Financial Markets

Call/ Notice/ Term Money:

Call money market is that part of the national money market where the day to day surplus of funds, of banks and primary dealers, are traded in.Call/ Notice/ term money market ranges between one day to 15 days borrowing and considered as highly liquid. Other key feature is that the borrowings are unsecured and the interest rates are very volatile depending on the demand and supply of the short term surplus/ defeciency amongst the interbank players.
The average daily turnover in the call money market is around Rs. 12000-13000 cr every day and the market is active between 9.30 to 2.30 every working day and 9.30to 12.30 every Saturday.

Repo / Reverse Repo:
It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds. Thus, whether a given agreement is termed as Repo or a Reverse Repo depends on which party initiated the transaction.

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. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions.

The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

Uses of RepoIt helps banks to invest surplus cashIt helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better ratesAn SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously. RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system.

Inter Corporate Deposits:
For short term cash management of the rich corporates, the company offers to borrow through Inter corporate deposits. The company has P1+ credit rating (Highest Rating in its category) for an amount of Rs. 250 crores.

The company offers two variables of the Inter Corporate Deposits:

Fixed Rate ICD : the quantum/ rates/ term to maturity of the ICD are negotitaed by the two parties at the beginning of the contract and remains same for the entire term of the ICD. As per the RBI guidelines the minimum period of the ICD is 7 days and can be extended to peiod of 1 year. The rates are generally linked to Interbank Call Money Market Rates.

Floating Rate ICD : Corporates interested in using the daily volatility of the call money market are offered Floating Rate ICD which may be benchmarked/ linked to either NSE Overnight Call/ Reuters Overnight Call rates. The corporates are also given Put/ Call option after 7 days for managing their funds in the event of uncertainity of availability of idle funds.

Commercial Paper :
It is a short term money market instrument comprising of unsecured, negotiable, short term usance promissory note with fixed maturity, issued at a discount to face value. CPs are issued by corporates to mpart flexibility in raising working capital resources at market determined rates. CPs are actively traded in the secondarymarket since they are issued in the form of Promissory Notes and are freely transferable in demat form.

Certificate of Deposit :
Certificates of Deposit (“CD”) were introduced in 1989 following the acceptance of the Vaghul Working Group of Money Market. These are also usance promissory notes issued at a discount to the face value and transferable in demat form. They attract stamp duty. CDs are issued by scheduled commercial banks and it offers them an opportunity to mobilise bulk resources for better fund management. To the investors they offer better cash management opportunity with market related yield and high safety.

Bills Rediscounting :
The bills rediscounting scheme was introduced by RBI in November 1970 under which all licensed scheduled commercial banks were eligible to rediscount with RBI genuine trade bills arising out of sale/ purchase of goods. In November 1981 RBI stopped rediscounting bills but permitted banks to rediscount the bills with one another as well as with approved Financial institutions. To augment facilities for this activity and also make a larger pool of resources available, RBI has been progressively enlarging the number of institutions eligible for bills rediscounting including primary dealers.

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