary deficits and other short and long term funding requirements.

2. Reserve Bank of India, as investment banker to the government, raises funds for the government through bond and t-bill issues, and also participates in the market through open- market operations, in the course of conduct of monetary policy. The RBI regulates the bank rates and repo rates and uses these rates as tools of its monetary policy. Changes in these benchmark rates directly impact debt markets and all participants in the market.

3. Primary dealers, who are market intermediaries appointed by the Reserve Bank of India who underwrite and make market in government securities, and have access to the call markets and repo markets for funds.

4. State Governments, municipalities and local bodies, which issue securities in the debt markets to fund their developmental projects, as well as to finance their budgetary deficits.



5. Public sector units are large issuers of debt securities, for raising funds to meet the long term and working capital needs. These corporations are also investors in bonds issued in the debt markets.

6. Corporate treasuries issue short and long term paper to meet the financial requirements of the corporate sector. They are also investors in debt securities issued in the market.

7. Public sector financial institutions regularly access debt markets with bonds for funding their financing requirements and working capital needs. They also invest in bonds issued by other entities in the debt markets.

8. Banks are the largest investors in the debt markets, particularly the treasury bond and bill markets. They have a statutory requirement to hold a certain percentage of their deposits (currently the mandatory requirement is 25% of deposits) in approved securities (all government bonds qualify) to satisfy the statutory liquidity requirements. Banks are very large participants in the call money and overnight markets. They are arrangers of commercial paper issues of corporates. They are also active in the inter-bank term markets and repo markets for their short term funding requirements. Banks also issue CDs and bonds in the debt markets.

9. Mutual funds have emerged as another important player in the debt markets, owing primarily to the growing number of bond funds that have mobilised significant amounts from the investors. Most mutual funds also have specialised bond funds such as gilt funds and liquid funds. Mutual funds are not permitted to borrow funds, except for very short-term liquidity requirements. Therefore, they participate in the debt markets pre-dominantly as investors, and trade on their portfolios quite regularly.

10. Foreign Institutional Investors are permitted to invest in Dated Government Securities and Treasury Bills within certain specified limits.

11. Provident funds are large investors in the bond markets, as the prudential regulations governing the deployment of the funds they mobilise, mandate investments pre-dominantly in treasury and PSU bonds. They are, however, not very active traders in their portfolio, as they are not permitted to sell their holdings, unless they have a funding requirement that cannot be met through regular accruals and contributions.



12. Charitable Institutions, Trusts and Societies are also large investors in the debt markets. They are, however, governed by their rules and byelaws with respect to the kind of bonds they can buy and the manner in which they can trade on their debt portfolios.

Participants and Products in the Debt Market:

Issuer Instrument Maturity InvestorsCentral Dated 2-30years RBI, Banks, InsuranceGovernment Securities Companies, Provident

Funds, Mutual Funds,PDs, Individuals

Central T-Bills 91/182/364 RBI, Banks, InsuranceGovernment Days Companies, Provident

Funds, PDs, MutualFunds, Individuals

State Dated 5-13 years Banks, InsuranceGovernment Securities Companies, Provident

Funds, RBI, Mutual Funds,Individuals, PDs.

PSUs Bonds, 5-10 years Banks, InsuranceStructured Companies, Corporate,Obligations Provident Funds, Mutual

Funds, IndividualsCorporates Debentures 1-12 years Banks, Mutual Funds,

Corporates, IndividualsCorporates, Commercial 7 days to 1 Banks, Corporate,PDs paper Year Financial institutions,

Mutual Funds, Individuals,FIIs

Scheduled 7 days to 1 Banks, Corporations,Commercial Certificates Year Individuals, Companies,Banks of Deposit Trusts, Funds,Financial (CDs) 1 year to 3 Associations, FIs, NRIsInstitutions YearsScheduled Bank Bonds 1-10 years Corporations, IndividualCommercial Companies, Trusts,Banks Funds, Associations, FIs,

NRIsMunicipal Municipal 0-7 years Banks, Corporations,Corporation Bonds Individuals, Companies,

Trusts, Funds,Associations, FIs, NRIs



SECONDARY MARKET FOR DEBT INSTRUMENTS

The NSE- WDM segment provides the formal trading platform for trading of a wide range of debt securities. Initially, government securities, treasury bills and bonds issued by public sector undertakings (PSUs) were made available for trading. This range has been widened to include non-traditional instruments like, floating rate bonds, zero coupon bonds, index bonds, commercial papers, certificates of deposit, corporate debentures, state government loans, SLR and non-SLR bonds issued by financial institutions, units of mutual funds and securitized debt. The WDM trading system, known as NEAT (National Exchange for Automated Trading), is a fully automated screen based trading system that enables members across the country to trade simultaneously with enormous ease and efficiency. The trading system is an order driven system, which matches best buy and sell orders on a price/time priority.

Central Government securities and treasury bills are held as dematerialised entries in the Subsidiary General Ledger (SGL) of the RBI. In order to trade these securities, participants are required to have an account with the SGL and also a current account with the RBI. The settlement is on Delivery versus Payment (DvP) basis. The Public Debt Office which oversees the settlement of transactions through the SGL enables the transfer of securities from one participant to another. Since 1995, settlements are on delivery-versus-payment basis. However, after creation of Clearing Corporation of India, most of the institutional trades are being settled through CCIL with settlement guarantee. The settlement through CCIL is taking place on DvP-III where funds and securities are netted for settlement.

Government debt, which constitutes about three-fourth of the total outstanding debt, has the highest level of liquidity amongst the fixed income instruments in the secondary market. The share of dated securities in total turnover of government securities has been increasing over the years. Two-way quotes are available for active gilt securities from the primary dealers. Though many trades in gilts take place through telephone, a larger chunk of trades gets routed through NSE brokers.

The instrument-wise turnover for securities listed on the NSE-WDM is shown in Table 2.3. It is observed that the market is dominated by dated government securities (including state development loan).



Security wise Traded Value:

Government securities share in the total market activity in the secondary market increased to 42.11% compared to 36.10% in the previous month. The share of the Treasury Bills in February 2014 increased to 43.57% from 39.75%in January2014. Institutional Bonds, Public Sector Bonds and Corporate Bonds & Bank Bonds formed 3.75%, 5.73 %, 4.74% and 0.10% of the total share of the market activity respectively. The breakup of various types of securities, in the traded value for the month of February 2014 is given in Graph-3 below:

Securities Feb 2014 Jan-2014 Dec-2013 2013-14* 2012-13Central Govt Securities 235770.02 255654.37 212253.73 3098488.35 4007922.19State Govt Securities 16224.09 29671.02 17184.01 272104.88 171349.18Treasury Bills 260776.65 314184.38 308992.68 2617901.25 1799018.12PSU Bonds 34300.00 71802.00 40074.75 870564.00 721425.65Institutional Bonds 22450.00 48188.00 24117.00 582880.00 557274.20Bank Bonds 590.00 292.00 65.00 31144.00 23609.00Corporates 28369.50 70557.50 22202.80 580724.10 641539.30

Others- - -

- -Total 598480.26 790349.27 624889.97 8053806.58 7922137.64

Source: NSE India



Retail Debt Market

With a view to encouraging wider participation of all classes of investors across the country (including retail investors) ni government securities, the Government, RBI and SEBI have introduced trading in government securities for retail investors. Trading in this retail debt market segment (RDM) on NSE has been introduced w.e.f. January 16, 2003.

Trading in Retail Debt Market is permitted under Rolling Settlement, where in each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. Settlement is on a T+2 basis. National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed in Retail Debt Market.

Negotiated Dealing System

The first step towards electronic bond trading in India was the introduction of the RBIs Negotiated Dealing System in February 2002.

NDS, interalia, facilitates screen based negotiated dealing for secondary market transactions in government securities and money market instruments, online reporting of transactions in the instruments available on the NDS and dissemination of trade information to the market. Government Securities (including T-bills), call money, notice/term money, repos in eligible securities are available for negotiated dealing through NDS among the members. NDS members concluding deals, in the telephone market in instruments available on NDS, are required to report the deal on NDS system within 15 minutes of concluding the deal. NDS interfaces with CCIL for settlement of government securities transactions for both outright and repo trades done/reported by NDS members. Other instruments viz, call money, notice/term money, commercial paper and certificate of deposits settle as per existing settlement procedure.

With the objective of creating a broad-based and transparent market in government securities and thereby enhancing liquidity in the system, the NDS was designed to provide:

• Electronic bidding in primary market auctions (T-Bills, dated securities, state government securities) by members,

• Electronic bidding for OMO of RBI including repo auctions under LAF,



• Screen based negotiated dealing system for secondary market operations,

• Reporting of deals in government securities done among NDS members outside the system (over telephone or using brokers of exchanges) for settlement,

• Dissemination of trade information to NDS members,

• Countrywide access of NDS through INFINET,

• Electronic connectivity for settlement of trades in secondary market both for outright and repos either through CCIL or directly through RBI, and Creation and maintenance of basic data of instruments and members.

The functional scope of the NDS relating to trading includes:

• giving/receiving a Quote,

• placing a call and negotiation (with or without a reference to the quote),

• entering the deals successfully negotiated,

• setting up preferred counterparty list and exposure limits to the counterparties,

• dissemination of on-line market information such as the last traded prices of securities, volume of transactions, yield curve and information on live quotes,

• interface with Securities Settlement System for facilitating settlement of deals done in government securities and treasury bills.

• facility for reporting on trades executed through the exchanges for information dissemination and settlement in addition to deals done through NDS.

The system is designed to maintain anonymity of buyers and sellers from the market but only the vital information of a transaction viz., ISIN of the security, nome nclature, amount (face value), price/rate and/ or indicative yield, in case applicable, are disseminated to the market, through Market and Trade Watch.

The benefits of NDS include:

• Transparency of trades in money and government securities market,

• Electronic connectivity with securities settlement systems, thus, eliminating submission of physical SGL form,



• Settlement through electronic SGL transfer,

• Elimination of errors and discrepancies and delay inherent in manual processing system,

• Electronic audit trail for better monitoring and control.

NDS-OM

NDS was intended to be used principally for bidding in the primary auctions of G-secs conducted by RBI, and for trading and reporting of secondary market transactions. However, because of several technic al problems and system inefficiencies, NDS was being used as a reporting platform for secondary market transactions and not as a dealing system. For actual transactions, its role was limited to placing bids in primary market auctions. Much of secondary market in the bond market continued to be broker intermediated.

It was therefore, decided to introduce a screen-based (i.e electronic) anonymous order matching system, integrated with NDS. This system (NDS-OM) has become operational with effect from August 1, 2005.

NDS-OM is an electronic, screen based, anonymous order driven trading system introduced by RBI as part of the existing NDS system to facilitate electronic dealing in government securities. It is accessible to members through RBIs INFINET Network. The system facilitates price discovery, liquidity, increased operational efficiency and transparency. The NDS-OM System supports trading in all Central Government Dated Securities and State Government securities in T+1 settlement type. Since August 1, 2006 the system was enhanced to facilitate trading in Treasury Bills and When Issued transaction in a security authorized for issuance but not as yet actually issued. All ‘WI’ transactions are on an ‘if’ basis, to be settled if and when the actual security is issued. Further, RBI has permitted the execution of intra-day short sale transaction and the covering of the short position in government securities can be done both on and outside the NDS-OM platform i.e. through telephone market.

The order system is purely order driven with all bids/offers being matched based on price/time priority for securities traded on price terms and yield/time priority for securities traded on yield, ensuring transparency and fairness to all users. This ensures a level playing field for all participants. The trader gets the best bid/offer in the system. It then tries to match the sale orders with the purchase orders available on the system. When a match occurs, the



trade is confirmed. The counterparties are not aware of each others identities- hence the anonymous nature of the system.

While initially only banks and primary dealers could trade on it, NDS-OM has been gradually expanded to cover other institutional players like insurance companies, mutual funds, etc. Further, NDS-OM has been extended to cover all entities required by law or regulation to invest in Government securities such as deposit taking NBFCs, Provident Funds, Pension Funds, Mutual Funds, Insurance Companies, Cooperative Banks, Regional Rural Banks, Trusts, etc.

The NDS-OM has several advantages over the erstwhile telephone based market. It is faster, transparent, cheaper and provides benefits to its users like straight through processing, audits trails for transactions. Straight through processing (STP) of transactions means that, for participants using CCILs clearing and settlement system, once a deal has been struck on NDS-OM, no further human intervention is necessary right upto settlement, thus eliminating possibilities human errors. The trades agreed on this system flow directly to CCIL for settlement.



INDIAN MONEY MARKET

The average turnover of the money market in India is over Rs 40,000 crore daily. This is more than 3 per cent of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 per cent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.

PARTICIPANTS IN THE MONEY MARKET:

The major participants who supply the funds and demand the same in the money market are as follows:

i) Reserve Bank of India: Reserve Bank of India is the regulator over the money market in India. As the Central Bank, it injects liquidity in the banking system, when it is deficient and contracts the same in opposite situation.

ii) Primary Dealers: There are number of primary dealers in India like Morgan Stanley, Nomura etc.

iii) Banks: Commercial Banks and the Co-operative Banks are the major participants in the Indian money market. They mobilise the savings of the people through acceptance of deposits and lend it to business houses for their short term working capital requirements. While a portion of these deposits is invested in medium and long-term Government securities and corporate shares and bonds, they provide short-term funds to the Government by investing in the Treasury Bills. They employ the short-term surpluses in various money market instruments.

iv) Discount and Finance House of India Ltd. (DFHI): DFHI deals both ways in the money market instruments. Hence, it has helped in the growth of secondary market, as well as those of the money market instruments.



v) Financial and Investment Institutions: These institutions (e.g. LIC, UTI, GIC, Development Banks, etc.) have been allowed to participate in the call money market as lenders only.

vi) Corporate: Companies create demand for funds from the banking system. They raise short-term funds directly from the money market by issuing commercial paper. Moreover, they accept public deposits and also indulge in interoperate deposits and investments.

vii) Mutual Funds: Mutual funds also invest their surplus funds in various money market instruments for short periods. They are also permitted to participate in the Call Money Market. Money Market Mutual Funds have been set up specifically for the purpose of mobilisation of short-term funds for investment in money market instruments.



FEATURES OF MONEY MAKET

It is a market purely for short-terms funds or financial assets called near money.

It is not a single market but a collection of markets for several instruments.

It is wholesale market of short term debt instruments.

It deals with financial assets having a maturity period less than one year only.

Money Market transaction cannot take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

Transactions have to be conducted without the help of brokers.

The participants of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

The main players are: Reserve bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies.

It is a need based market wherein the demand and supply of money shape the market.



FUNCTIONS OF MONEY MARKET

A money market is generally expected to perform following broad functions:

To provide a parking place to employ short term surplus funds.

To provide room for overcoming short term deficits.

To provide a balancing mechanism to even out the demand for and supply of short term funds

To Provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy

To provide reasonable access to suppliers and users of short term funds to fulfil their borrowings and investment requirements at an efficient market clearing price.

Besides the above functions, a well functioning money market facilitates the development of a market for longer term securities. The interest rates for extremely short term use of money serve as a benchmark for longer term financial instruments.



BENEFITS OF EFFICIENT MONEY MARKET

An efficient money market benefits a number of players. It provides a stable source of funds to banks in addition to deposits allowing alternative financing structures and competition. It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity structure of their assets and liabilities.

A developed inter-bank market provides the basis for growth and liquidity in the money including the secondary market for commercial paper and treasury bills.

An efficient money market encourages the development of non-bank intermediaries by increasing the competition for funds. Savers get a wide array of savings instruments to choose from and invest their savings.

A liquid money market provides an effective source of long term finance to borrowers. Large borrowers can lower the cost of raising funds and manage short term funding or surplus efficiently.

A liquid and vibrant money market is necessary for the development of a capital market, foreign exchange market, and market in derivative instruments. The money market supports the long term debt market by increasing the liquidity of securities. The existence of an efficient money market is a precondition for the development of a government securities market and a forward foreign exchange market.

Trading in forwards, swaps, and futures is also supported by a liquid money market as the certainty of prompt cash settlement is essential for such transactions. The government can achieve better pricing on its debt as it provides access to a wide range of buyers. It facilitates the government market borrowing.

Monetary control through indirect methods (repos and open market operations) is more effective if the money market is liquid. In such a market response to the central bank’s policy actions are both faster and less subject to distortion.



INSTRUMENTS OF MONEY MARKET

A variety of instruments are available in a developed money market. In India till 1986, only a few instruments were available. They were:

Treasury bills

Money at call and short notice in the call loan market.

Commercial bills, promissory notes in the bill market.

Now, in addition to the above the following new instruments are available:

Commercial papers.

Certificate of deposit.

Inter-bank participation certificates.

Repo instrument

Bankers Acceptance

Repurchase agreement

Money Market mutual fund



TREASURY BILL

A Treasury Bill is an instrument for short-term borrowing by the Government of India. It is issued by the Reserve Bank of India on behalf of the Government of India in the form of a promissory note. The necessity for issuing treasury bills arises because of the periodic nature of receipts of Government while the Government expenditure is on a continuing basis. Taxes are payable to the Government after quarterly intervals or so, but Government has to meet its expenditure on daily or monthly basis. Thus, to bridge this miss-match between the timings of Government receipts and expenditure, Government borrows money on short-term basis by issuing Treasury Bills. The Treasury Bills are issued for different maturity periods. Till May 14, 2001, the maturity periods were 14 days, 91 days, 182 days and 365 days. But with effect from May 14, 2001 auctions of 14 days and 182 days Treasury Bills have been discontinued.

The Treasury Bills are sold through auctions. While auctions of 91 days Treasury Bills take place on a weekly basis, the auctions for 364, days Treasury Bills are held on a fortnightly basis. The Reserve Bank of India also notifies the amounts in respect of the Treasury bill auctions. The notified amounts for 14 days, 91 days Treasury Bills auctions are Rs. 100 crores each. The notified amount for 364 day Treasury Bills was raised from Rs. 500 crores to Rs. 750 crores during 2000-01 and has been further raised to Rs. 1000 crores for auctions to be held during 2002-03. Out of the bids received by it, the Reserve Bank of India accepts bids upto the notified amount after determining its cut-off rate. The bids may be accepted for a lower amount also. In such cases, the rest of the amount,(i.e. unsubscribe amount) devolves on the Reserve Bank of India. On the basis of the cut-off price, a yield on the Treasury bill is calculated.

T-bills are traded electronically as well as telephonically and have T+1 settlement. T-bill yields largely depend on liquidity and expected RBI policy rates. Rates tend to move up when overnight rates are high due to tight liquidity conditions. Rates tend to move down when overnight rates are low due to easy liquidity conditions. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of its tenure at Rs. 100.00. Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.

Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par.



PARTICIPANTS IN THE T-BILLS MARKET

The Reserve Bank of India, mutual funds, financial institutions, primary dealers, satellite dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all participants in the Treasury bill market. The sale government can invest their surplus funds as non-competitive bidders in T-bills of all maturities.

Treasury bills are pre-dominantly held by banks. In the recent years, there has been a growth in the number of non-competitive bids, resulting in significant holding of T- bills by provident funds, trusts and mutual funds

GOVERNMENT OF INDIA : TREASURY BILLS OUTSTANDING (FACE VALUE)

(Rs in Billion)As on March 21, 2014 Major Holders Total

Banks Primary Dealers State Govts.1 2 3 4

14-day – – 1,231.5 1,240.291-day 269.4 315.5 481.2 1,333.5182-day 226.3 276.4 6.8 685.7364-day 298.9 522.6 6.9 1,367.1CMB – – – –Source: RBI



CERTIFICATE OF DEPOSITS

Certificate of deposit is unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions.

The scheme of certificates of Deposits (CDs) was introduced by RBI as a step towards deregulation of interest rates on deposits. Under this scheme, any scheduled commercial banks, co-operative banks excluding land development banks, can issue certificate of deposits for a period of not less than three months and upto a period of not more than one year. The financial institutions specifically authorised by the RBI can issue certificate of deposits for a period not below one year and not above 3 years duration. Certificate of deposits, can be issued within the period prescribed for any maturity.

Certificates of Deposits (CDs) are short-term borrowings by banks. Certificates of deposits differ from term deposit because they involve the creation of paper, and hence have the facility for transfer and multiple ownerships before maturity. Certificate of deposits rates are usually higher than the term deposit rates, due to the low transactions costs. Banks use the certificates of deposits for borrowing during a credit pick-up, to the extent of shortage in incremental deposits. Most certificates of deposits are held until maturity, and there is limited secondary market activity.

Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of certificate of deposits are presently governed by various directives issued by the Reserve Bank of India.



Eligibility for Issue of Certificate of Deposits:

Certificate of deposits can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short -term resources within the umbrella limit fixed by RBI.

Banks have the freedom to issue certificate of deposits depending on their requirements. An FI may issue certificate of deposits within the overall umbrella limit fixed by RBI, i.e., issue of certificate of deposits 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.

Denomination For Certificate Of Deposits:

Minimum amount of a certificate of deposits 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. Certificate of deposits can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to certificate of deposits, but only on non-repatriable basis which should be clearly stated on the Certificate. Such certificate of deposits cannot be endorsed to another NRI in the secondary market.

Maturity:

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

Discount on Issue of Certificate Of Deposits:

Certificate of deposits may be issued at a discount on face value. Banks/FIs are also allowed to issue certificate of deposits on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market -based. The issuing bank/FI is free to determine the discount/coupon rate. The interest rate on floating rate certificate of deposits



would have to be reset periodically in accordance with a pre -determined formula that indicates the spread over a transparent benchmark.

Reserve Requirement and Transferability:

Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the certificate of deposits. Physical certificate of deposits are freely transferable by endorsement and delivery.

Dematted certificate of deposits can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the certificate of deposits. Banks/FIs cannot grant loans against certificate of deposits. Furthermore, they cannot buy- back their own certificate of deposits before maturity.

COMMERCIAL PAPERS

Commercial Paper is a short-term usance promissory note with fixed maturity, issued by creditworthy and highly rated corporations. It is negotiable by endorsement and delivery. Commercial Paper: Large, well established companies sometimes borrow on a short term through commercial paper and other money instruments. Commercial paper represents an unsecured, short-term, negotiable promissory note sold in the money market. Because these notes are a money market instrument, only the most creditworthy companies are able to use commercial paper as a source of short term financing.

The commercial paper market is composed of two parts: the dealer market and the direct placement market Industrial firms, utilities and medium sized finance companies sell commercial paper through dealers. The dealer organization is composed of a half-dozen major dealers who purchase commercial paper from the issuer and, in turn, sell it to investors. The typical commission a dealer earns is in % and maturities on dealer placed paper generally range from 30 to 90 days. The market is highly organized and sophisticated; paper is generally sold in minimum denominations of 5 lacs. Although the dealer market has been characterized in the past by the significant number of issuers who borrowed on a seasonal basis, the trend is definitely toward financing on revolving or more permanent basis.



The Reserve Bank of India permitted its introduction in January 1990 as an additional source of short-term finance to corporate and also as an avenue for investment of funds by large investors.

RESERVE BANK OF INDIA HAS ISSUED GUIDELINES FOR ISSUANCE OF COMMERCIAL PAPER.

The summary of RBI guidelines for issue of Commercial paper is given below:

Corporate, primary dealers, satellite dealers and all India financial institutions are permitted to raise short term finance through issue of commercial paper, which should be within the umbrella limit fixed by RBI.

A corporate can issue Commercial Paper if:

Its tangible net worth is not less than Rs.5 crores as per latest balance sheet.

Working capital limit is obtained from banks/ all India financial institutions,

And its borrowal account is classified as standard asset by banks/ all India financial institutions.

Credit rating should be obtained by all eligible participants in cp issue from the specified credit rating agencies like CRISIL, ICRA, CARE, and FITCH. The minimum rating shall be equivalent to P-2 of CRISIL.

Commercial paper can be issued for maturities between a minimum of 15 days and a maximum of upto one year from the date of issue.

The maturity date of commercial paper should not exceed the date beyond the date upto which credit rating is valid.

It can be issued in denomination of Rs. 5 lakhs or in multiples thereof.



Amount invested by a single investor should not be less than Rs. 5 lakhs (face value).

A company can issue commercial paper to an aggregate amount within the limit approved by board of directors or limit specified by credit rating agency, whichever is lower.

Banks and financial institutions have the flexibility to fix working capital limits duly taking into account the resource pattern of company’s financing including commercial papers.

The total amount of commercial paper proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.

Commercial paper may be issued on a single date or in parts on different dated provided that in the latter case, each commercial paper shall have the same maturity date.

Every commercial paper should be reported to RBI through issuing and paying agent (IPA).Only a scheduled bank can act as an IPA.

Commercial paper can be subscribed by individuals, banking companies, corporate, NRIs and FIIs.

It can be issued either in the form of a promissory note or in a dematerialised form.

It will be issued at a discount to face value as may be determined by the issuer.

Issue of commercial paper should not be underwritten or co-accepted.

The initial investor in commercial paper shall pay the discounted value of the commercial paper by means of a crossed account payee cheque to the account of the issuer through IPA.



On maturity, if commercial paper is held in physical form, the holder of commercial paper shall present the investment for payment to the issuer through IPA.

When the commercial paper is held in demat form, the holder of commercial paper will have to get it redeemed through depository and received payment from the IPA.

Commercial paper is issued as a ‘stand alone’ product. It would not be obligatory for banks and financial institutions to provide stand-by facility to issuers of commercial paper.

Every issue of commercial paper, including renewal, should be treated as a fresh issue.

REPURCHASE AGREEMENTS

It is a method of borrowing against certain securities for a short period. The borrower undertakes a commitment to purchase back (or to take back) the same securities after the specified period at a pre-determined price. The difference between the two prices is treated as interest on to amount borrowed.

Repo is a form of overnight borrowing and is used by those who deal in government securities.

They are usually very short term repurchases agreement, from overnight to 30 days of more.

The short term maturity and government backing usually mean that Repos provide lenders with extremely low risk.

Repos are safe collateral for loans.



BANKERS ACCEPTANCE

A banker's acceptance, or BA, is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker's acceptance specifies the amount of money, the date, and the person to which the payment is due. After acceptance, the draft becomes an unconditional liability of the bank. But the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit.

A banker's acceptance starts as a time draft drawn on a bank deposit by a bank's customer to pay money at a future date, typically within six months, analogous to a post-dated check. Next, the bank accepts (guarantees) payment to the holder of the draft, analogous to a post-dated check drawn on a deposit with over-draft protection.

The party that holds the banker's acceptance may wait the acceptance until it matures, and thereby allow the bank to make the promised payment, or it may sell the acceptance at a discount today to any party willing to wait for the face value payment of the deposit on the maturity date. The rates, at which they trade, calculated from the discount prices relative to their face values, are called banker's acceptance rates.

COMMERCIAL BILLS OF EXCHANGE

Commercial Bills of Exchange arise out of genuine trade transactions and are drawn by the seller of the goods on the buyers (i.e. debtors), where goods are sold on credit. They are called 'Demand Bills', when payable on demand or on presentment before the buyer, who is called the 'drawee' of the bill. Alternatively, the bills may be payable after a specified period of time, e.g. 30, 60 or 90 days. Such bills ' are called 'Usance Bills and need acceptance by the drawee. By accepting the bills, the drawee gives his consent to make payment of the bills on the due date. Thus, payment of the bills is assured on the dates of maturity. These bills are, therefore, called self-liquidating in nature.

The drawee or the bill (i.e. the seller of the goods) generally discounts the bill with a commercial bank. By discounting is meant that the bill is endorsed in favour of the banker, who makes payment of the amount of the bill less discount (interest on the amount for the period of the bill) to the drawee. Thus, the drawee gets payment of the bill (less discount)



immediately. The discounting banker, however, recovers the money from the acceptor of the bill on the due date of the bill. The bill is thereafter extinguished.

Commercial bill of exchange is a negotiable instrument i.e. it may be negotiated (or endorsed transferred) any number of times till its maturity. When the discounting bank falls short of liquidity, it may negotiate the bill in favour of any other bank/financial institution or the Reserve Bank of India and may receive payment of the bill less re-discounting charges (i.e. interest for the unexpired period of the bill). This process is called re-discounting of Commercial Bills and may be undertaken several times, till the date of maturity of the bill.

The Reserve Bank of India introduced a Bills Re-discounting Scheme in 1970. Under this scheme bills are re-discounted by Reserve Bank of India or by any scheduled bank/financial institution/investment institution/mutual fund. But important pre-conditions are that the bill should arise out of a genuine trade transaction, must be accepted by the buyer's banker either singly or jointly with him and the period of maturity should not exceed 90 days.

Commercial bill of exchange, thus, is an instrument through which the banks/financial institutions/mutual funds may park their surplus funds for a shorter period as they can afford. Thus liquidity imbalances in the financial system are 8 removed or minimised. Reserve Bank of India has taken several steps in the past, but the practice of drawing bills has not become very popular in India. The obvious reason is the strict discipline that it imposes on the acceptor of the bill to make payment of the bill on the due date. Bills purchased and discounted by Scheduled Commercial Banks in India as on March 31, 2001 constituted just 3.88% of their total assets (i.e. Rs. 50224 crores). Rut the outstanding amount of commercial bills re-discounted by them with various financial institutions was Rs. 1013 crores as on the same date. This shows that bills re-discounting with other financial institutions is to a limited extent only.



MONEY MARKET MUTUAL FUNDS

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short- term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc.

Money market mutual funds (mmmfs) were introduced in April 1991 to provide an additional short-term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments. Money market mutual funds bridge the gap between small investors and the money market. It mobilizes saving from small investors and invests them in short-term debt instruments or money market instruments.

There are various investment avenues available to an investor such as real estate, bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of Investment avenue available to investors. There are many reasons why investors prefer mutual funds. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investor’s portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio. It is also less expensive to invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy only a few stocks and not get the desired diversification. These are some of the reasons why mutual funds have gained in popularity over the years.



REVIEW OF INDIAN MONEY MARKET

The weighted average rates in the money market did not change much as compared to the previous month. The maximum rise of 9 bps, was noticed in the Repo segment during February 2014, followed by the 8 bps higher weighted average rates in the CBLO market and 6 bps in the Call segment. First half of the month witnessed short term rates heading towards the MSF rate following liquidity tightness in the system. However, weighted average rates cooled down to near-8.00% mark towards the end of the month following easy liquidity conditions in the banking system. As far as trading volumes are concerned, all the money market segments experienced decline with highest decrease witnessed in the Call market (- 31.78%), trailed by the CBLO (-19.88%) and the Repo (-17.45%). The subsequent tables give the comparative weighted average rates over a period of time and the comparative statistics of volume and rates across the different sub-groups of the money market.

Comparative Weighted Average Money Market Rates (%)

Feb-14 Jan-14 3 months ago 6 months ago Year agoCALL 8.26 8.20 8.50 9.93 7.81REPO 8.32 8.23 8.56 9.93 7.83CBLO 8.20 8.12 8.42 9.77 7.63Source: CCIL

Liquidity Adjustment Facility

Overall, cash conditions in the system improved smartly m-o-m during February 2014 with the total liquidity absorption by the RBI through LAF Reverse Repo auctions increasing by 57% to 53,963 crore. Average volume jumped by 92% to 2,998 crore from 1,562 crore during January 2014. On the contrary, total as well as average borrowing by the banks via RBI's LAF Repo window decreased by 29% ( 563,803 crore) and 13% ( 31,322 crore) respectively. One of the reasons observed for the comfortable cash position is the conduct of repo auctions of various tenors by the RBI. During February 2014, RBI injected 1,462,182 crore into the system-45% higher than the liquidity support worth 1,008,115 crore during January 2014. In order to address the anticipated tightening in liquidity conditions on account of advance tax payments by corporate commencing mid-March 2014 and with a view to providing flexibility to the banking system in its liquidity management towards March-end 2014, the RBI has decided to conduct term repo auctions of appropriate amount and tenor during March 2014.



The total as well as average liquidity support in the form of MSF increased by 5% and 28% to 112,496 crore and 6,250 crore respectively in February 2014.

Government Securities Market

Primary Market

During the month under review, RBI auctioned 3 government securities for 10,000 crore, 23 SDLs for 18,692 crore and treasury bills worth 68,582 crore. There wasn't any liquidity support from the RBI through OMOs and it did not conduct any auctions of CMBs. Finance Minister, in Interim Budget 2014-15 pegged the gross borrowing at 5.97 lakh crore, lower-than-market-expectations of 6-6.4 lakh crore. For the current financial year, the gross borrowing was 5.63 lakh crore. On a net basis, the borrowing for 2014-15 would be 4.57 lakh crore, marginally lower than the current year's 4.68 lakh crore.

The following tables provide the details of the auctions of government securities, SDLs and treasury bills along with its average cut-off yields over a period of time.

Dated G-Sec Auction/Issue

Date of Issue/Auction Paper Amount (in Crore)

Cut-off Price Yield (%)

07-Feb-14 8.12% G.S. 2020 3000 95.46 9.020507-Feb-14 8.83% G.S. 2023 5000 100.65 8.726407-Feb-14 8.32% G.S. 2032 2000 92.70 9.1454Source: CCIL



Secondary Market

Trading activity in the secondary market for the government securities remained muted during the month under consideration. Number of trades and trading volume, both, declined by 36%. In absolute terms, number of trades and volume stood at 55,418 and 5,47,753 crore respectively during February 2014. Similarly, security settlement through CCIL also weakened during the month. CCIL settled total volume of 5 61,083 crore during February 2014 vis-à-vis 8 43,578 crore in January 2014 a fall of 33%. On an average, settlement stood at 31,171 crore against 38,344 during the previous month. As, RBI neared the end of the current fiscal's market borrowing programme and as only once G-Sec auction took place during February, total trades transacted in the When Issued market stood at merely 14 with the volume of 75 crore of 8.83% G.S. 2023.

Yield Movement

The average 10-year G-Sec yields hardened, though marginally (by 5 bps) to 8.78% and moved between 8.89% and 8.68% during the month. Anticipation of lower wholesale as well as retail inflation, improvement in the rupee, RBI revealing details of the debt switch and optimism that demand for the existing debt will increase as the government annual borrowing programme draws to a close, pulled 10-year benchmark yields from 8.75% (February 03) to 8.70% (February 10). Reverting from the trend, yields scaled to 8.84% by midmonth ahead of the Interim Budget and the announcement of the government borrowing for the next fiscal. Benchmark yields hovered between 8.77% - 8.80% till February 21 on the RBI's announcement that it would inject liquidity through term repos in March as well. Towards the end of the month, market sentiments turned cautious once again, leading yields to harden to 8.89% in expectation of liquidity tightening incoming days because of the advance tax outflows due by mid-March.



Yields on different tenure bonds (%)

Source: Economist, March 01, 2014

$$- 5-year yield

Yields on the short-term instruments across countries such as Brazil and India increased by 10bps and 86bps respectively. Short term yields for other countries such as USA (1bp), China (6bps), Euro Zone (1bp) and Greece (1bp)registered a marginal decline.

Yields on long-term instruments for USA (1bp), Japan (5bps), China (20bps), Euro Zone (2bps) Brazil (90bps) and Greece (150bps)declined during the month. However, yields in case of countries such as India (14bps), and Russia (18bps) witnessed an upward trend.

T-Bills Market

An aggregate of Rs. 52,000 crore of T-bills were raised in the month of February'14 as per the auction calendar. Yields on the 91-day T-bills moved 17bps upwards between the first and fourth auction of the month and settled at 9.15%. Yields on 182-day T-bills settled at 9.10%, 2bps higher than the first auction of the month while those of364- day T-bills at 9.00%, 3bps lower from the first auction.

As per the T-bills auction calendar for H2FY14, Rs. 56,000 crore of T-bills is scheduled to be auctioned in March'14 (Rs. 32,000 crore of 91-days, Rs. 12,000 crore of 180-days and Rs. 12,000 crore of 364-days T-bills).



Corporate Debt Market

14 corporates, issued debt instruments in the month of February'14 to the tune of Rs. 3,480.49 crore. Table 4 provides a record of some of these issues.

Debt Issues during 1st Feb - 28th Feb'14

Source: CARE



AAA Spreads

Corporate bond spreads over G-secs across various maturities settled lower in the month of February'14 barring 1-year, 2-year, 3-year and 4-year maturity papers. The sharpest decline of 35bps between spreads in January'14 and February'14 was recorded in the long term paper with the maturity of 7-years followed by 6-year (29bps) and 5-year (16bps) maturity papers. The highest increase of 25 bps was recorded by the 3-year maturity paper followed by 2-year (14bps) and 1-year (4bps) maturity papers.

Latest data on trade in corporate bonds suggests that Rs. 56,882.61 crore of corporate bond trades were settled in the month of December'13 through 4,905 transactions, registering an increase of 10.5% in corporate bond trades when compared with November'13..

Corporate Bonds- Confidence Index

The Barron's Confidence Index settled marginally higher at 72.3as on 21st February'14, when compared with 72.0 as on 31st January'14. This index is a ratio of the average yield- to-maturity of the best grade bonds list compared to the average yield-to-maturity of the intermediate grade bond list. The ratio is higher and the bond yield spread narrower as the confidence index rises when investors are confident about the market.



FIIs and Mutual Funds in Debt Market

Foreign investors poured approximately $1,825mn into the Indian debt market in the month of February'14 compared to a net investment of $2,061 in the preceding month. This continued positive inflow into the debt market has been on account of the stability observed in foreign exchange and interest rates.

Mutual funds registered a decline in February'14 by Rs. 1,326 crore amounting to a net investment position of Rs. 44,089 crore. Absence of fresh investments into mutual funds and selling of the funds by investors in order to recover their costs have led to decline in the overall mutual funds investments.

Net Investments in the Debt Market

Feb 2014 Jan 2014FIIs (US $ mn) 1825 2061Mutual Funds (Rs. Crore) 44089 45415Source: SEBI



CONCLUSION

The Debt Market is set to grow tremendously in India with the broadening of the market participation and the availability of a wide range of debt securities for retail trading through the Exchanges.

The following are the trends, which will impact the Retail Debt Market in India in the near future:

Expansion of the Retail Trading platform to enable trading in a wide range of government and non-government debt securities

Introduction of new instruments like STRIPS, G-Secs. with call and put options, securitised paper etc.

Development of the secondary market in Corporate Debt

Introduction of Interest Rate Derivatives based on a wide range of underlying in the Indian Debt and Money Markets.

Development of the Secondary Repo Markets.

The vision for the Indian Debt Market foresees the markets growing in leaps and bounds in the near future, soon attaining global standards of safety, efficiency and transparency. This will truly help the Indian capital markets to attain a place of pride among the leading capital markets of the world.



WEBLIOGRAPHY

www.rbi.org.in

www.ccilindia.com

www.fimmda.org

www.nseindia.com

www.bseindia.com

www.sebi.gov.in

www.careratings.com


http://www.careratings.com/

http://www.sebi.gov.in/

http://www.bseindia.com/

http://www.nseindia.com/

http://www.fimmda.org/

http://www.ccilindia.com/

http://www.rbi.org.in/

Analysis of Indian Debt Market

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