Fixed Income & Money Markets Business
May 11th, 2000
Products
 Securities
 Funding & Gapping
 Government Bonds
 FX Re/$ Swaps
 Commercial Paper
 DFI Bonds and CDs
 Corporate bonds
 Interest Rate Derivatives
Overview of the Money Markets
Structure of Short-term rates

Repo Rate
Floating Rate
Rate at which Central Bank drains liquidity

Bank Rate
7% (Level I)
Rate at which the Central Bank lends money
to PDs / banks

Reverse Repo Floating Rate
(Liquidity Adjustment Facility)
Daily Auction of Money where RBI injects
money into the system at a variable rate
determined on the basis of bids received
from the market.

RBI targets a corridor for overnight rates

Increased reliance on Open Market Operations for monetary management

Short term money markets (3-6mth) not developed
Instruments, Yields and Market Size
Instruments
Call
Present Yield
8.50% - 9.00%
Size ( $ MM)
Participants
3000 / day
Banks / PDs.
DFIs & MFs - only to lend
Term (91 days)
10.00% - 10.50%
450 o/s
Banks / PDs
DFIs - borrow 3 months +
Repo (14d)
CPs (90d)
CDs (3m)
Tbills (3m)
9.25% - 9.75%
350 o/s
9.80%
1200 o/s
All
1600 o/s
Banks and DFIs
9.90% - 10.25%
9.25%
Banks / PDs / DFIs / MFs
Auction Calendar No restrictions
14-D, 3m, 6m, 1y
Overview of the Debt Markets
The Government is the Largest Issuer
Debt Available for Trading on the National Stock
Exchange ($ MMM)
FIs/ Banks
Corporate
7%
3%
Tbills
4%
State
8%
GOI
69%
PSU Bonds
9%
Govt.. of India
$ 69 MMM
Public Sector Bonds $ 9 MMM
State Governments $ 8 MMM
T-bills
$ 4 MMM
DFIs/ Banks
$ 7 MMM
Corporate Bonds
$ 3 MMM
Total
$ 100MMM
Feb-2000
Trading on the National Stock Exchange
The NSE is the primary exchange where
corporate and government debt is traded
Trading Share on the National Stock Exchange
Primary Dealers
23.0%
FIs / MFs
3.0%
Indian Banks
41.0%
Trading Members
16.0%
Foreign Banks
17.0%
Secondary Market Trading Volumes
Debt Volumes on the National Stock Exchange
68
70
60
USD MMM
50
Increase in number and type of
participants, along with falling
interest rates, has led to
increased trading volumes
40
28.5
30
20
10
12.1
2.2
23.9
3.5
0
1994-95 1995-96 1996-97 1997-98 1998-99
19992000
Est.
Yield Curve - Government of India bonds
12.50%
Tenor
12.00%
1
Goi Yields
( Jun-2000)
9.83 %
2
9.91 %
3
10.00 %
5
10.15 %
7
10.65 %
10.00%
10
11.08 %
9.50%
15
11.18 %
0.90%
11.50%
11.00%
Mar-99
Jun-00
10.50%
9.00%
0
2
4
6
8
10
12
14
16
Yields have declined steadily driven by poor credit off-take, rate cuts and
falling inflation
Yield Curve - AAA Corporate Bonds
15.00%
14.00%
1.9%
13.00%
12.00%
Mar-99
Jun-00
11.00%
10.00%
9.00%
1
2
3
5
7
10
AAA corporate yields have declined faster, driven by mutual fund demand
and flight to quality
New Developments
New Developments . . . . . . . . . Interest Rate Derivatives

Guidelines issued in July 1999

Currently, Notional Outstanding in IRS over USD 400 MM

Overnight rates - are the only reliable benchmark for all swaps

Limited inter-bank deals
– ISDA documentation
– Not represented fully by all foreign banks & Primary Dealers
– Absence of nationalised banks
– Other derivatives have not taken off

IRD scope widened to include Mutual Funds
New Developments . . . . . . . . . Mutual Fund Growth

New Mutual Fund Policy
– Dividends Tax free in the hands of the investor
– Debt Fund to pay 20% tax on dividend distributed ( 0% for Equity)
– Ability for investor to enhance post-tax return by Dividend stripping

Impact
– Compression of spread between GOI and corporate yield
– Sharp increase in funds mobilised by MFs
– Pressure on Banking spreads
Net MF Investment
 Statutory Reserves (35% on deposits)
1997-98
$ 921 MM
 Differential Tax treatment
1998-99
$ 705 MM
(30% on Interest income)
1999–00
$4900 MM
 Capital Adequacy Requirements
( 10 mths)
( 70% by Pvt. MFs)
Total AUM of MFs USD 25 MMM
( UTI-73%, Public Sector –10%,
Pvt Sector –17% )
Going forward - What is required

Permission to short securities for increasing liquidity

Develop the market for strips / When issued market in GOI securities

Securitization market - Need for legal framework & investor awareness

Corporate Debt
 Extension of repo market - participants & eligible securities
 Dematerialisation of corporate bonds
 Align stamp duty on all debt contracts to that applicable to Govt.. Securities

Removal of withholding tax for FIIs on debt securities

Development of retail interest in Corporate & Govt.. Debt
DISCLAIMER



Although the information contained herein is believed to be reliable,
Citibank makes no representation as to the accuracy or completeness of
any information contained herein or otherwise provided by Citibank.
The ultimate decision to proceed with any transaction rests solely with the
customer. Citibank N.A. is not acting as your advisor. Therefore, prior to
entering into any proposed transaction, you should determine the
economic risks and merits, as well as the legal, tax and accounting
characterizations and consequences of the transaction, and that you are
able to assume these RISKS.
The contents of this presentation are proprietary in nature, and may not
disseminated in whole or in part without Citibank's written consent.