PRESENTATION ON MONEY MARKET AND GOVERNMENT SECURITIES

Team Members (GROUP: 2) Roll No Name 5040 Patel Kaustubh 5068 Ankita Bhardwaj 5098 Kalpana Sindhu 5100 Komal Patel

Money market As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.

Features of Money Market? It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only. In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done. Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

Objective of Money Market? To provide a parking place to employ short term surplus funds. To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.

Money Market Instrument A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available. However, now certain improvement is been seen in money market instrument. There are two types of Instrument in General a) Government Securities and b) Non Government Securities Instrument Government Securities Non-Government Securities

Government Securities Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities.

Meaning of Government Sec. Government security means a security created and issued by the Government for the purpose of raising a public loan or any other purpose as notified by the Government. The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills issued by the Government of India. Also known as Gilt Edged Securities

Features of Government Securities Issued at face value Face value is the par value of the security. The issue price may be at a discount or a premium to the par value. No Tax Deducted At Source In government securities no tax is deducted at source. No default risk The main feature of investing in G-secs is that there is a minimal default risk, as the instrument is issued by the GOI. The government generates revenue in the form of taxes and income from ownership of assets. Besides these, it borrows extensively from banks, financial institutions and the public to finance its expenditure in excess of its revenues.

Can be held in D-mat form Government Securities can also be held in demat form. SGL or CSGL are a demat form of holding government securities with the RBI. Liquidity G-secs have ample amount liquidity available both in the primary and secondary market. Maturity and rate of interest These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable half yearly. Repayment Government securities are repaid at par on the expiry of their tenor.

Government Securities Central Government(T-Bill & Bonds) State Government(Bonds or Dated Securities)

Instruments of Govt. Sec. T-Bills Cash management Bills Dated Securities State Development Loans(SDLs)

T-Bills T-bills(Tenure) 91 days 182 days 364 days Treasury bills or T-bills, are the money market instruments, that are short term debt instruments issued by the Government of India. T-bills(Tenure) 91 days 182 days 364 days

Ques : T-Bill- 91 days , Maturity Date-31/10/2012 B/P-98 Ques : T-Bill- 91 days , Maturity Date-31/10/2012 B/P-98.0445 , Redemption price -100 FORMULA: Gain/B/P * 365/No. of T-Bill days GAIN = R/P-B/P = 100-98.0445 = 1.955 1.955/98.0445 * 365/91=8% When gain =9%(GIVEN) B/P=? 9%=100-X/X * 365/91 So, X=97.81

STATE DEVELOPMENT LOANS(SDLs) State Governments also raise loans from the market. SDLs are dated securities issued through an auction similar to the auctions conducted for dated securities issued by the Central Government . Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs issued by the State Governments qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).

Cash Management Bills Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and redeemed at face value at maturity. The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the Government.

Dated Securities Dated Securities Fixed rate Bonds Floating Rate Bonds Zero coupon bonds Capital Indexed bonds

Different types of Dated Securities Securities with fixed coupon rates viz, Dated Securities. Securities with variable coupon rates, viz, Floating Rate Bonds. Zero Coupon Bonds Securities for either the subscription is received or the repayment is made in instalments Securities with Embedded Derivatives (e.g. Call and Put Options).

Issue of government securities Auction OMOs Fixed Coupon Rate Floating Rate

Non-Competitive Bidding Auction Yield Based Auction Price Based Auction Uniform Price Multiple price Competitive Bidding Non-Competitive Bidding

Yield Based Auction:  A yield based auction is generally conducted when a new Government security is issued. Successful bidders are those who have bid at or below the cut- off yield. Price Based Auction:  A price based auction is conducted when Government of India re-issues securities issued earlier. Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. Uniform Price :Each winning bidder pays the uniform price decided by the Reserve Bank.

Multiple Price : Each winning bidder pays the price it bid.  Competitive Bidding :  In a competitive bid, participants submit their bids to the Reserve Bank who then decides the cut off yeild/ price and makes the allotment. Non-Competitive Bidding : In non competitive bid, participants are not allowed to bid ,as they do not have the expertise in bidding and are allotted bids at the weighted average price determined in competitive bidding.

Open Market Operations (OMOs) OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.

Question-Answer What is meant by buyback of Government securities? Governments make provisions in their budget for buying back of existing securities. Buyback can be done through an auction process or through the secondary market route, i.e., NDS/NDS-OM. How and in what form can Government Securities be held? How does the trading in Government securities take place? Over the Counter/Telephone Negotiated Dealing System Stock Exchange

Why does the price of Government security change? The price of a Government security, like other financial instruments, keeps fluctuating in the secondary market. The price is determined by demand and supply of the securities. Specifically, the prices of Government securities are influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as, expected rate of inflation, liquidity in the market, etc.

Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the Government securities. Further, developments in international bond markets, specifically the US Treasuries affect prices of Government securities in India. Policy actions by RBI (e.g., announcements regarding changes in policy interest rates like Repo Rate, Cash Reserve Ratio, Open Market Operations, etc.) can also affect the prices of Government securities.

What are the risks involved in holding Government securities? Market risk – Market risk arises out of adverse movement of prices of the securities that are held by an investor due to changes in interest rates. This will result in booking losses on marking to market or realizing a loss if the securities are sold at the adverse prices. Small investors, to some extent, can mitigate market risk by holding the bonds till maturity so that they can realize the yield at which the securities were actually bought.

2. Reinvestment risk – Cash flows on a Government security includes fixed coupon every half year and repayment of principal at maturity. These cash flows need to be reinvested whenever they are paid. Hence there is a risk that the investor may not be able to reinvest these proceeds at profitable rates due to changes in interest rate scenario.

3. Liquidity risk – Liquidity risk refers to the inability of an investor to liquidate (sell) his holdings due to non availability of buyers for the security, i.e., no trading activity in that particular security. Usually, when a liquid bond of fixed maturity is bought, its tenor gets reduced due to time decay. For example, a 10 year security will become 8 year security after 2 years due to which it may become illiquid. Due to illiquidity, the investor may need to sell at adverse prices in case of urgent funds requirement. However, in such cases, eligible investors can participate in market repo and borrow the money against the collateral of the securities.