Indian Treasury Markets

8/3/2019 Indian Treasury Markets

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Indian Treasury Markets

Indian Markets and Instruments -Basics

Course Coordinators :-

Mr. Jitendra Mehta, Senior AssociateMr. Sachin Chiramel, Research Analyst


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Introduction to Indian

Treasury MarketsGov ernment Securities

Central Government Securities (G-sec) / StateDevelopment Loans(SDL)

C o rp o rate Debt

P SU Bonds / Corporate Debt / Bonds of FIs & banksMo ney Market

Call Money / Term Money / Repo & Reverse RepoCBLOTreasury BillsCommercial P aper / Certificate of DepositsInter corporate deposits / Bill Discounting


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Introduction to Indian

Treasury MarketsFX Markets

SpotForwards

SwapsInterest Rate Swaps / FRAsCross Currency Swaps

C urrency Opti o ns


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G overnment Securities /T-Bills / SDL


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GOI Securities

Liabilities of GOI issued in the nature of Bonds

Issued to finance budget deficits of GOI

Available in both SGL & P hysical form

RBI acts the Investment Banker , Custodian, Registrar andmarket regulator P rimarily, wholesale in nature

Active trading & investment avenue for Banks, P Ds, FIs,

Insurance Cos., P Fs, MFs, etc


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GOI Securities

Treasury Bills - Issued by GOI91 D , 182 D and 364 D TBillsZero coupon securities issued as discount instruments, withmaturity < 1 year

Dated Securities - Issued by GOIBonds which include both coupon bearing and zero couponInitial maturity > 1 year

State Govt Loans - Bonds issued by State Govts.


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GOI Securities

Auctions ( P rimary market)P rice based auctionsYield based auctionsUniform pricing auctionsUnder writing by P Ds

On Tap sale for primary issuanceP rivate P lacements with RBI

OMO sales by RBI (Secondary Market)


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CharacteristicsOver The Counter market

NDS & Brokered dealsNSE - WDM is used more as a trade disclosure systemCounter-parties known when concluding the dealP ositions of big participants can be tracked

NDS-OM(Order Matching)High degree of anonymity, counter-parties unknown evenafter deal is concludedCredit Clearing Corporation of India Limited(CCIL) acts asa counterparty


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Market ParticipantsCommercial Banks

SLR investment should be > 25%P reference for medium maturity papers for SLRMost banks have PV BP / Duration based limits

P rimary DealersUnderwriting primary issues and market making17 primary dealers currentlyRefinance facility from RBI at bank rate linked to biddingcommitments & turnover


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Market ParticipantsP rovident / P ension FundsInvestment of > 25% of its total investable corpus in GOI Sec. &> 40% in SDLsIncrease yield by investing some corpus in illiquid & longer maturity securitiesCBOT & Coal Mines P rovident Fund are the largest investors

Insurance companiesInvestment > 25% for GOI Securities & >50% for GOI & StateLoans for Life Insurance CompaniesInvestment > 20% for GOI Securities & >30% for GOI & StateLoans for General Insurance CompaniesFocus on longer maturity securitiesLIC is the largest investor & subscribers to primary auctions


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Market ParticipantsMutual Funds

Gilt / Income / Short term / Liquid schemesDepending upon the scheme, 40%-90% is invested in GOI

Co-operative BanksSLR investment should be > 25%

FIs / CorporatesCash Management and Investment


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PricingOf

Treasury Bills A treasury bill (t-bill) is a zero coupon security, therefore it isnot priced using YTMP ricing of a t-bill is illustrated using the example shown belowExample: Suppose the t-bill has a price 97.5 - the investor hasto pay 97.5 on the value date (27-11-2005) to buy thesecurity. At maturity, say 25-01-2006, the investor will receive100 rupeesThe yield (y) on the t-bill :y = (((100-97.5)/97.5)*(365/(25-11-06 27-11-05)))*100

= 0.02564*(365/59)*100=15.86%


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PricingOf

Treasury BillsTherefore the yield (y), given price ( P ) and value date (vd) andmaturity date (md) is:

y = ((100-P)/P)*(365/(md- v d))*100

Similarly, given yield(y), value date(vd) and maturity date(md)the P rice( P ) of a t-bill is:

P = 100/(1+(y*(md- v d)/365))


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C orporate & PSU Debt


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Corporate Debt

DebenturesIssued by Financial Institutions / corporates / foreign banks /private sector banks

BondsIssued by FIs / P SUs / Nationalised banks


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Corporate Debt ProductsFixed rate non convertible in nature

Secured debentures / bonds with or without put call options

Credit Rating essential

Subordinated bonds by banks for Tier II capital

Subordinated bonds by P Ds for Tier III capital

Floating rate bonds linked to G-secs & MIBOR

Deep discount, zero coupon, step up coupon

Tax free P SU bonds


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Corporate Debt ProductsInfrastructure bonds with Sec 88, 54 EA/EB/EC benefits

Sec 10 (23G) Infrastructure bonds

Credit enhanced structured obligations

Securitised / P ass through certificates

Short Term P roducts like C P s & CDsV arious innovative debt capital market structures


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Characteristics

P ricing, typically, at a relevant spread over GOI securitiesP rimarily, wholesale in nature

Main market participants for trading & investment avenue include

Banks, P Ds, FIs, Insurance Cos., P Fs, MFs, etc.Trading not as liquid as GOI Securities

Trading more liquid in higher rated papersTrading more liquid in shorter tenor papersQuotes & deals done on an annualised yield basis. P rice is derivedfrom the agreed yields


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Market ParticipantsMutual FundsIncome / Short term / Liquid schemesDepending upon the scheme, 25%-60% is invested in P SUBonds / Corporate Debt

Commercial BanksCannot invest where original maturity < 1yr other than C P s &CDsCannot invest in unrated securitiesInvestment in unlisted securities < 10% of total Non SLR

investment. Additional 10% allowed only for securitised issuance.


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Market ParticipantsP rimary DealersNot invest insecurities with original maturity < 1yr other than C P s & CDsNot invest in unrated securitiesInvestment in unlisted securities < 10% of total Non SLR investment

Cannot invest more than 5% of networth in Banks Tier II BondsCannot use call money to invest in Non SLR

Insurance CompaniesFor Life Insurance Companies, Investment in Infrastructure bonds >15% & Approved Investments < 35% (within this category > 15% incorporate & P SU debt)For General Insurance Companies, Investment in Infrastructure bonds >10% & Approved Investments < 55% (within this category > 25% incorporate & P SU debt)No investments in unrated papersGroup wise limit


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Market ParticipantsP rovident FundsCan investment 25%-55% in P SU Bonds & deposits & a cap of 10% inP rivate sector debt.P rivate sector debt has to rated investment grade by at least 2 creditrating companiesIncrease yield by investing some corpus in illiquid & longer maturitysecurities

FIsNot invest insecurities with original maturity < 1yr other than C P s & CDsNot invest in unrated securitiesInvestment in unlisted securities < 10% of total Non SLR investment

Debt FIIsOverall annual limit of $ 1.75 BnOf this, $ 1.55 Bn for dedicated debt FIIs$ 200 mn, kept open for equity FIIs, in the automatic 70:30 route


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GOI Vs

Corporate Debt

N o stamp duty o n issueDVP basis o n T+1 basisQu o ted semi- annualMo stly plain v anilla, dated,c o up o n sec

Data discl o sed by RBI/ N SETrading o n interest rates

Varying stamp duty o n issuanceDealt o n T, T+1, T+2 basis

Qu o ted annuallyStructured- step up/d o wn, deepdisc o unt, pri o rity sect o r, taxfree,zer o c o up o nData n o t readily a v ailable

Trading o n interest rates and creditspreads


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Money Market Instruments


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Call Money MarketsOvernight market where funds are lent / borrowed on an

overnight basisTerm Money Markets are Inter-bank interest rates for a periodgreater than 1 day


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Market ParticipantsC

all / Notice MarketBorrowing:Commercial Banks

Average Fortnightly borrowing < 100% of capital fundsCooperative Banks

Daily borrowing < 2% of aggregate deposits of previous financialyear

P Ds Average Fortnightly borrowing < 200% of net owned funds


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Market ParticipantsC

all / Notice MarketLending:Commercial Banks

Average Fortnightly lending < 25% of capital fundsCooperative Banks

No limitP Ds

Average Fortnightly borrowing < 25% of net owned funds

F inancial Instituti o ns, Insurance C o mpanies & MutualF unds n o t all o wed t o lend in call m o ney markets


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Ot

her SecuritiesC o mmercial Paper ( C P) are unsecured, negotiable, short

term usance promissory notes with fixed maturity issued byleading, nationally reputed, creditworthy and highly rated largecorporationsC ertificate o f Dep o sit ( C D) are marketable receipts inbearer or registered form of funds deposited in banks for aspecified period at a specified rate of interest. They aretransferable, negotiable, short term, fixed interest bearing,maturity dated money market instruments.


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R epurc

hase securities(

R epos) A Repo is a money market instrument which enables

collateralized short term borrowing and lending throughsale/purchase operations in debt instruments. Under a repotransaction, a holder of securities sells them to an investor

with an agreement to repurchase them at a predetermineddate and rate

Example


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R BI LAFRBI Reverse Repo rate

The RBI borrows at reverse repo rate from the market on a dailybasis

RBI Repo rateThe RBI lends at repo rate on a daily basis

Only Banks, P Ds & FIs can participate in RBI LAF


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C olateralised Borrowing & LendingO

bligation (C

BLO

) An obligation by the borrower to return the money borrowed, at aspecified future date

An authority to the lender to receive money lent, at a specified futuredate with an option/privilege to transfer the authority to another

person for value received An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent

Behaves like an exchange traded repo


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Market ParticipantsCommercial BanksP rimary DealersP rovident Funds

NBFCs

Mutual Funds

Insurance companies

Co-operative Banks

FIs / CorporatesFIIs


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Interest R ate Swaps


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Interest Swaps in IndiaThe interest rate swaps traded in the Indian markets, include:

OIS (NSE MIBOR)MITOR Swap (Reuters MITOR)MIFOR SwapsINBMK Swaps (1Y GOI Yields)INCMT Swaps (Constant Maturity Swaps)FRAs

Example


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Market Participants

Scheduled Commercial BanksFor trading, hedging & market making

P rimary DealersFor trading, hedging & market making

Financial InstitutionsFor trading, hedging & market making

CorporatesFor Hedging purposes(Have to show underlying liability/asset)

Mutual FundsFor Hedging purposes(Have to show underlying liability/asset)

Insurance CompaniesFor Hedging purposes(Have to show underlying liability/asset)


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Factors A ff ecting Treasury Markets


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Factors A ff ecting Treasury MarketsCategorized into 5 broad factors:

LiquidityDemand / SupplyDomestic Interest Rates

Global Interest Rates & Geo P olitical factorsMacro Economic factors like GD P , IIP , Inflation, etc.Government Finances


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Factors A ff ecting Yields

High FiscalDeficit

Historicallylow rates

GeoP oliticalFactors

Credit off-take

Concernsover higher oil priceComfortableLiquidity

Soft ratepolicy bias

BenignInflation

Stablecurrency

High cutoff in primary


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Th e risk return trade-o ff Total return = cap gain/loss + coupons + interest on coupons

YTM will be realized if bond held till maturitycoupons reinvested at the same rate

Major risks

Interest rate riskReinvestment risk

riskfixed & kn o wn

risk


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R ole Of R BI


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Investment Banker To T h eG overnment

Schedules the govt borrowing program

Issues govt securities via primary auctionsRe-issue of an existing paper / new securityStructuring of new issuesUniform price / Discriminatory pricing

Manages liquidity / market sentiment through devolvements /private placementsP otential conflict with its role of conductor of monetary policy


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Process o f Issuance Auctions ( P rimary market)

P rice based auctionsYield based auctionsDiscriminatory auctions

Uniform pricing auctionsP rivate placements with RBI

OMO sales by RBI (Secondary Market) through AuctionsOn tap sales


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Institutional Set Up By R BIRole of Bank Rate / Reverse Repo Rate

Setting up of Liquidity Adjustment Facility

Liquidity Management through Open Market Operations & MSS

Commitment to supply unlimited amount of money at thetargeted interest rates

Sterlisation of FX flows

Signaling of Monetary Stance through Credit P olicy


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Signaling ToolsChanges in Bank Rate / Reverse Repo Rate

Changes in CRR

Frequent statements from RBI regarding their monetary

stance


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Th ank You

Indian Treasury Markets

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