Indian Fixed Income Market

Presented by :
Guided by : DONETA AGARWAL
Prof. C. K. Maheshwari NITESH GOYAL
RICHA SINGH
SOMYA DIXIT
VINIT DALMIYA
VIVEK GOYAL
 Fixed Income Securities..???
An investment that
provides a return in
the form of fixed
periodic payments and
the eventual return of
principal at maturity.
Periodic
Payments
Example :
Principal
Let us assume that a
Repayment at
person / company
maturity
known to you comes
to you and asks you to
lend some money
 The Questions arises….
• Why does he need this money? ( purpose)
• When will he repay? ( Tenure)
• How much interest does he pay me for waiting to receive my
money? ( Coupon)
• How will he repay my principle? ( Is it at the end of the tenure /
amortize / bullet payment)
• What are the means for him to repay my money? ( Cash flows)
• What is the security for my money? Is this security enforceable?
• How does he repay my interest? ( is it monthly, quarterly or other
periods)
• Does he have an earlier history of borrowing and repaying
successfully?
• How good is he as a borrower ( Credit Score, etc)
Why does companies need money & how do
they raise this money?

• Companies need money for various purposes

including general corporate purposes,
expansion, growth, buyout of other
companies, etc.
• They can raise money either by offering the
investors an equity stake or by debt.
• Here, in fixed income securities, we are talking
of the debt route of borrowing.
Origin of Indian Fixed Income Mkt…

Future
After
Economic
Aspects
Before Liberalization
Economic
Liberalization
 Size does matter…
• Avg. daily turnover in call money market.
• Corp. debt traded at NSE.
• Trading in corp. bonds.
• Central govt. mkt. borrowing.
 Financial Markets
• Money Market- for short-term funds (less than
a year)
– Organized (Banks)
– Unorganized (money lenders, chit funds, etc.)

• Capital Market- for long-term funds

– Primary Issues Market
– Stock Market
– Bond Market
 Money/ Corporate Sec. market
Call Money
Short notice
Term Money
Commercial Paper
Certificates of Deposits
Money Market Mutual Funds
Commercial Bills
Treasury Bills Primary Market consists of:
Public Corporate, Existing Stock holders other entities
Inter Corporate Funds .
Handles Instruments like:
Stock / Shares/Debentures/Units/Bonds/Warrants/

Collective Instruments like:

Venture Capital Funds, Global depository receipts,
Foreign currency convertible Bonds
Capital Markets
1.Primary
2.Secondary
 Organized Money Market
• Call money market
• Bill Market
– Treasury bills
– Commercial bills
• Bank loans (short-term)
• Organized money market comprises RBI,
banks (commercial and co-operative)
 Purpose of the money market
• Banks borrow in the money market to:
– Fill the gaps or temporary mismatch of funds
– To meet the CRR and SLR mandatory requirements
as stipulated by the central bank
– To meet sudden demand for funds arising out of
large outflows (like advance tax payments)

• Call money market serves the role of

equilibrating the short-term liquidity position of
the banks
 Money Market Instruments
• Certificates of Deposit
• Commercial Paper
• Inter-bank participation certificates
• Inter-bank term money
• Treasury Bills
• Bill rediscounting
• Call/notice/term money
• CBLO
 Certificates of Deposit
• CDs are short-term borrowings in the form of p-
notes issued by scheduled banks.
• For meet their short term requirements.
• Introduced in 1989
• Maturity of not less than 7 days and maximum up to
a year. FIs are allowed to issue CDs for a period
between 1 year and up to 3 years
• Issued to individuals, corporations, trusts, funds and
associations
• They are issued at a discount rate freely determined
by the market/investors
 Commercial Papers
• Short-term borrowings by corporates, financial
institutions, primary dealers from the money market
• CPs are issued by corporate borrowers to meet their
working capital requirement
• Can be issued in the physical form ( Promissory Note)
or demat form
• Introduced in 1990
• Issued subject to minimum of Rs. 5 lacs and in the
multiple of Rs. 5 lacs after that
• Maturity is 7 days to 1 year
• Unsecured and backed by credit rating of the issuing
company
• Issued at discount to the face value
 T-Bill Market
• Treasury Bill market- Also called the T-Bill market
– These bills are short-term liabilities (91-day, 182-day, 364-
day) of the Government of India
– a promise to pay the stated amount after expiry of the
stated period from the date of issue
– They are issued at discount to the face value and at the
end of maturity the face value is paid
– The rate of discount and the corresponding issue price are
determined at each auction
– RBI auctions 91-day T-Bills on a weekly basis, 182-day T-
Bills and 364-day T-Bills on a fortnightly basis on behalf of
the central government
 Govt Bonds
• Fixed-income securities are classified
according to the length of time before
maturity. These are the three main categories:
• Bills - debt securities maturing in less than one
year.
• Notes - debt securities maturing in one or
more years.
• Bonds - debt securities maturing in more than
1 years.
 Call money market
• Call Money, Notice Money & Term Money
• Clean Loan (No collateral is required)
• Purpose : Temporary deficit of funds among
the banks
• The call market helps banks economies their
cash and yet improve their liquidity
• It is a highly competitive and sensitive market
 Call Money Market Participants
• Those who can both borrow and lend in the
market – RBI , banks and primary dealers
• Once upon a time, select financial institutions
like IDBI, UTI, Mutual funds were allowed in
the call money market only on the lender’s
side
• These were phased out and call money market
is now a pure inter-bank market (since August
2005)
 Trading in call Money market
• No broker and a OTC market
• Settlement is done between the participants
through the current account maintained with
the RBI
• Currently, there are 98 commercial banks,
3,000 co-operative banks and 17 PDs who
are borrowing and lending in the market,
 Money Market Instruments
• Money market instruments are those which
have maturity period of less than one year.
• The most active part of the money market is
the market for overnight call and term money
between banks and institutions and repo
transactions
• Call money/repo are very short-term money
market products
 Market Repos

• Repo is the rate at which RBI infuses liquidity

through purchase of government securities
• Repo (repurchase agreement) instruments enable
collateralized short-term borrowing through the selling of
debt instruments.
• A security is sold with an agreement to repurchase it at a pre-
determined date and rate
• Reverse repo is the process of absorption of liquidity
from the system through sale of government papers .
• Reverse repo is a mirror image of repo and reflects the
acquisition of a security with a simultaneous commitment to
resell
 Collateralised Borrowing and Lending
Obligation (CBLO)
• CCIL introduced a new product Collateralised
Borrowing and Lending Obligation (CBLO) in
January, 2003.
• The product was introduced with a definite
objective, which was to provide an alternative
avenue for managing short term liquidity for
the market players who have been restricted
and/or being phased out of call money market.
 CBLO
• It is an obligation by borrower to return
money as a future date
• Securities are held in custody with CCIL( The
Clearing Corp of India Ltd )
• Members- Banks, FIs,Insurance Cos, Mutual
Funds,Primary Dealers,NBFCs,Non Govt
PF,Corporates.
• Members to open SGL a/c with CCIL
 CBLO
• It is a money Market Instrument.No restriction
on min denomination or lock in period for its
secondary market
• Maturity- 1 day to 1 year
• Rate - As decided by market participants
• Borrowing Limit- As decided by CCIL at the
beginning of the day taking in to a/c securities
deposited by the borrowers
 CBLO
• market players used to borrow funds from the CBLO
market, which was available at 3.5-4 per cent and put the
money in reverse repo, where it earned around 6 per
cent. However, now with CBLO rates going up, there is no
such incentive( position as of April 08 ).
• CBLO is the money market for non-banking entities to
lend and borrow funds for daily requirement. The average
daily turnover in the CBLO segment increased from Rs.
515 crore (2003-04) to Rs. 32, 390 crore (2006-07)
• CBLO Segment clocked the highest volume of Rs.
80,609.75 Crores on June 12, 2009
Category wise Turnover
In CBLO
Limitation..
Insufficient data on company defaults, credit ratings, and available instruments

Irrational and immature market

Low liquidity in the markets arising from trading in a few G-sec

Lack of better Statistical models being used in terms of yield curve and degree
of polynomial to be used.

Estimation of zero coupon using bootstrapping

Segmentation of the interest rate market.

• Thank You