The below mentioned instruments are normally termed as money market instruments:
- Certificate of Deposit (CD)
- Commercial Paper (C P)
- Inter Bank Participation Certificates
- Inter Bank term Money
- Treasury Bills
- Bill Rediscounting
- Call/ Notice/ Term Money
Banks borrow in this money market for the following purpose:
- To fill the gaps or temporary mismatches in funds
- To meet the CRR & SLR mandatory requirements as stipulated by the Reserve Bank of India
- To meet sudden demand for funds arising out of large outflows.
The role of Primary Dealers is to;
- commit participation as Principals in Government of India issues through bidding in auctions
- provide underwriting services
- offer firm buy – sell / bid ask quotes for T-Bills & dated securities
- development of Secondary Debt Market
RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs through which non-competitive bids will be allowed up to 5 percent of the notified amount in the specified auctions of dated securities.
The procedure for selling of state loans, the auction process and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to GOI-Secs. They are also issued in dematerialized form. State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are transferable. No stamp duty is payable on transfer for State Loans as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.
The procedure for selling of state loans, the auction process and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to GOI-Secs. They are also issued in dematerialized form. State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are transferable. No stamp duty is payable on transfer for State Loans as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.Treasury bills are actually a class of Central Government Securities. Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill of the following periods are currently issued by Government/Reserve Bank of India in Primary Market : 91-day, 182-day and 364-day T-Bills. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it’s tenure at Rs. 100.00.
a) Multiple Price Auction (French Auction)
In French auction, buyers typically submit bids that specify a quantity and a price (or a yield) at which they wish to purchase the desired quantity. Once submitted, these bids are ranked from the highest to the lowest price (or from the lowest to the highest yield) and the quantity for sale is awarded to the best bids (i.e. highest prices or lowest yields) upto the cut-off price (partial allotment being resorted to in case the quantum of securities left over are less than the amount bid at cut-off price). Under the multiple price auctions, each successful bidder will pay the actual price at which he has bid which would thus be a price higher than or equal to the cut-off price arrived at in the auction.
b)Uniform Price Auction (Dutch Auction)
The process is similar to the Multiple Price Auction except that the each successful bidder (who has bid above the cut-off price) pays the lowest price (cut-off price) accepted by the debt manager. All the successful bidders will pay the same price, irrespective of their actual bid price.
c) Private Placement
After having discovered the coupon through the auction mechanism, if on account of some circumstances the Government / Reserve Bank of India decides to further issue the same security to expand the outstanding quantum, the government usually privately places the security with RBI. The RBI in turn may sell these securities at a later date through their open market window albeit at a different yield.
d) On-tap issue
Under this scheme of arrangements after the initial primary placement of a security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time specific or volume specific