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• SBIDFHI :
• It was set up jointly by RBI, SBI ,some other public sector banks and some
other financial institutions in 1988. The main function of DFHI was to
smoothen the short term liquidity imbalances by developing an active
secondary market for the money market instruments in general ( basically
to play the role of a market maker).
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• the main objective was to foster the development of an active secondary market
for Government securities and bonds issued by Public sector undertakings, FIs,
Corporates etc.
• The Company was incorporated with an authorised and paid up capital of Rs. 500
crores of which RBI contributed 50.18 per cent. RBI later on divested its shares in
favour of other shareholders.
• Presently Bank of India is the major shareholder with 29% followed by State Bank
of India and Associates 10.5%, and IDFC 10%. The remaining portion is held by
other Public Sector Banks and Financial Institutions.
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• ii) Secondly the banks borrow from the call money market to meet CRR
requirements, which they should maintain with RBI on a fortnightly basis.
Currently the CRR stands at around 5.5% of the NDTL( Net demand and
time liabilities).
• Call rates:
• The interest rates charged on call money is known as the call
rate.
• The call rate varies from day to day and often from hour to
hour .The call rate reflects the demand supply situation of
short term money.
• Currently the call rate stands at 3.0-3.30 %
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• The corridor may however be breached sometimes due to lack of demand from
the respective ends.
• If the RBI is not absorbing enough liquidity( in case it is not having enough
securities to keep as collateral ) then the banks with surplus funds may lend in the
call money market at a rate lower than the Reverse repo rate and hence the floor
will be breached , and if the banks do not have enough securities to keep as
collateral with RBI they would rather take an unsecured loan in the call money
market at a rate higher than the repo rate and thereby breach the ceiling .
• Dealing Session
• Deals in the call/notice money market can be done upto 5.00 pm on weekdays
and 2.30 pm on Saturdays or as specified by RBI from time to time.
• In case of lenders and borrowers who are non members of the NDS-call, the funds
are lent and paid back through a banker’s pay order which is cleared by a special
high value clearing cell of RBI.
• All dealings in call/notice money on NDS-call ,do not require separate reporting.
• For deals done outside the NDS-call, it is mandatory for all Negotiated Dealing
System (NDS) members to report their call/notice money market deals on NDS.
Deals should be reported within 15 minutes on NDS, irrespective of the size of the
deal or whether the counterparty is a member of the NDS or not. In case there is
repeated non-reporting of deals by an NDS member, it will be considered whether
non-reported deals by that member should be treated as invalid.
• Deals between non-NDS members will be reported to the Financial Markets
Department (FMD) of RBI by fax as per a prescribed form.
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• The securities used in a repo transaction are usually govt. bills or bonds, or
other very high quality issues.
• Most repo trades are very short term, the repurchase date being typically
between one week or two weeks from the date of transaction.
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Securities
Initial Repo
Transaction bank
(Sale)
Customer Principal
(Cash)
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– b) If the securities fall in value to the point where their current market value is less than
the amount of funds lent, the borrower is required to provide additional securities with
a market value sufficient to make up the deficit.
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A Typical CD :
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• Origin of CDs:
• In India, CDs were introduced in 1989 based on
recommendations by Vaghul Committee( 1987).
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• Eligibility to issue:
• As per the latest RBI guidelines, CDs can be issued by :
• (i) scheduled commercial banks excluding Regional Rural Banks (RRBs)
and Local Area Banks (LABs); and
• (ii) select all-India Financial Institutions (EXIM bank, NHB, NABARD and
SIDBI)that have been permitted by RBI to raise short-term resources.
• Subscribers:
• CDs are available to individuals, corporations, companies, trusts, funds,
associations etc. for subscription.
• NRI s can also subscribe but on a non repatriable basis i.e they will have to
hold till maturity--- cannot endorse to another NRI in the secondary
market.
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• An FI other than a bank (SIDBI, NABARD and NHB) may issue CDs
within the overall umbrella limit fixed by RBI, i.e., issue of CD together
with other instruments, viz., term money, term deposits, commercial
papers and inter-corporate deposits should not exceed 100 per cent of
its net owned funds, as per the latest audited balance sheet.
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• Maturity
• The maturity period of CDs issued by banks should be not less than
7 days and not more than one year.
• The FIs can issue CDs for a period not less than 1 year and not
exceeding 3 years from the date of issue.
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• Pricing of CDs:
• CDs are discount instruments.
• But unlike bills and some other instruments where prices may be
quoted as a discount rate, CD prices are generally quoted on yield to
maturity basis. V
• Therefore the price will b given by : P = YxD
1+
365
• Where P is the sale price( initially)/purchase price( in secondary
market) of the CD
• V is the value of the sum payable at maturity
• Y is the required yield on the CD
• D is the number of days to maturity
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• Solution:
• Maturity value = 20 million x(1 + 0.0545 x91/365) = 20,271,753
• No of days from 6 Sep to 11 Oct =35. Therefore remaining days to maturity
= 56 days
• P on 11 October =20,271,753/(1+0.056 x 56/365)=20,099,066
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• Solution:
• Maturity value = Rs.1,016,000
• Initial yield expected = ((1,016,000/1,000,000)-1)x365/91=6.4176%
• P after 7 days = 1,016,000/(1+ 0.0625x84/365)=1,001,594.
• P after another 38 days i.e after 45 days from issue or with 46 days remaining
maturity =1,016,000/(1+0.061x46/365)= 1,008,248.914
• Return to this investor will be = ((1,008,248.914/1,001,594)-1)x365/38=6.38%
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