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Indian Fixed Income Markets

Introduction, Meaning, Types Products, Participants Money Market instruments G-Security Market Other Instruments Summary

Why Fixed Income Markets?

Government deficit Rs 1.6 lakh crores
Internal borrowing internal debt Raises the questions of cost of rising debt and servicing debt.

State government deficits state development loans This borrowing requires debt markets to develop. Corporates need short term and long term funds

Introduction to Indian Fixed Income Markets

Government Securities
Central Government Securities (G-sec) / State Development Loans(SDL)

Corporate Debt
PSU Bonds / Corporate Debt / Bonds of Financial Institutions & banks

Introduction to Indian Fixed Income Markets

Money Market
Call Money / Term Money / Repo & Reverse Repo CBLO Treasury Bills Commercial Paper / Certificate of Deposits Inter corporate deposits / Bill Discounting

Fixed Income Markets at a glance

Indian Fixed Income Markets at a Glance Year / Month Call Money Government Securities Average Turnover in Govt. securitie s (Rs.crore )+ 4,826 3,643 4,863 Liquidity Management Average Daily Turnover (Rs.crore) 2004-05 2005-06 2006-07 14,170 17,979 21,725 Average Call Rates* (%) 4.65 5.6 7.22 Average 10year Yield @ (%) 6.22 7.12 7.78 Average MSS Outstandi ng # (Rs. Crore) 46,445 58,792 37,698 Average Daily Reverse Repo (LAF) Outstanding (Rs. Crore) 35,592 10,986 21,973

Jun-06 Jul-06 Aug-07 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07

17,425 18,254 21,294 23,665 26,429 25,649 24,168 22,360 23,254 23,217 29,689 20,476 16,826

5.73 5.86 6.06 6.33 6.75 6.69 8.63 8.18 7.16 14.07 8.33 6.96 2.42

2,258 2,243 5,786 8,306 4,313 10,654 5,362 4,822 4,386 2,991 4,636 4,442 6,250

7.86 8.26 8.09 7.76 7.65 7.52 7.55 7.71 7.9 8 8.1 8.15 8.2

31,845 36,936 40,305 40,018 41,537 38,099 38,148 39,553 40,827 52,944 71,468 83,779 83,049

48,610 48,027 36,326 25,862 12,983 9,937 -1,713 -10,738 648 -11,858 -8,937 -6,397 1,689

Types of Fixed Income Securities

Money market Instruments
Short term Medium term Long term

G-Securities Other debt instruments

Overnight call market Repo market Commercial Paper, Certificate of Deposit, (all having maturity of less than one year)

About Bills , Notes & Bonds

Treasury Bills, are short term instruments with maturities of not more than one year. T -Bills function like Zero- Coupon Bonds. Available at discount to the face value. Treasury Notes are intermediate to long term investments, issued in maturity of two, five & ten years. Interest is paid semi-annually. Treasury Bonds cover terms of more than ten years & the interest is paid semi-annually.

Government Security market

G Securities issued by the RBI on behalf of GOI to finance its debt obligations Fiscal deficit Cost of borrowing Yield curve Market depth


Other Instruments
Treasury bonds State and Local Government securities Public Sector Units/ Financial Institutions bonds Corporate bonds Inter Corporate Deposits


Indian Debt Markets

Classification of markets Market transformation & impact of reforms Reforms proposed to deepen debt markets Return & risk in debt instruments Trends in NSE WDM segment & G-sec. yield


Major Investors in Government Securities
Banks 59.5% LIC 17.9% RBI 9.1% Provident Funds, Mutual Funds 7% Banks holding more than required by SLR by about one-third


Participants in Debt Market

Issuers GOI State Government Local bodies Public sector corporates Private sector corporates Investors Banks Financial Institutions Primary Dealers Insurance Companies Provident Funds, Pension funds Trusts Individuals

Market Participants
Market Participants
Reserve Bank of India (RBI) Banks/Financial Institutions (FIs) Provident/ Pension Funds Mutual Funds (MFs) Trusts Foreign Institutional Investors (FIIs) Corporate Treasuries & Non-Banking Financial Companies (NBFCs) Primary Dealers (PDs)

Debt Markets & Participants

Reserve Bank of India (RBI) Regulator of Government securities (G-sec.) market Issuer and manager of Government (Centre as well as States) borrowings Purpose to meet government borrowing, minimise market impact of large government debt operations and facilitate better coordination between monetary policy and debt management


Debt Markets & Participants

G-Sec Holding Corporate Debt Holding Corporate Deposits (CDs) & Commercial Papers (CPs) Holdings Treasury Bills (T-Bills)


Debt Markets & Participants

G-Sec Holding Corporate Debt Holding Infrastructure Bonds Short-Term Working Capital (STWC), CDs & CPs Long-Term Debt Tax free Bonds

Debt Markets & Participants

Provident/ Pension Funds Purpose to induce savings Monthly contribution by employer & employee Independently managed by Employees of Provident Fund (PF) Trust PF invested in Central & State Government securities and rated corporate debentures Pension funds prefer to invest in government securities

Government Securities / T-Bills / SDL


GOI Securities
Liabilities of GOI issued in the nature of Bonds Issued to finance budget deficits of GOI Available in both SGL, electronic form


GOI Securities
RBI acts the Investment Banker , Custodian, Registrar, and market regulator Primarily, wholesale in nature Active trading & investment avenue for Banks, PDs, FIs, Insurance Cos., PFs, MFs,

GOI Securities
Treasury Bills - Issued by GOI
91 D , 182 D and 364 D TBills Zero coupon securities issued as discount instruments, with maturity < 1 year

Dated Securities - Issued by GOI

Bonds which include both coupon bearing and zero coupon Initial maturity > 1 year

State Govt Loans - Bonds issued by State Govts.


GOI Securities
Auctions (Primary market)
Price based auctions Yield based auctions Uniform pricing auctions Under writing by PDs

On Tap sale for primary issuance Private Placements with RBI Open Market Operations sales/purchases by RBI (Secondary Market)


Over The Counter market Negotiated Dealing System & Brokered deals
NSE Wholesale Debt Market is used more as a trade disclosure system Counterparties known when concluding the deal Positions of big participants can be tracked


Market Participants
Commercial Banks
SLR investment should be > 25% Preference for medium maturity papers for SLR

Primary Dealers
Underwriting primary issues and market making 19 primary dealers currently Refinance facility from RBI at bank rate linked to bidding commitments & turnover

Market Participants
Provident / Pension Funds
Investment of > 25% of its total investible corpus in GOI Sec. & > 40% in State Development Loans Increase yield by investing some corpus in illiquid & longer maturity securities Central Board Of Taxes & Coal Mines Provident Fund are the largest investors


Market Participants
Insurance companies
Investment in GOI securities > 25% for GOI Securities & >50% for GOI & State Loans for Life Insurance Companies Investment in GOI securities > 20% for GOI Securities & >30% for GOI & State Loans for General Insurance Companies Focus on longer maturity securities LIC is the largest investor & subscribers to primary auctions


Market Participants
Mutual Funds
Gilt / Income / Short term / Liquid schemes Depending upon the scheme, 40%-90% is invested in GOI

Co-operative Banks
SLR investment should be > 25%

FIs / Corporates
Cash Management and Investment

TB rates
Treasury Bills in the Primary Market Year / Month Notified Amount (Rupees crore) Average Implicit Yield at Minimum Cutoff Price (%) 91-day 182-day 364-day Average Bid-Cover Ratio 91-day 182-day 364-day

2004-05 2005-06 2006-07

1,38,500 @ 1,55,500 @ 1,86,500 @

4.91 5.68 6.64

5.82 6.91

5.16 5.96 7.01

2.43 2.64 1.97

2.65 2.00

2.52 2.45 2.66

@ : Total for the financial year Notes : (i) - 182-day TB's were reintroduced with effect from April 2005. (ii) - Notified amounts are inclusive of issuances under the Market Stabilisation Scheme (MSS)

Source: RBI Monthly bulletin August 2007


Corporate & PSU Debt


Corporate Debt
Issued by Financial Institutions / corporates / foreign banks / private sector banks

Issued by FIs / PSUs / Nationalised banks


Corporate Debt Products

Fixed rate non convertible in nature Secured debentures / bonds with or without put call options Credit Rating essential Subordinated bonds by banks for Tier II capital Subordinated bonds by PDs for Tier III capital Floating rate bonds linked to G-secs & MIBOR Deep discount, zero coupon, step up coupon Tax free PSU bonds


Corporate Debt Products

Infrastructure bonds with Sec 88, 54 EA/EB/EC benefits Sec 10 (23G) Infrastructure bonds Credit enhanced structured obligations Securitised / Pass through certificates Short Term Products like CPs & CDs Various innovative debt capital market structures


Pricing, typically, at a relevant spread over GOI securities Primarily, wholesale in nature Main market participants for trading & investment avenue include Banks, PDs, FIs, Insurance Cos., PFs, MFs, etc. Trading not as liquid as GOI Securities Trading more liquid in higher rated papers

Trading more liquid in shorter tenor papers Quotes & deals done on an annualised yield basis. Price is derived from the agreed yields


Market Participants
Commercial Banks
Cannot invest where original maturity < 1yr other than CPs & CDs Cannot invest in unrated securities Investment in unlisted securities < 10% of total Non SLR investment. Additional 10% allowed only for securitised issuance.


Market Participants
Primary Dealers
Not invest insecurities with original maturity < 1yr other than CPs & CDs Not invest in unrated securities Investment in unlisted securities < 10% of total Non SLR investment Cannot invest more than 5% of networth in Banks Tier II Bonds Cannot use call money to invest in Non-SLR


Market Participants
Provident Funds
Can investment 25%-55% in PSU Bonds & deposits & a cap of 10% in Private sector debt. Private sector debt has to rated investment grade by at least 2 credit rating companies Increase yield by investing some corpus in illiquid & longer maturity securities

Mutual Funds
Income / Short term / Liquid schemes Depending upon the scheme, 25%-60% is invested in PSU Bonds / Corporate Debt

Market Participants
Insurance Companies
For Life Insurance Companies, Investment in Infrastructure bonds > 15% & Approved Investments < 35% (within this category > 15% in corporate & PSU debt) For General Insurance Companies, Investment in Infrastructure bonds > 10% & Approved Investments < 55% (within this category > 25% in corporate & PSU debt) No investments in unrated papers Group wise limit

Market Participants
Not invest insecurities with original maturity < 1yr other than CPs & CDs Not invest in unrated securities Investment in unlisted securities < 10% of total Non SLR investment


Market Participants
Debt FIIs
Overall annual limit Of this some amount is for dedicated debt FIIs Some amount is kept open for equity FIIs, in the automatic 70:30 route (Take the current limits from SEBI circular on its website)




Corporate Debt
Varying stamp duty on issuance Dealt on T, T+1, T+2 basis Quoted annually Structured- step up/down, deep discount, priority sector, tax free,zero coupon Data not readily available Trading on interest rates and credit spreads

No stamp duty on issue DVP basis on T+1 basis Quoted semi- annual Mostly plain vanilla, dated, coupon sec Data disclosed by RBI/ NSE Trading on interest rates

Money Market Instruments


Money market statistics

Activity in Money Market Segments ( Rupees crore ) Year / Month Average Daily Volume (One Leg) Commercial Paper Certificates of Deposit

Repo M ar k et ( O ut si d e th e L A F) 4,284 5,296 8,419

Call Mon ey 2004-05 2005-06 2006-07 7,085 8,990 10,863

Collaterise d Borro wing and Lendi ng Oblig ation (CBL O) 3,349 10,020 16,195

Term M o n e y M ar k et 263 417 506

Total 14,718 24,306 35,477

Outstandi ng 11,723 17,285 21,621

WADR ( % ) 5.34 6.46 8.08

Outstanding 6,052 27,298 63,746

WADR (%) 8.23

WADR : Weighted Average Discount Rate

Source: RBI Monthly bulletin August 2007

Call Money Markets

Overnight market where funds are lent / borrowed on an overnight basis Term Money Markets are Inter-bank interest rates for a period greater than 1 day


Call/Notice/Term Money
Call money dealt on overnight basis Notice for a period of 2-14 days Term money 15 days to one year Strict entry barriers
Only banks and Primary Dealers can borrow and lend


Market Participants Call / Notice Market

Borrowing: Commercial Banks
Average Fortnightly borrowing < 100% of capital funds

Cooperative Banks
Daily borrowing < 2% of aggregate deposits of previous financial year

Average Fortnightly borrowing < 200% of net owned funds

Market Participants Call / Notice Market

Lending: Commercial Banks
Average Fortnightly lending < 25% of capital funds

Cooperative Banks
No limit

Average Fortnightly borrowing < 25% of net owned funds


NSE-Call rates
Short term Interest rates Overnight DATE 3-May-07 4-May-07 5-May-07 7-May-07 8-May-07 9-May-07 10-May-07 11-May-07 12-May-07 14-May-07 15-May-07 16-May-07 17-May-07 18-May-07 19-May-07 21-May-07 22-May-07 23-May-07 24-May-07 25-May-07 26-May-07 MIBID 8.51 7.93 7.28 6.61 5.82 4.47 2.65 3.15 6.04 8.53 9.01 8.73 8.38 8.03 8.22 7.93 7.68 7.51 7.75 7.78 7.9 MIBOR 8.77 8.07 7.7 6.85 6.05 4.71 3.03 3.47 6.44 8.82 9.31 9.06 8.6 8.3 8.48 8.15 7.85 7.67 7.88 7.98 8.1 14 day MIBID 8.48 8.53 8.5 7.84 7.71 7.73 7.66 7.57 7.22 8.12 8.3 8.56 8.41 8.07 7.59 7.89 7.87 7.69 7.84 7.76 7.29 MIBOR 9.42 9.25 9.34 8.85 8.48 8.42 8.45 8.34 8.33 8.85 9.15 9.2 9.05 8.87 8.51 8.55 8.64 8.43 8.54 8.51 8.44 1 month MIBID 9.3 9.11 9.23 8.98 8.94 8.79 8.71 8.71 8.56 8.82 8.87 9.14 8.98 8.69 8.3 8.58 8.55 8.42 8.42 8.4 8.15 MIBOR 10.1 9.96 10.1 9.98 9.8 9.55 9.48 9.41 9.62 9.61 9.73 9.81 9.77 9.54 9.41 9.4 9.39 9.2 9.33 9.28 9.35 3 month MIBID 10.06 9.85 9.91 9.9 9.92 9.85 9.93 9.81 9.75 9.82 9.91 9.92 9.73 9.71 9.84 9.73 9.66 9.63 9.62 9.65 9.69 MIBOR 10.76 10.66 10.78 10.72 10.66 10.57 10.52 10.37 10.53 10.53 10.58 10.63 10.41 10.45 10.58 10.4 10.41 10.33 10.32 10.33 50 10.5

Market Participants Call / Notice Market

Financial Institutions, Insurance Companies & Mutual Funds not allowed to lend in call money markets


RBI Liquidity Adjustment Facility

RBI Reverse Repo rate
The RBI borrows at reverse repo rate from the market on a daily basis

RBI Repo rate

The RBI lends at repo rate on a daily basis

Only Banks, PDs & Fis can participate in RBI LAF


Ready forward contract
3 day, 7 day, 14 day A contract in which one party sells specified securities to another with an agreement to repurchase the same at a mutually decided future date and a price from the later. Features
Transactions are only in securities permitted by RBI Permitted through Public Debt Office, Mumbai only Basically secured lending/borrowing transactions Interest rates are marginally lower than call/Notice money rates which are unsecured Only entities having SGL/Current a/c with RBI are permitted


Liquidity Adjustment facility (LAF) Banks and other financial intermediaries Rate is fixed by RBI and changes as and when required depending on liquidity conditions


Commercial Papers
Commercial Paper (CPs) are unsecured, negotiable, short term usance promissory notes with fixed maturity issued by leading, nationally reputed, creditworthy and highly rated large corporations


Commercial Papers
Introduced in 1990 January in pursuance of the recommendation of the Vaghul Working Group Unsecured and negotiable promissory notes issued by well-rated corporate entities to raise short-term funds directly from the market PDs and All-India FIs also permitted to issue CPs

Commercial Papers
Minimum credit rating of P-2 or equivalent Minimum maturity of 15 days and maximum maturity of one year To be issued in demat form only


Certificate of Deposits
Certificate of Deposit (CDs) are marketable receipts in bearer or registered form of funds deposited in banks for a specified period at a specified rate of interest. They are transferable, negotiable, short term, fixed interest bearing, maturity dated money market instruments.


Certificate of Deposit
It is a promissory note Negotiable term deposits accepted by commercial banks from bulk depositors at market related rates Generally issued at par Carry low credit risk Liquidity of the instrument is high

Difference between FDs and CDs

FDs Non transferable No minimum amount No maximum maturity Loans against FDs are available from issuing bank FDs have CDs Transferable Minimum amount is specified Maximum maturity is one year Loans are not available CDs does not have an option embedded

Collateralized Borrowing & Lending Obligation (CBLO)

An obligation by the borrower to return the money borrowed, at a specified future date An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent Behaves like an exchange traded repo

Market Participants
Commercial Banks Primary Dealers Provident Funds NBFCs Mutual Funds Insurance companies Co-operative Banks FIs / Corporates FIIs

Role of RBI


Investment Banker To The Government

Schedules the govt borrowing program Issues govt securities via primary auctions Re-issue of an existing paper / new security Structuring of new issues Uniform price / Discriminatory pricing Manages liquidity / market sentiment through devolvements / private placements Potential conflict with its role of conductor of monetary policy


Process of Issuance
Auctions (Primary market)
Price based auctions Yield based auctions Discriminatory auctions Uniform pricing auctions

Private placements with RBI OMO sales by RBI (Secondary Market) through
Auctions On tap sales

Institutional Set Up By RBI

Role of Bank Rate / Reverse Repo Rate Setting up of Liquidity Adjustment Facility Liquidity Management through Open Market Operations & Monetary Stabilization Scheme
Commitment to supply unlimited amount of money at the targeted interest rates Sterlisation of FX flows

Signaling of Monetary Stance through Credit Policy


Signaling Tools
Changes in Bank Rate / Reverse Repo Rate Changes in CRR Frequent statements from RBI regarding their monetary stance


Role of Fixed income markets Participants Instruments Statistics Role of Regulator


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