CASH MANAGEMENT BILLS
A New Debt Paper From RBI
Rama Krishna Vadlamudi, BOMBAY June 15, 2010
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Governments, in general, are hungry for money. They always find new methods of raising money from the public, be it debt or taxes. Central Banks usually act as money managers and raise money on behalf of the Governments.
To meet temporary cash shortages on its account, Government of India had proposed to introduce a new instrument called Cash Management Bills, which are short-term in nature. Even though the guidelines for issuance of Cash Management Bills were issued in August last year, the Government had started using the new instrument only in the second week of May 2010.
Let us examine the contours of this new instrument:
A Cash Management Bill is a Government Security through which Government of India raises money in order to meet its temporary cash shortages. It is issued for a maturity of less than 91 days. It is a new type of government debt paper. Reserve Bank of India (RBI) acts as a money manager and issues these Cash Management Bills on behalf of Government of India.
Government of India (GOI) had, along with RBI, issued guidelines in August 2009 itself for the Cash Management Bills. But, it started using the new instrument since May this year when the first auction was conducted by RBI on behalf of GOI.
The US Treasury also issues Cash Management Bills for maturities of less than six months.
The maturity period will depend upon on Government’s temporary cash needs. But, the tenure of the Bills will be less than 91 days. (Effectively, the tenure can be between one day and 90 days)
They will be issued at a discount to the face value, similar to Treasury Bills
The settlement of the auction will be T+1 basis
The Non-Competitive Bidding Scheme for Treasury Bills will not be extended to the Cash Management Bills
They will be tradable and qualify for ready forward (repo) facility
Investment in the Bills will be reckoned as an eligible investment in Government Securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949
It will be an integral part of the Money Market
What is the difference between a T-Bill and a Cash Management Bill?
Debt obligations of the government that have maturities of one year or less are normally called Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/Government. In India, T-Bills are usually issued for maturities of 91, 182 and 364 days.
The Cash Management Bills will have the generic character of Treasury Bills. Even though Cash Management Bills will be treated as Government of India Treasury Bills technically, there is a one big difference in practice with regard to maturity period. That is:
A T-Bill can be issued for a maturity period of between 91 days and 364 days
A Cash Management Bill can be issued for maturity of between 1 day and 90 days
However, both these instruments will have the following similarities:
These are instruments issued at a discount to the face/par value
Both are money market instruments and form part of the money market
Both of them are zero-coupon instruments
They are tradable and offer ready forward (repo) facility
A Live Example of a Cash Management Bill:
A Cash Management Bill is essentially a zero-coupon instrument in the sense that it does not carry any interest rate (coupon). As a zero-coupon instrument is issued at a discount, the implicit interest for the investor (holder) will be the difference between the par value and the discounted price. The interest on this zero-coupon instrument is paid at the end of the maturity period including the price paid at the time of purchasing the instrument.
Let us see a real-life example. RBI conducted an auction for Cash Management Bills (28 days maturity) on May 18, 2010 for an amount of Rs 6,000 crore. According to the bids received from investors (typically, banks, insurance companies and pension funds), the cut-off price was set at Rs 99.70, which is the discounted price for a par value of Rs 100. The implicit interest is Re 0.30 (Rs 100 – Rs 99.70). On the date of investment, the investor would pay an amount of Rs 99.70 to RBI for a par value of Rs 100. After 28 days from the date of investment, the investor will receive par value of Rs 100 (interest of Re 0.30 plus price paid Rs 99.70) from RBI on June 16, 2010.
How is the interest calculated in percentage terms in the above example? The investor received an interest of Re 0.30 for an investment of Rs 99.70 for a holding period of 28 days. The interest in percentage terms is:
Re 0.30 365
= ---------- x ----- x 100 = 3.9225 % (rounded off)
Rs 99.70 28
The implicit rate of interest is 3.9225 per cent for this 28-day Cash Management Bill. Technically, this is called yield to maturity (YTM).
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References:
1. RBI circular dated August 10, 2009
2. RBI press releases dated May 10, 2010 and May 17, 2010.
Disclaimer: The views are personal.
My documents relating to debt market can be read at:
http://www.scribd.com/my_document_collections/2333349
Government Securities Market & Bond Duration Management
http://www.scribd.com/doc/20833001
Bond Basics and All You Wanted to Know about Bonds
http://www.scribd.com/doc/20618363
Good Liquid Funds or Money Market Mutual Funds in India
http://www.scribd.com/doc/23073415
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