Money Instruments

8/13/2019 Money Instruments

1/14


2/14

Money markets exist to facilitate efficient transfer of

short-term funds between holders and borrowers of

cash assets.

For the lender/investor, it provides a good return on

their funds.

Provide focal point for RBIs intervention for

influencing liquidity and general levels of interest rates

in the economy


3/14

Treasury Bill (T Bill)

Repurchase Agreement (Repo or Reverse Repo)

Commercial Paper

Call Money

Commercial Bill


4/14

Treasury Bills one of the safest money market

instruments, Short term (mature in one year or less from their issue

date) borrowing instruments.

Available both in Primary market as well as Secondarymarket

T Bills are issued with three-month, six-month & one-year maturity periods.

The Central Government (RBI in India) issues T- Billsat a price less than their face value (par value). They areissued with a promise to pay full face value on maturity.

At maturity of T-Bills, the government pays the holderits face value. The difference between the purchase price& the maturity value is the interest income earned bythe purchaser of the instrument.


5/14

T-Bills are issued through a bidding process at auctions.

At present, the Government of India issues three typesof treasury bills through auctions, 91-day, 182-day and

364-day.

Treasury bills are available for a minimum amount ofRs.25K and in its multiples.

91-day T-bills are auctioned every week on Wednesdays.

182-day and 364-day T-bills are auctioned every

alternate week on Wednesdays.


6/14

Repurchase transactions, called Repo or Reverse Repoare transactions or short term loans in which two parties

agree to sell and repurchase the same security. They are

usually used for overnight borrowing.

Repo/Reverse Repo transactions can be done only

between the parties approved by RBI and in RBI

approved securities viz. GOI and State Govt. Securities.

Under Repurchase agreement the seller sells specified

securities with an agreement to repurchase the same at

mutually decided future date and price.


7/14

The buyer purchases the securities with an agreement to

resell the same to the seller on an agreed date at a

predetermined price, This transaction is called a Repo

when viewed from the perspective of the seller of the

securities and Reverse Repo when viewed from the

perspective of the buyer of the securities

The lender or buyer in a Repo is entitled to receive

compensation for use of funds provided to the

counterparty. Effectively the seller of the security

borrows money for a period of time (Repo period) at a

particular rate of interest mutually agreed with the

buyer of the security who has lent the funds to the seller.


8/14

Commercial Paper (CP) is an unsecured money market

instrument issued in the form of a promissory note.

Introduced in India in 1990 with a view to enabling

highly rated corporate borrowers to diversify their

sources of short-term borrowings and to provide an

additional instrument to investors. Subsequently,

primary dealers and all-India financial institutions

were also permitted to issue CP to enable them to meet

their short-term funding requirements for theiroperations.


9/14

Corporates, primary dealers (PDs) and the All-India

Financial Institutions (FIs) are eligible to issue CP.

CPs are issued in the denomination of Rs. 5 Lakhs and

the multiple of Rs.5 Lakhs.

CP can be issued for maturities between a minimum of 7days and a maximum of up to one year from the date of

issue. However, the maturity date of the CP should not

go beyond the date up to which the credit rating of the

issuer is valid.

The usage of CP is limited to only blue chip companies.


10/14


11/14

issued in dematerialised form or as a Usance Promissory

Note against funds deposited at a bank or other eligible

financial institution for a specified time period.

CDs can be issued by (i) scheduled commercial banks

{excluding Regional Rural Banks and Local Area

Banks} and (ii) select All-India Financial Institutions

(FIs) that have been permitted by RBI to raise short-

term resources within the umbrella limit (fixed timeperiod by RBI)


12/14

Banks have the freedom to issue CDs depending on theirfunding requirements.

Minimum amount of a CD should be Rs.1 lakh, i.e., theminimum deposit that could be accepted from a singlesubscriber should not be less than Rs.1 lakh, and inmultiples of Rs. 1 lakh thereafter.

CDs can be issued to individuals, corporations,companies (including banks), trusts, funds, associations,etc. Non-Resident Indians (NRIs) but only on non-

repatriable basis, which should be clearly stated on theCertificate. Such CDs cannot be endorsed to anotherNRI in the secondary market.


13/14

The maturity period of CDs issued by banks should not

be less than 7 days and not more than one year, from thedate of issue.

The FIs can issue CDs for a period not less than 1 year

and not exceeding 3 years from the date of issue.

CDs in physical form are freely transferable by

endorsement and delivery. There is no lock-in period for

the CDs.


14/14

Banks/FIs cannot grant loans against CDs.

Furthermore, they cannot buy-back their own CDsbefore maturity. However, the RBI may relax these

restrictions for temporary periods through a separate

notification.

Money Instruments

Documents

Transcript of Money Instruments