S 6 – Money and Capital Markets

B B Chakrabarti
Professor of Finance
 Government Securities Market
• A Government security is a tradable instrument issued by
the Central Government or the State Governments. It
acknowledges the Government’s debt obligation.  Such
securities are short term (usually called treasury bills, with
original maturities of less than one year) or long term
(usually called Government bonds or dated securities with
original maturity of one year or more). 
• The Central Government issues both, treasury bills and
bonds or dated securities while the State Governments
issue only bonds or dated securities, which are called the
State Development Loans (SDLs). 
• Government securities carry practically no risk of default
and, hence, are called risk-free gilt-edged instruments..
 Government Securities Market
• Government of India also issues savings instruments
(Savings Bonds, National Saving Certificates (NSCs), etc.) or
special securities (oil bonds, Food Corporation of India
bonds, fertiliser bonds, power bonds, etc.). They are,
usually not fully tradable and are, therefore, not eligible to
be SLR securities.
• Treasury Bills (T-bills)
• T-bills are short term debt instruments issued by the
Government of India and are presently issued in three
tenors, namely, 91 day, 182 day and 364 day. Treasury bills
are zero coupon securities and pay no interest. They are
issued at a discount and redeemed at the face value at
maturity.
 Government Securities Market
• RBI conducts auctions usually every Wednesday to issue T-
bills. Payments for the T-bills purchased are made on the
following Friday. The 91 day T-bills are auctioned on every
Wednesday. The Treasury bills of 182 days and 364 days
tenure are auctioned on alternate Wednesdays. RBI releases
an annual calendar of T-bill issuances for a financial year in
the last week of March of the previous financial year.
• Cash Management Bills (CMBs)
• Govt. of India issues Cash Management Bills (CMBs), to meet
temporary mismatches in the cash flow of the Govt. The
CMBs have the generic character of T-bills but are issued for
maturities less than 91 days. The tenure, notified amount and
date of issue of the CMBs depends upon the temporary cash
requirement of the Govt. First set of CMBs were issued on
May 12, 2010.
 Government Securities Market
• Dated Government Securities
• Dated Government securities are long term securities and
carry a fixed or floating  coupon (interest rate) which is paid
on the face value, payable at fixed time periods (usually half-
yearly). The tenor of dated securities can be up to 30 years.
• The nomenclature of a typical dated fixed coupon
Government security contains the following features -
coupon, name of the issuer and maturity.  For example, 7.49%
GS 2017.
• Interest to be calculated on a 30E / 360 day basis.
• No. of days = 360*(Y2-Y1)+30*(M2-M1)+(D2-D1)
and if D1 is 31, then change D1 to 30 and If D2 is 31, then
change D2 to 30.
 Government Securities Market
• In case there are two securities with the same coupon and
are maturing in the same year, then one of the securities
will have the month attached as suffix in the nomenclature.
For example, 6.05% GS 2019 FEB, would mean that
Government security having coupon 6.05 % that mature in
February 2019 along with the other security with the same
coupon, namely, 6.05% 2019 which is maturing in June
2019.
• If the coupon payment date falls on a Sunday or a holiday,
the coupon payment is made on the next working day.
However, if the maturity date falls on a Sunday or a holiday,
the redemption proceeds are paid on the previous working
day itself.
 Government Securities Market
• Instruments:
• Fixed Rate Bonds – These are bonds on which the coupon
rate is fixed for the entire life of the bond.  Most
Government bonds are issued as fixed rate bonds.
• Floating Rate Bonds – Floating Rate Bonds are securities
which do not have a fixed coupon rate. The coupon is re-set
at pre-announced intervals (say, every six months or one
year) by adding a spread over a base rate. In the case of
most floating rate bonds issued by the Government of India
so far, the base rate is the weighted average cut-off yield of
the last three 364- day Treasury Bill auctions preceding the
coupon re-set date and the spread is decided through the
auction. Floating Rate Bonds were first issued in September
1995 in India.
 Government Securities Market
• Zero Coupon Bonds – Zero coupon bonds are bonds with no
coupon payments. Like Treasury Bills, they are issued at a
discount to the face value. The Government of India issued
such securities in the nineties, It has not issued zero coupon
bond after that.
• Bonds with Call/ Put Options – 6.72%GS2012 was issued on
July 18, 2002 for a maturity of 10 years maturing on July 18,
2012. The optionality on the bond could be exercised after
completion of five years tenure from the date of issuance
on any coupon date falling thereafter. The Government has
the right to buyback the bond (call option) at par value
(equal to the face value) while the investor has the right to
sell the bond (put option) to the Government at par value
at the time of any of the half-yearly coupon dates starting
from July 18, 2007.
 Government Securities Market
• Capital Indexed Bonds – These are bonds, the principal of
which is linked to an accepted index of inflation with a view to
protecting the holder from inflation. A capital indexed bond,
with the principal hedged against inflation, was issued in
December 1997. These bonds matured in 2002.
• Outstanding Govt. Debts up to August 2018 are as follows
(figures in ‘000 crores).

G-Sec Special T-Bill Floating SDL UDAY Total

Securities Rate Bonds
Bonds
5,144 199 537 157 2,345 202 8,430
(61.0%) (2.4%) (6.4%) (1.9%) (27.8%) (2.4%) (100%)
 Issue of Government Securities
• Govt. securities are issued through auctions conducted by
the RBI.  Auctions are conducted on the electronic platform
called the NDS – Auction platform. Commercial banks,
scheduled urban co-operative banks, Primary Dealers,
insurance companies and provident funds, who maintain
funds account (current account) and securities accounts
(SGL account) with RBI, are members of this electronic
platform. All members of PDO-NDS can place their bids in
the auction through this electronic platform.
• RBI issues an indicative half-yearly auction calendar which
contains information about the amount of borrowing, the
tenor of security and the likely period during which
auctions will be held.
 Types of Auctions in Govt. Securities
• Currently, the rate of interest (coupon rate) gets fixed
through a market based price discovery process.
• An auction may either be yield based or price based.
• Yield Based Auction: A yield based auction is generally
conducted when a new Government security is issued.
Investors bid in yield terms up to two decimal places. Bids
are arranged in ascending order and the cut-off yield is
arrived at the yield corresponding to the notified amount of
the auction. The cut-off yield is taken as the coupon rate for
the security. Successful bidders are those who have bid at
or below the cut-off yield. Bids which are higher than the
cut-off yield are rejected.
 Types of Auctions in Govt. Securities
• Price Based Auction: A price based auction is conducted
when Government of India re-issues securities issued
earlier. Bidders quote in terms of price per Rs.100 of face
value of the security (e.g., Rs.102.00 per Rs.100/-). Bids are
arranged in descending order and the successful bidders
are those who have bid at or above the cut-off price. Bids
which are below the cut-off price are rejected.
• Depending upon the method of allocation to successful
bidders, auction could be classified as Uniform Price based
and Multiple Price based.
 Primary Dealers
• Primary dealers are registered entities with the RBI who have
the license to purchase and sell government securities.  They
are entities who buys government securities directly from the
RBI (the RBI issues government securities on behalf of the
government), aiming to resell them to other buyers. In this
way, the Primary Dealers create a market for government
securities.
• There are 21 Primary Dealers. Some are Standalone Primary
dealers and some are Bank Primary dealers.
• Most of the PDs are started by scheduled commercial banks
and are registered as NBFCs.

Microsoft Office
Excel Worksheet
 When Issued Market in Govt. Securities
• “When Issued”, a short term of "when, as and if issued",
indicates a conditional transaction in a security notified for
issuance but not yet actually issued.
• “When Issued” transactions in the Central Govt. securities
have been permitted to all NDS-OM members and have to
be undertaken only on the NDS-OM platform.
• “When Issued” market helps in price discovery of the
securities being auctioned as well as better distribution of
the auction stock.
• When Issued trading details are as follows.
Year No. of Trades Value in Rs. crore
2016-17 1,400 13,535
2017-18 966 9,555
 Call, Notice and Term Money Market
• The money market is a market for short-term financial assets
that are close substitutes of money. The most important
feature of a money market instrument is that it is liquid and
can be turned into money quickly at low cost and provides an
avenue for equilibrating the short-term surplus funds of
lenders and the requirements of borrowers.
• Under call money market, funds are transacted on an
overnight basis, under notice money market, funds are
transacted for a period between 2 days and 14 days and Term
money refers to borrowing and lending of funds for
a period of more than 14 days.
• Scheduled commercial banks (excluding RRBs), co-operative
banks (other than Land Development Banks) and Primary
Dealers (PDs), are permitted to participate in call/notice
money market both as borrowers and lenders.
 Call, Notice and Term Money Market
• There are prudential limits for borrowing and lending for the
market participants.
• The transactions can be executed either on NDS-Call, a
screen–based, negotiated, quote-driven electronic trading
system managed by the Clearing Corporation of India (CCIL),
or over the counter (OTC) through bilateral communication.
• It is mandatory that all the OTC Call/Notice/Term money deals
be reported over the reporting platform of NDS-Call by the
parties who are having NDS-Call membership.
• OTC deals should be reported within 15 minutes on NDS-Call
reporting platform, irrespective of the size of the deal or
whether the counterparty is a member of the NDS-Call or not.
• The reporting time for all OTC Call/Notice/Term money deals
on NDS-Call is up to 5:00 pm.
• Interest is calculated on Actual / 365 day basis.
 Call, Notice and Term Money Market
• NDS-Call Dealt transactions in Aug 18 (value in Rs. ‘000 cr.)

ON ON Notice Notice Term Term Total Total

Trade Value Trade Value Trade Value Trade Value
2,718 257.4 17 2.3 83 5.9 2,818 265.7
• NDS-Call Reported transactions in Aug 18 (value in Rs. ‘000 cr.)

ON ON Notice Notice Term Term Total Total

Trade Value Trade Value Trade Value Trade Value

7,249 81.7 563 5.0 153 5.0 7,965 91.8

 Repo and Reverse Repo Market
• Repo or ready forward contact is an instrument for
borrowing funds by selling securities with an agreement to
repurchase the said securities on a mutually agreed future
date at an agreed price which includes interest for the
funds borrowed.
• The reverse of the repo transaction is called ‘reverse repo’
which is lending of funds against buying of securities with
an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes
interest for the funds lent.
• The duration between the two legs of repo/reverse repo is
called the ‘repo period’. Predominantly, repos are
undertaken on overnight basis, i.e., for one day period.
 Repo and Reverse Repo Market
• As part of the measures to develop the corporate debt
market, RBI has permitted select entities (scheduled
commercial banks and others) to undertake repo in
corporate debt securities.
• This is similar to repo in Govt. securities except that
corporate debt securities are used as collateral for
borrowing funds. Only listed corporate debt securities that
are rated ‘AA’ or above by the rating agencies are eligible to
be used for repo.
• These transactions take place in the OTC market and are
required to be reported on FIMMDA platform within 15
minutes of the trade for dissemination of information. They
are also to be reported on the clearing house of any of the
exchanges for the purpose of clearing and settlement.
 Repo and Reverse Repo Market
• Instrument wise Settlement Value for Repo Trades ‘17-’18
(value in Rs. ‘000 cr.)
Central Govt. Dated T-Bills State Govt. Dated
9,131 (71.45) 2,684 (21.01%) 963 (7.54%)

• Repo Term Analysis in ‘17-’18 (value in %)

Overnight 2-3 days 4-7 days 8-14 days > 14 days
68.06 23.76 6.92 0.65 0.61

• Category wise Repo and R/Repo Settle. Value in ‘17-’18 (%)

Co-op Fin /Ins. For. MF PDs Public Priv. Oth.
Banks Cos. banks Banks Banks

Repo 3.34 0.97 16.0 0 36.0 18.57 18.30 6.8

Reverse Repo 0.19 6.21 33.23 40.6 1.32 8.1 10.37 0

 Marginal Standing Facility vs Repo
• The RBI has deployed a number of liquidity support
measures for banks to ensure that there will be enough
liquidity in the banking system. Most popular of these
measures is the RBI Overnight LAF Repo.
• Another feature of repo is that there should be eligible
securities with the bank to avail money from the RBI by
pledging them. Eligible securities are first class securities
(including government bonds, T Bills etc) held by a bank
over the SLR requirement. This means that the securities
held by a bank above 19.5% (SLR as on 14th of November
2017) of its liabilities (deposits) can be pledged by the bank
with the RBI to avail funds.
 Marginal Standing Facility vs Repo
• Marginal Standing Facility is a liquidity support arrangement
provided by RBI to commercial banks if the latter doesn’t have
the required eligible securities above the SLR limit.
• Under MSF, the eligible entities can avail overnight, up to 1%
of their respective Net Demand and Time Liabilities (NDTL).
• MSF rate will be higher than LAF repo rate and is currently
6.25% against Repo rate of 6%.
• For ex., imagine that a bank has securities holding of just 19.5
% (of NDTL). This is equal to its mandatory SLR holding. The
bank can’t borrow using the repo facility. But as per the MSF,
the bank can borrow 1 % of its liabilities from the RBI. As in
the case of repo, the bank has to mortgage the securities with
the RBI.
 Liquidity Adjustment Facility (LAF)
• LAF is a facility extended by the RBI to the scheduled
commercial banks (excluding RRBs) and primary dealers to
avail of liquidity in case of requirement or park excess funds
with the RBI in case of excess liquidity on an overnight basis
against the collateral of Govt. securities including State
Govt. securities.
• Basically LAF enables liquidity management on a day to day
basis. The operations of LAF are conducted by way of
repurchase agreements (repos and reverse repos).
• LAF is an important tool of monetary policy and enables RBI
to transmit interest rate signals to the market.
 CBLO Market
• “Collateralized Borrowing and Lending Obligation (CBLO)"
facilitates in a collateralized environment, borrowing and lending of
funds to market participants who are admitted as members in CBLO
Segment.  CCIL becomes Central Counterparty to all CBLO trades and
guarantees settlement of CBLO trades. CBLO is traded on Yield Time
priority.
• CBLO facilitates borrowing and lending for various tenors, from
overnight up to a maximum of one year, in a fully collateralised
environment.
• The type of entity eligible for CBLO Membership are Nationalized
Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial
Institutions, Insurance Companies, Mutual Funds, Primary Dealers,
Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension
Funds etc.
• Eligible securities are Central Government securities including
Treasury Bills as specified by CCIL from time to time.
 CBLO Market
• Money Market Comparison in 2017-18 (value in Rs. ‘000 cr.)
Uncollateralized call, Repo CBLO
Notice & Term Market
3,872 12,780 28,330

• CBLO Trading in ‘17-’18 (value in Rs. ‘000 cr.)

Overnight Term Total
25,408 (89.7%) 2,923 (10.3%) 28,331 (100%)

• Category wise share (%) in CBLO Borrow. & Lend. in ‘17-’18

Co-op Fin /Ins. For. MF PDs Public Priv. Oth.
Banks Cos. banks Banks Banks

Borrowing 2.55 8.54 2.49 11.04 8.7 38.95 19.1 8.62

Lending 1.05 11.04 3.97 66.58 0.02 3.56 3.15 10.63

 Yield – Time Priority
• Best Yield – Time Priority refers to the matching
principle for the Borrow and lend orders.
• The Best Yield for Borrow order is the rate either
equal or higher than the lending rate available in the
system.
• The Best Yield for Lend order is the rate either equal
or lesser than the borrow rate available in the
system.
• If there are two or more identical borrow/Lend
orders with the same Borrow and/ or Lend Yield,
then the system follows the “Time Priority” principle
based on the time of receipt of order by the system.
 Commercial Paper Market
• Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note.
• CP, as a privately placed instrument, was introduced in India
in 1990 with a view to enable highly rated corporate
borrowers to diversify their sources of short-term
borrowings and to provide an additional instrument to
investors.
• Subsequently, primary dealers (PDs) and all-India financial
institutions (FIs) were also permitted to issue CP to enable
them to meet their short-term funding requirements.
• CP shall be issued in denominations of Rs. 5 lakh and
multiples thereof.
• CP shall be issued at a discount to face value.
 Commercial Paper Market
• CP shall be issued for maturities between a minimum of 7
days and a maximum of up to one year.
• Every issuer must appoint an IPA for issuance of CP.
• The minimum credit rating shall be ‘A3’.
• All OTC trades in CP shall be reported within 15 minutes of
the trade to the Financial Market Trade Reporting and
Confirmation Platform (“F-TRAC”) of Clearcorp Dealing
System (India) Ltd.
• Discount is calculated on actual number of days / 365 day
year basis.
 Certificate of Deposit Market
• Certificate of Deposit (CD) is a negotiable money market
instrument and 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 RRBs and Local Area Banks} and (ii) select All-
India Financial Institutions (FIs).
• Minimum amount of a CD should be Rs.1 lakh and in
multiples of Rs. 1 lakh thereafter.
• The maturity period of CDs issued by banks should not be
less than 7 days and not more than one year.
• FIs can issue CDs for a period not less than 1 year and not
exceeding 3 years from the date of issue.
 Certificate of Deposit Market
• CDs may be issued at a discount on face value. Banks / FIs
are also allowed to issue CDs on floating rate basis provided
the methodology of compiling the floating rate is objective,
transparent and market-based.
• All OTC trades in CP shall be reported within 15 minutes of
the trade to the Financial Market Trade Reporting and
Confirmation Platform (“F-TRAC”).
• Discount is calculated on Actual / 365 day basis.
• F-TRAC Historical summary (value in Rs. ‘000 crore)
CD CP Repo in Corp bonds, CD & CP

2016-17 979 1,147 17

2017-18 879 1,289 23

 Corporate Bond and Debenture Market
• These are debt instruments issued by corporates or public
sector undertakings. A bond/debenture is a debt obligation.
• Features
- Interest to be calculated as per Information Memorandum
filed.
- Prices to be quoted up to a maximum of four decimal places.
In terms of yield, it is quoted up to four decimal places.
 Corporate Bond and Debenture Market
• Corporate Bond Issuances – Aug 2018
Rating No. Amount (Rs. Cr.) Avg. Tenor (Year) Avg. Coupon (%)
AAA 19 44,088 4.44 8.26
AA 23 19,808 4.66 9.75
A 8 749 3.94 10.00
BBB 8 1,364 7.72 9.03
NA 26 4,800 4.41 12.15

• Secondary Market Trading Analysis – Aug 2018

Rating No. of Trades Value (Rs. Cr.) Avg. Tenor Avg. Spread (bps)
AAA 1,851 52,466 3.69 81
AA 612 15,650 7.05 143
A 142 4,904 6.00 152
BBB 12 212 3.56 283
NA 34 2,832 4.55 238
 Comparable Average Rates in August 2018
Description Monthly Average Rate (%)
Call Rate 6.3285
Repo Rate 6.3685
CBLO Rate 6.2609
FBIL-Overnight MIBOR (10-45 AM) 6.48
FBIL-Term MIBOR 14 Days Rate (11-45 AM) 6.87
FBIL-Term MIBOR 1 Month Rate (11-45 AM) 7.00
FBIL-Term MIBOR 3 Months Rate (11-45 AM) 7.39
10 Year Benchmark (WAY) 7.8237
Auction Cut-Off Rate – 91 DTB 6.7623
Auction Cut-Off Rate – 182 DTB 6.9899
Auction Cut-Off Rate – 364 DTB 7.3000
Policy Rate – LAF Repo 6.48
Policy Rate – LAF Reverse Repo 6.24