Money market some other
issues
Some terms used in Money Market:
Open Market operation:
It refers to the sale and purchase of the Central
and state Government and Treasury Bills
Objective:
i. To control in the amount of bank credit and
money supply
ii. To make bank rate policy more effective
iii. To support government borrowing program
iv. To smoothen the seasonal flow of banks credit
market.
Bank Rate: The BR is the standard rate at
which the RBI buys/rediscounts bills of
exchange/other eligible commercial
papers.
It is also the rate which the RBI charges on
certain collateral to banks
RBI uses it as a signal to reflect the monitory
policy and bank uses it to signal to change
the price of their loan.
Refinance: The RBI uses this instrument to
relive liquidity shortage in the system,
control monitory and credit conditions and
direct credit to the selective sectors.
Cash Reserve Ratio (CRR): It refers to the
cash which banks have to maintain with
the RBI, as a percentage of their demand
and time liabilities.
Statutory Liquidity Ratio (SLR): It is
reserve the bank has to maintain with the
RBI for a period ( daily basis) in order to
restrict credit and ensure solvency.
Cash + Bal in current account +
Gold and unencumbered approved
securities
SLR = -------------------------------------------Demand + Time liability
Liquidity Adjusted Facility (LAF): It
provide for Collateralized Lending Facility
By RBI to Banks up to .25 percent of
fortnightly average outstanding deposit.
It acts over and above the other instruments
like SLR and CLR.
Repos and Reverse Repos: It is a transaction in
which two parties agree to sell and repurchase
the same security. The seller specified securities
with an agreement to repurchase the same at a
mutually decided future date and price. Like
wise the buyer purchases the securities with an
agreement to resell the same to the seller on an
agreed date and at a predetermined price.
The same transaction is Repo from the view point
of the seller and Reverse repo from the view
point of the buyer of the securities.
The condition of repo or reverse repo will be
depended on the counterpart who initiate it.
Repos and Reverse Repo helps in:
i. Meet short fall in the cash position
ii. Increase return on funds yield
iii. Borrow securities to meet regulatory
requirement and,
iv. By the RBI to adjust liquidity in the
financial year.
There are two legs in the repo transaction:
i. First Leg or step:
Total Consideration: Deal rate X Face
value + Accrued Interest
ii. Second leg: (here the repo rate is
adjusted with the interest earned on the
security during the holding period, to
arrive at the reversal price.
Reversal Price: Deal Rate x Face value
+(interest for holding period-Interest
paid at repo rate)/face value
Eg: Bank X entered into a repo for 14 days
with bank Y for Rs.10 crore. The security
chosen is 13.6% GS -2010. The repo rate
is 5 percent. The agreed purchase price is
Rs.1,01,12,00,000. The last coupon was
paid 30 days ago.
Calculation of first leg:
Sale price:
Rs.1,01,12,00,000
Accrued Interest (30 days) Rs.
11,33,300
-----------------------Net Cash Outflow
Rs. 1,01,23,33,300
Calculation for second leg:
Repo interest income
(Rs.101,23,33,300 x 0.05 x 14/365) = 19,41,461
Cash Inflow
(Rs.101,23, 33,333 + 19,41,461) = 1,01,32,52,838
Less Accrued Interest (44 days) =
1,63,945
-----------------------Purchase Price:
= 1,01,30,88,893
----------------------Rate = 1,01,30,88,893/10000000= Rs.101.31
Yield Calculation:
(100 – P) x 365 x 100
Y = ------------------------------PxD
Where; Y = Discounted yield
P = Price
D = Days to maturity
Eg: SBI wants to purchase 91 days T Bill
maturing on Dec 6, 2009 on October 12,
2009. The rate quoted by PNB Guilt's is
Rs. 99.1489 ( Rs.100 face value).
The YTM = (Rs.100 – Rs.99.1489) x 365 x
100 /99.1489 x 55) = 5.70 per cent.