What are Money Market Instruments?
By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year.The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. The below mentioned instruments are normally termed as money market instruments:
1) Certificate of Deposit (CD)
2) Commercial Paper (C.P)
3) Inter Bank Participation Certificates
4) Inter Bank term Money
5) Treasury Bills
6) Bill Rediscounting
7) Call/ Notice/ Term Money
What is Commercial Paper ?
Commercial Papers are short term borrowings by Corporates, FIs, PDs, from Money Market.
Features
· Commercial Papers when issued in Physical Form are negotiable by endorsement and delivery and hence highly flexible instruments
· Issued subject to minimum of Rs 5 lakhs and in the multiples of Rs. 5 Lac thereafter,
· Maturity is 15 days to 1 year
· Unsecured and backed by credit of the issuing company
· Can be issued with or without Backstop facility of Bank / FI
Eligibility Criteria
Any private/public sector co. wishing to raise money through the CP market has to meet the following requirements:
· Tangible net-worth not less than Rs 4 crore - as per last audited statement
· Should have Working Capital limit sanctioned by a bank / FI
·Credit Rating not lower than P2 or its equivalent - by Credit Rating Agency approved by Reserve Bank of India.
· Board resolution authorizing company to issue CPs
· PD and AIFIs can also issue Commercial Papers
Commercial Papers can be issued in both physical and demat form. When issued in the physical form Commercial Papers are issued in the form of Usance Promissory Note. Commercial Papers are issued in the form of discount to the face value.
Commercial Papers are short-term unsecured borrowings by reputed companies that are financially strong and carry a high credit rating. These are sold directly by the issuers to the investors or else placed by borrowers through agents / brokers etc.
FIMMDA has issued operational and documentation guidelines, in consultation with Reserve Bank of India, on Commercial Paper for market.
What are Certificates of deposit (CD):
CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year.
CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act)
They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits
Features of CD
· All scheduled banks (except RRBs and Co-operative banks) are eligible to issue CDs
· Issued to individuals, corporations, trusts, funds and associations
· They are issued at a discount rate freely determined by the issuer and the market/investors.
·Freely transferable by endorsement and delivery. At present CDs are issued in physical form (UPN)
These are issued in denominations of Rs.5 Lacs and Rs. 1 Lac thereafter. Bank CDs have maturity up to one year. Minimum period for a bank CD is fifteen days. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. CDs issued by AIFI are also issued in physical form (in the form of Usance promissory note) and is issued at a discount to the face value.
What is Debt Market?
There is no single location or exchange where debt market participants interact for common business. Participants talk to each other, over telephone, conclude deals, and send confirmations by Fax, Mail etc. with back office doing the settlement of trades. In the sense, the wholesale debt market is a virtual market. The daily transaction volume of all the debt instruments traded would be about Rs.4000 - 5000 crores per day. In India, NSE has its separate segment, which allows online trades in the listed debt securities through its member brokers. Recently BSE as well as OTCI have introduced Debt Market Segment. Reserve Bank of India has proposed Negotiated Dealing System (NDS) for trades in the G-Secs and Repos. NDS is likely to be operational by October 2001.
What is Debt Instrument?
A tradable form of loan is normally termed as a Debt Instrument. They are usually obligations of issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Debt Instruments are of various types. The distinguishing factors of the Debt Instruments are as follows: -
1) Issuer class
2) Coupon bearing / Discounted
3) Interest Terms
4) Repayment Terms (Including Call / put etc. )
5) Security / Collateral / Guarantee
Who are institutional investors in the Indian Debt Market? Institutional investors operating in the Indian Debt Market are:
· Banks
· Insurance companies
· Provident funds
· Mutual funds
· Trusts
· Corporate treasuries
·Foreign investors (FIIs)
Who Regulates Indian G-Secs and Debt Market?
RBI:The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has to simultaneously fulfill several other important objectives viz. managing the borrowing program of the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment.
RBI controls the issuance of new banking licenses to banks. It controls the manner in which various scheduled banks raise money from depositors. Further, it controls the deployment of money through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on investment assets etc.
Another major area under the control of the RBI is the interest rate policy. Earlier, it used to strictly control interest rates through a directed system of interest rates. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. Over the years RBI has moved slowly towards a regime of market determined controls.
SEBI
Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). SEBI controls bond market and corporate debt market in cases where entities raise money from public through public issues.
It regulates the manner in which such moneys are raised and tries to ensure a fair play for the retail investor. It forces the issuer to make the retail investor aware, of the risks inherent in the investment, by way and its disclosure norms. SEBI is also a regulator for the Mutual Funds, SEBI regulates the entry of new mutual funds in the industry. It also regulates the instruments in which these mutual funds can invest. SEBI also regulates the investments of debt FIIs.
Apart from the two main regulators, the RBI and SEBI, there are several other regulators specific for different classes of investors, eg the Central Provision Fund Commissioner and the Ministry of Labour regulate the Provident Funds.
Religious and Charitable trusts are regulated by some of the State governments of the states, in which these trusts are located.
What factors determine interest rates?
When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the bond/G-Sec,market, rates offered to small investors in small savings schemes like NSC rates at which companies issue fixed deposits etc.
The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic. Some of these factors are:
1) Demand for money
2)Government borrowings
3)Supply of money
4) Inflation rate
5) The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.
What are G-Secs?
G-Secs or Government of India dated Securities are Rupees One hundred face-value units / debt paper issued by Government of India in lieu of their borrowing from the market. These can be referred to as certificates issued by Government of India through the Reserve Bank acknowledging receipt of money in the form of debt, bearing a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date on redemption
What are ‘Gilt edged’ securities?
The term government securities encompass all Bonds & T-bills issued by the Central Government, state government. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.
’Gilt Securities’ are issued by the RBI, the central bank, on behalf of the Government of India. Being sovereign paper, gilt securities carry absolutely no risk of default.
What is Government of India dated securities (G-Secs) & What type of new G-Secs are issued by Government of India?
Like Treasury Bills, G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program approved by the parliament in the ‘union budget’. G- Secs are normally issued in dematerialized form (SGL). When issued in the physical form they are issued in the multiples of Rs. 10,000/-. Normally the dated Government Securities, have a period of 1 year to 20 years. Government Securities when issued in physical form are normally issued in the form of Stock Certificates. Such Government Securities when are required to be traded in the physical form are delivered by the transferor to transferee along with a special transfer form designed under Public Debt Act 1944.
The transfer does not require stamp duty. The G-Secs cannot be subjected to lien. Hence, is not an acceptable security for lending against it. Some Securities issued by Reserve Bank of India like 8.5% Relief Bonds are securites specially notified & can be accepted as Security for a loan.
Earlier, the RBI used to issue straight coupon bonds ie bonds with a stated coupon payable periodically. In the last few years, new types of instruments have been issued. These are :-
Inflation linked bonds:These are bonds for which the coupon payment in a particular period is linked to the inflation rate at that time - the base coupon rate is fixed with the inflation rate (consumer price index-CPI) being added to it to arrive at the total coupon rate.
The idea behind these bonds is to make them attractive to investors by removing the uncertainty of future inflation rates, thereby maintaining the real value of their invested capital.
FRBs or Floating Rate Bonds comes with a coupon floater, which is usually a margin over and above a benchmark rate. E.g, the Floating Bond may be nomenclature/denominated as +1.25% FRB YYYY ( the maturity year ). +1.25% coupon will be over and above a benchmark rate, where the benchmark rate may be a six month average of the implicit cut-off yields of 364-day Treasury bill auctions. If this average works out 9.50% p.a then the coupon will be established at 9.50% + 1.25% i.e., 10.75%p.a. Normally FRBs (floaters) also bear a floor and cap on interest rates. Interest so determined is intimated in advance before such coupon payment which is normally,Semi-Annual.
Zero coupon bonds: These are bonds for which there is no coupon payment. They are issued at a discount to face value with the discount providing the implicit interest payment. In effect, zero coupon bonds are like long duration T - Bills.
What is SDL?
State government securities (State Loans) : SDLs These are issued by the respective state governments but the RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. The planning commission in consultation with the respective state governments determines this limit. Generally, the coupon rates on state loans are marginally higher than those of GOI-Secs issued at the same time.
The procedure for selling of state loans, the auction process and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to GOI-Secs. They are also issued in dematerialized form.
SGL Form State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are transferable. No stamp duty is payable on transfer for State Loans as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.
What are T-Bills? Who issued it ? Who can invest in it ?
Treasury bills are actually a class of Central Government Securities. Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill of below mentioned periods are currently issued by Government/Reserve Bank
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