MONEY MARKET

Lecture 4
 MONEY MARKET
 Money market is a market for overnight to short-term funds (i.e.,
up to 1 year) and for short-term money and financial assets that
are close substitutes for money, that is, financial assets that can
be quickly converted into cash (money) with minimum transaction
cost and without loss in value.

 The broad objectives/functions of the money market are three-

fold:
(i) It acts as an equilibrating mechanism for evening out short-term
surpluses and deficiencies of funds,
(ii) It is the focal point of RBI intervention for influencing liquidity in
the economy and
(iii) It provides reasonable access to the users of short-term funds to
meet their requirements at realistic/reasonable cost or to
temporarily deploy their excess funds for earning returns.
 MONEY MARKET
 The operational features of the money market, in contrast to the capital
market are:
a. short duration (upto 1 year);
b. institutional source of working capital financing;
c. large number of participants; wholesale market (large volume of funds);
d. same day settlement of transactions;
e. scope for innovative dealings;
f. a large number of inter-related sub-markets .

The main players in the MM are RBI, banks, the Discount and Finance House
of India (DFHI), mutual funds, insurance companies, NBFCs, corporate
investors, state governments, provident funds, primary dealers, Securities
Trading Corporation of India (STCI), public sector undertakings.

 The main elements of the money market in India are:

(i) RBI as the regulator of money and credit and
(ii) money market organization.
 REFORMS IN MONEY MARKET IN THE LAST TWO
DECADES
 Discount and Finance House of India(DFHI) set up by RBI and public sector banks and FIs in 1988
to impart liquidity to the money market instruments and help development of a secondary market
for them.

 Commercial papers introduced in 1990.

 Securities Trading Corporation of India (STCI) , now called STCI Finance Ltd.set up in June 1994
to provide active secondary market in government dated securities and public sector bonds.

 It is now classified as Systemically Important Non-Deposit taking NBFC registered with RBI.

 Allowing entry of FIIs, non-bank FIs and mutual funds.

Liquidity adjustment facility
 Innovative instruments introduced (LAF , MSF etc.) Marginal Standing Facility

 New money market derivatives like Forward Rate Agreements (FRAs) and Interest Rate Swaps
(IRS) introduced in 1999.

 Payment system infrastructure strengthened by: Negotiated Dealing System (NDS)-2002, Clearing
Corporation of India Ltd.(CCIL)-2002, Real Time Gross Settlement (RTGS)-2004.

 Collateral Borrowing and lending Obligation (CBLO) introduced in 2003

SOME TERMS/ INSTITUTIONS IN MONEY MARKET
1. SUBSIDIARY GENERAL LEDGER(SGL) Account
 The Central Bank makes it mandatory on all
commercial banks to invest a certain percentage of their
liabilities in government securities viz. T-Bills, Bonds
etc which is called SLR.

 These securities are parked in an account maintained

with the Central Bank which is called Subsidiary
General Ledger. The main purpose of this account is the
holding and trading of government securities.
 2. PRIMARY DEALERS (PDS)
 Introduced by RBI in 1995 to strengthen the infrastructure of
Govt. Securities and put in place an improved, efficient
secondary market trading system.

 A primary dealer is a bank/securities broker dealer who can

trade directly with RBI in government debt.

 To encourage holding of G-sec. on large scale and make the

market more vibrant and liquid.

 PDs can also be referred to as merchant bankers to

Government of India as only they are allowed to underwrite
primary issues of government securities.

 In 2006-07, RBI allowed banks to act as primary dealers.

2. PRIMARY DEALERS (PDS)
Core activities of PDs:
 Dealing and underwriting of G-sec.
 Dealing in Interest rate derivatives.
 Providing broking services in G-sec.
 Dealing and underwriting in corporate/PSU/ FI
bonds/debentures.
 Lending in call/notice/term/repo/CBLO markets.
 Investment in CPs, CDs, receipts issued by securitization and
reconstruction companies.

 Non core activities: investment/trading in equity and equity

derivatives market, portfolio management services, issue
management services, mergers and acquisition advisory
services, etc.
3.NEGOTIATE DEALING SYSTEM (NDS)
 NDS is an RBI-operated electronic trading system, that
does away with the physical exchange of forms between
its trading members in facilitation of exchanges of
government securities and other money market
instruments.

 The platform was introduced as a part of RBI's long-

term plan for developing the government securities
market. The system has helped in achieving paperless
settlement of secondary market transactions and in the
process has brought about transactional efficiency and
transparency.

 The system was introduced in February 2002.

 3.NEGOTIATE DEALING SYSTEM (NDS)

 The objectives of NDS include:

1. Starting an automated electronic reporting and settlement
process,
2. facilitating electronic auctions and
3. providing a platform for trading in government securities on a
negotiated basis as well as through a quote-driven
mechanism.

 Securities traded: Repo transactions in Treasury Bills and

government-dated securities (Central and state governments)
are settled through NDS.

 (https://www.rbi.org.in/scripts/FAQView.aspx?Id=86)
4. 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, Treasury Bills
or Dated Government Securities.

 Government Securities are mostly interest bearing, dated

securities issued by RBI on behalf of the Government of India.

 GOI uses these funds to meet its expenditure commitments.

 These securities are generally fixed maturity and fixed coupon

securities carrying semi-annual coupon.
4. GOVERNMENT SECURITIES
 Since the date of maturity is specified in the securities, these are
known as dated Government Securities, e.g. 8.24% GOI 2025
is a Central Government Security maturing in 2025, which carries
a coupon of 8.24% payable half yearly.

 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 Public Debt Office (PDO) of the Reserve Bank of India acts
as the registry / depository of Government securities and deals
with the issue, interest payment and repayment of principal at
maturity.
GOVERNMENT SECURITIES
 Features of Government Securities
 Issued at face value

 No default risk as the securities carry sovereign guarantee.

 Ample liquidity as the investor can sell the security in the secondary market

 Interest payment on a half yearly basis on face value

 Can be held in Demat form.

 Rate of interest and tenor of the security is fixed at the time of issuance and is
not subject to change (unless intrinsic to the security like FRBs - Floating Rate
Bonds).

 Redeemed at face value on maturity; Maturity ranges from of 2-30 years.

 Securities qualify as SLR (Statutory Liquidity Ratio) investments (unless

otherwise stated).
5. DISCOUNT AND FINANCE HOUSE OF INDIA LTD (DFHI)

 DFHI was set up in March 1988 by Reserve Bank of India jointly with
public sector banks and all India Financial Institutions to develop the
money market and to provide liquidity to money market instruments as a
sequel to Vaghul Working Group recommendations.

 With the introduction of new money market instruments such as

Certificates of Deposits and Commercial Paper, DFHI began dealing in
these instruments as well.

 With effect from 1992-93, DFHI was authorized to deal in dated

Government Securities.

 After DFHI was accredited as a Primary Dealer in February 1996, its

operations significantly increased particularly in Treasury Bills and dated
Government Securities.
5. FUNCTIONS OF DFHI
 To even out the liquidity imbalances in the banking system i.e. to balance the
demand with the supply for short term finance in the money market.

 To promote secondary market in short term money market instruments i.e. to

be an active trader in money market instruments rather than a mere
repository, and thereby, impart improved liquidity to short term money market
instruments.

 Provide safe and risk-free short-term investment avenues to institutions; DFHI

being an institution promoted by the public sector banks/financial institutions
and RBI, enjoys excellent credit rating in the market.

 Provide greater liquidity to money market instruments.

 Facilitate money market transactions for small and medium sized institutions
who are not regular participants in the market.

 DFHI provides the 'Constituent SGL' Account facility which enables even
those entities which otherwise do not have an SGL Account facility with the
RBI to reap the full benefits of investing in government securities.
6. CLEARING CORPORATION OF INDIA LIMITED (CCIL)

 CCIL was set up in April 2001 by banks, financial institutions and

primary dealers, to function as an industry service organization
for clearing and settlement of trades in money market,
government securities and foreign exchange markets.

 The Clearing Corporation plays the crucial role of a Central

Counter Party (CCP) in:
i. Government securities,
ii. USD –INR forex exchange (both spot and forward segments)
and
iii. Collaterised Borrowing and Lending Obligation (CBLO)
markets.

 In order to minimize these risks that it exposes itself to, CCIL

follows specific risk management practices which are as per
international best practices.
 MONEY MARKET ORGANIZATION

 The organization of the money market in India till the mid-eighties,

suffered from three deficiencies:
1. a narrow base in terms of limited participants,
2. paucity of instruments and
3. controlled interest rates.

 The present organization comprises of a number of instruments

(interrelated sub-markets) and intermediaries. The sub-markets are:
1. Call and Notice market,
2. T-bills market,
3. Commercial bills market,
4. Commercial Papers market and
5. Certificates of Deposit market.
6. Collateralized Bond Lending and Borrowing (CBLO)
 The money market intermediaries are Primary Dealers and Money
Market Mutual Funds.
 1. CALL MARKET/ NOTICE MARKET
 The call/notice money market deals with overnight/one-day (call) money
and notice money for upto 14 days.

 It primarily serves the purpose of balancing the short term liquidity

position of banks.

 Call money is required by banks to meet their CRR requirements on a

reporting Friday.

 The call market is a pure inter-bank market now.

 There are also prudential limits on lending and borrowing by banks/

(PDs) in the call market.

 No collateral security is required for borrowing in this market.

 1. CALL MARKET
 The call rates are affected by a number of factors such as easy/tight
liquidity conditions, reserve requirements, volatile forex market
conditions and so on.

 The RBI moderates liquidity and volatility in the call market through
LAF, repo and reverse repo and changes in CRR.

 Commercial banks, both Indian and foreign, co-operative banks,

Discount and Finance House of India Ltd.(DFHI), Securities trading
corporation of India (STCI) participate as both lenders and borrowers.

 LIC, UTI, NABARD can participate only as lenders.

 The major call money markets are in Mumbai, Kolkatta, Delhi,

Chennai, and Ahmadabad.
PREVAILING RATES
Money Market
: 5.00% - : 4.80% - 6.40%Call Rates 3.70% - 5.20% *
Call Rates Call Rates
6.60% * *
* as on previous day
* as on previous day * as on previous day

Government Securities Market

7.17% GS
:7.8112% 7.17% GS 2028 :7.4858% 7.26% GS 2029 :6.6860% #
2028
91 day T-
: 6.9366%* 91 day T-bills : 6.3149%* 91 day T-bills : 5.2006%*
bills
182 day T-
: 7.2092%* 182 day T-bills : 6.3519%* 182 day T-bills : 5.3323%*
bills
364 day T-
: 7.4665%* 364 day T-bills : 6.3892%* 364 day T-bills : 5.4111%
bills
* cut-off at the last * cut-off at the last auction;
* cut-off at the last auction;
auction; Data as on 30th data as on 12th Oct 2019
data as on 30th March 2019
October 2018 (https://www.rbi.org.in/)
(https://www.rbi.org.in/)
(https://www.rbi.org.in/)
2. COMMERCIAL BILLS MARKET
 A commercial bill is a short-term negotiable instrument.

 It is a written instrument containing an unconditional order signed by the

maker (seller of goods), directing the buyer to pay a certain amount of
money only to a particular person or to the bearer of the instrument (also
called a Trade Bill).

 Trade bills can be inland and foreign.

 When trade bills are accepted by commercial banks, they are called
commercial bills.

 These commercial bills can be discounted in the Bill Discount Market.

 In the initial stages of the development of the bill discounting market, the
RBI provided significant support, but it gradually withdrew its support and
allowed FIs to rediscount such bills.

 Bill rediscounting, as a money market instrument, has not become popular

in India inspite of several measures, including abolition of stamp duty,
taken by the RBI to develop bill finance.
 3. T-BILL MARKETS
 A T-bill is an instrument of short-term borrowing by the
Government of India to bridge seasonal/temporary gaps
between receipts and expenditures.

 It is a particular kind of finance bill (that does not arise from

any genuine transaction in goods) or a promissory note
issued by RBI on behalf of the Government.

 The features of T-bills are:

(a) negotiability,
(b) issued at discount to face value and redemption at par on maturity,
(c) high liquidity, low transaction cost,
(d)absence of default risk,
(e)eligibility for inclusion in the SLR and transaction through SGL Account.
3. T-BILL MARKETS
 Being a risk-free instrument, the yields on T-bills at various
maturities serve as a benchmark and help in pricing different
floating rate instruments in the market.

 All entities registered in India like banks, financial institutions,

Primary Dealers, firms, companies, corporate bodies, partnership
firms, institutions, mutual funds, Foreign Institutional Investors,
State Governments, Provident Funds, trusts, research
organizations, Nepal Rashtrabank and even individuals are eligible
to bid and purchase Treasury bills.

 Treasury bills are zero coupon securities and pay no interest.

 For example, a 91 day Treasury bill of Rs.100/- (face value) may be

issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and
would be redeemed at the face value of Rs.100/-.

 They are issued in minimum denomination of Rs.25000 and in

multiples of it.
 3. T-BILL MARKETS
 On the basis of periodicity, treasury bills may be classified into
three categories:
1. 91 Days treasury bills,
2. 182 Days treasury bills, and
3. 364 Days treasury bills.

 The Reserve Bank of India conducts auctions usually every

Wednesday to issue T-bills.

 Payments for the T-bills purchased are made on the following

Friday.

 Auctions are conducted on the electronic platform, the NDS –

Auction platform.

 https://m.rbi.org.in/Scripts/FAQView.aspx?Id=79
AUCTIONING OF GOVERNMENT SECURITIES
 Government securities are issued through auctions conducted by the
RBI

 An auction may either be yield based or price based.

1. 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 (for example, 8.19
per cent, 8.20 per cent, etc.).
 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.
AUCTIONING OF GOVERNMENT SECURITIES
2. 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, Rs.101.00, Rs.100.00, Rs.99.00, etc., 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.

(https://rbi.org.in/Scripts/FAQView.aspx?Id=79#4)
AUCTIONING OF GOVERNMENT SECURITIES
Depending upon the method of allocation to successful bidders,
auctions can be classified as Uniform Price based and Multiple Price
based

(1) Multiple Price Auction

 Under this method (also known as French Auction), all bids equal
to/above the cut-off price are accepted.

 Advantage of this method is that RBI obtains the maximum price each
bidder is willing to pay.

(2) Uniform Price Auction

 RBI invites bids in descending order and accepts those that fully
absorb the issue amount, i.e., each winning bidder pays the same
price.
AUCTIONING OF GOVERNMENT SECURITIES

 Participants can either bid as competitive bidders or as non-

competitive bidders.

 Participation as non-competitive bidders would mean that they

do not quote the price at which they desire to buy these bills.

 The Reserve Bank allots bids to the non-competitive bidders at

the weighted average price of the competitive bids accepted in
the auction.
4. COMMERCIAL PAPER (CP)MARKET
 A CP, introduced in 1990, is a short-term, unsecured, negotiated
instrument consisting of a promissory note with a fixed maturity.

 Depending on whether it is issued by the company concerned

directly or through a dealer, the CP is called a direct paper or a
dealer paper respectively.

 It can be issued by corporates, primary dealers (PDs) and the All-

India Financial Institutions (FIs).

 It was introduced to enable highly rated corporate borrowers to

diversify their sources of short-term borrowings and to provide an
additional instrument to investors.

 Credit rating of CPs is mandatory.

 CP can be issued for maturities between 7 days to 1 year from the

date of issue. However, the maturity date of the CP should not go
beyond the date up to which the credit rating of the issuer is valid.
4. COMMERCIAL PAPER MARKET

 CP can be issued in denominations of Rs.5 lakh and in multiples

thereof.

 The total amount of CP proposed to be issued should be raised

within a period of 2 weeks from the date on which the issuer
opens the issue for subscription.

 They are issued at a discount to face value.

 Every issuer must appoint an Issuing and Paying Agent (IPA) for
issuance of CP.
 5. CERTIFICATE OF DEPOSITS MARKET
 A CD is a negotiable money market instrument, issued in a
demat form or as a promissory note for funds deposited at a
bank/other eligible FIs for a specified time period.

 In other words, a CD is a marketable receipt of funds

deposited in a bank/FI, for a fixed period, at a specified rate
of interest.

 CDs are like bank term deposits but unlike traditional time
deposits, these are freely negotiable and are often referred
to as Negotiable Certificates of Deposit.

 It is attractive both to the bank/FI and the investors as the

former does not have to encash the deposit prematurely,
while the latter can sell it in the secondary market before its
maturity.

 The framework of the issue of CDs in India is prescribed by

the RBI.
5. CERTIFICATE OF DEPOSITS MARKET

 CDs issued by banks should not have the maturity less than
7 days and not more than 1 year. Financial Institutions are
allowed to issue CDs for a period between 1 year and up to 3
years.

 CDs are issued in denominations of Rs.1 Lakh and in the

multiples of Rs. 1 lakh thereafter.

 Discount/Coupon rate of CD is determined by the issuing

bank/FI.

 Loans cannot be granted against CDs and Banks/FIs cannot

buy back their own CDs before maturity.
 5. CERTIFICATE OF DEPOSITS MARKET

Other features
 All scheduled banks (except RRBs and Co-operative banks) are
eligible to issue CDs.

 They can be issued to individuals, corporations, trusts, funds and

associations.

 They are issued at a discount rate freely determined by the issuer

and the market/investors.

 For CDs there is no lock-in period.

 6. COLLATERALIZED BORROWING
AND LENDING OBLIGATION (CBLO)
 CBLO is another money market instrument operated by the CCIL, for
the benefit of the entities who have either no access to the inter bank
call money market or have restricted access in terms of ceiling on call
borrowing and lending transactions.

 CBLO is a discounted instrument available in electronic book entry

form for the maturity period ranging from 1 day to 90 days (up to one
year as per RBI guidelines).

 CCIL members can borrow or lend funds against the collateral of eligible
securities.

 Eligible securities are Central Government securities including Treasury

Bills, and such other securities as specified by CCIL from time to time.
6. COLLATERALIZED BORROWING AND LENDING
OBLIGATION (CBLO)

 Borrowers in CBLO have to deposit the required amount of eligible

securities with the CCIL based on which CCIL fixes the borrowing
limits.

 CCIL matches the borrowing and lending orders submitted by the

members and notifies them.

 While the securities held as collateral are in custody of the CCIL, the
beneficial interest of the lender on the securities is recognized through
proper documentation.

 In order to enable the market participants to borrow and lend funds,

CCIL provides the Dealing System through Indian Financial Network
(INFINET), a closed user group to the Members of the Negotiated
Dealing System (NDS) who maintain Current account with RBI and
through Internet for other entities who do not maintain Current account
with RBI.
MONEY MARKET INTERMEDIARIES: MONEY
MARKET MUTUAL FUNDS (MMMF)

 An MMMF is a conduit through which small investors can

participate in the money market to earn the market-related yield.
They are, however, a marginal player in the Indian money market.

 A money market fund is a mutual fund open-ended scheme that

invests solely in cash/cash equivalent securities with less than
one year maturity, which are also often referred to as money
market instruments.

 These investments are short-term very liquid investments with

high credit rating.

 Money market fund's purpose is to provide investors with a safe

place to invest in easily accessible cash-equivalent assets
characterized as a low-risk, low-return investment.
TYPES OF GOVERNMENT SECURITIES
Fixed Rate Bonds
 These are bonds on which the coupon rate is fixed for the entire life (i.e. till
maturity) of the bond. Most Government bonds in India are issued as fixed rate
bonds.
For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years
maturing on April 22, 2018. Coupon on this security will be paid half-yearly at
4.12% (half yearly payment being half of the annual coupon of 8.24%) of the face
value on October 22 and April 22 of each year.

Floating Rate Bonds (FRB)

 FRBs 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.
 FRBs were first issued in September 1995 in India.

 For example, a FRB was issued on December 21, 2009 for a tenor of 11 years,
thus maturing on December 21, 2020. The base rate on the bond for the coupon
payments was fixed at 3.79% being the weighted average rate of implicit yield on
182-day Treasury Bills during the preceding three auctions. In the bond auction,
coupon for the first six months was fixed at 4.8557%
TYPES OF GOVERNMENT SECURITIES
Zero Coupon Bonds
 Zero coupon bonds are bonds with no coupon payments.

 However, like T- Bills, they are issued at a discount and

redeemed at face value. The Government of India had
issued such securities in the 1990s; It has not issued zero
coupon bonds after that.

Capital Indexed Bonds

 These are bonds, the principal of which is linked to an
accepted index of inflation with a view to protecting the
Principal amount of the investors from inflation.
 A 5 year capital indexed bond, was first issued in
December 1997 which matured in 2002.
TYPES OF GOVERNMENT SECURITIES
Inflation Indexed Bonds (IIBs)
 IIBs are bonds wherein both coupon flows and Principal amounts
are protected against inflation.

 The inflation index used in IIBs may be Whole Sale Price Index
(WPI) or Consumer Price Index (CPI).

 Globally, IIBs were first issued in 1981 in UK.

 In India, Government of India through RBI issued IIBs (linked to

WPI) in June 2013.

 Since then, they were issued on monthly basis (on last Tuesday of
each month) till December 2013.

 Based on the success of these IIBs, Government of India in

consultation with RBI issued the IIBs (CPI based) exclusively for
the retail customers in December 2013.
TYPES OF GOVERNMENT SECURITIES
Bonds with Call/ Put Options
 Bonds can also be issued with features of optionality wherein
the issuer can have the option to buy-back (call option) or
the investor can have the option to sell the bond (put option) to
the issuer during the currency of the bond.

 It may be noted that such bond may have put only or call only or
both options.

 The first G-Sec with both call and put option viz. 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 5

years tenure from the date of issuance on any coupon date falling
thereafter.
 The Government has the right to buy-back 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 on any
of the half-yearly coupon dates starting from July 18, 2007.
TYPES OF GOVERNMENT SECURITIES
Special Securities
 Under the market borrowing programme, the Government of
India also issues, from time to time, special securities to
entities like Oil Marketing Companies, Fertilizer Companies,
the Food Corporation of India, etc. (popularly called oil bonds,
fertiliser bonds and food bonds respectively) as compensation
to these companies in lieu of cash subsidies.

 These securities are usually long dated securities and carry

marginally higher coupon (spread of about 20-25 bps) over the
yield of the dated securities of comparable maturity.

 These securities are, however, not eligible SLR securities but

are eligible as collateral for market repo transactions.

 The beneficiary entities may divest these securities in the

secondary market to banks, insurance companies / Primary
Dealers, etc., for raising funds.
TYPES OF GOVERNMENT SECURITIES
STRIPS – Separate Trading of Registered Interest and
Principal of Securities.

 STRIPS are the securities created by way of separating the cash flows associated
with a regular G-Sec i.e. each semi-annual coupon payment and the final principal
payment to be received from the issuer, into separate securities.

 They are essentially Zero Coupon Bonds (ZCBs).

 However, they are created out of existing securities only and unlike other securities,
are not issued through auctions.

 Securities represent future cash flows (periodic interest and principal repayment) of
an underlying coupon bearing bond. Being G-Secs, STRIPS are eligible for SLR.

 In India, currently dated securities (other than FRBs, IIBs and special securities)
having their coupon due on Jan 2 and Jul 2 are eligible for STRIPPING.
 Guidelines for stripping and reconstitution of G-Secs have already been issued
(IDMD circular dated March 25, 2010). For example, when Rs.100 of the
8.24%GS2018 is stripped, each cash flow of coupon (Rs. 4.12 each half year) will
become a coupon STRIP and the principal payment (Rs.100 at maturity) will become
a principal STRIP.
 TYPES OF GOVERNMENT SECURITIES
 These cash flows are traded separately as independent securities in
the secondary market.

 STRIPS also provide institutional investors with an additional

instrument for their asset liability management (ALM).

 Further, as STRIPS have zero reinvestment risk, being zero coupon

bonds, they can be attractive to retail/non-institutional investors.

 The process of stripping/ reconstitution of G-Secs is carried out at RBI,

Public Debt Office (PDO).

 Physical securities are not eligible for stripping/reconstitution.

Minimum amount of securities that needs to be submitted for
stripping/reconstitution is Rs. 1 crore (Face Value) and in multiples
thereof.

 They are currently tradable in both OTC market and on NDS-OM.

 (https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=250)
 TYPES OF GOVERNMENT SECURITIES
Sovereign Gold Bond (SGB)
 SGBs are unique instruments, prices of which are linked to commodity price viz Gold.

 SGBs are denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

 The tenor of the SGB is for a period of 8 years with exit option from 5th year to be
exercised on the interest payment dates.

 SGBs are restricted for sale to resident Indian entities including individuals, HUFs, trusts,
Universities, charitable institutions.

 Price of bond at the time of issue is fixed in Indian Rupees on the basis of the previous
week’s (Monday–Friday) simple average of closing price of gold of 999 purity
published by the India Bullion and Jewellers Association Ltd. (IBJA).

 The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday)
simple average of closing price of gold of 999 purity published by IBJA.

 SGBs are eligible for SLR, can be used as collateral for loans and are tradable on stock
exchanges.