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What is a Treasury bill?
 

  • Treasury Bills (T-bills) are the instruments of short term borrowing by the central government.
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  • They are promissory notes issued at discount and for a fixed period. The interest received on them is the discount which is the difference between the price at which they are issued and their redemption value (zero coupon securities).
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  • They were first issued in India in 1917.
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  • T-bill can be issued for tenor of 91,182-days or 364-days. Also T-bill can be issued for 14 days.
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  • The 14-day bills are a means of financing the needs of the government under ways and means advances (WMA). They tend to peak at the fiscal year end.
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  • T-bills are available for a minimum amount of 25,000 and in multiples of 25,000.
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Objective for issuing T-Bill
 

  • Government issues to raise funds for meeting short term expenditure needs.
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  • To provide outlet for parking temporary surplus funds by investors.
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  • T-bills are used also as a mechanism to mop up liquidity in the market.
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T-bill Auction
 

  • RBI conducts T-bills auction every Wednesday
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  • 182-day T bills are auctioned on the Wednesday of a non reporting week.
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  • RBI issues a quarterly calendar of T-bills auction.
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  • The calendar for the quarter Jul- Sep 2013 has auctions of 7000crs of 91-day T-bills and 5000crs of 182-day or 364-day T-bills every alternate week.
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  • Chart below shows the quarterly trend in outstanding T-bills.
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quarterly trend in outstanding T bills

 

  • From the chart above, we see that the government short term borrowing through T-bill has grown almost 3 times in the last seven years.
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  • T-bills account for around 11% of the internal debt and 10% of the government’s total debt.
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  • As on June 2013, total outstanding T-bills stood at 4052bn.
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  • Charts below shows the outstanding composition breakup of different tenor T-bills as on June 2013 and composition % of T-bill and dated government securities to internal debt FY13 (RE).
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composition breakup of T bills

 
Cash Management Bill (CMB)
 

  • CMBs in India are non-standard, discounted instruments issued by government to meet temporary mismatches in the cash flow of the government.
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  • First set of CMBs were issued in May 2010.
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  • CMBs have the generic character of Treasury Bills but are issued for maturities less than 91 days.
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  • CMB is the most flexible instrument for a central bank because it can be issued when needed, allowing the central bank to have lower cash balances and issue fewer long-term notes. CMBs tend to pay higher yields than bills with fixed maturities.
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  • As in the present case they may be used to drain liquidity from the banking system.
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  • The announcement of the auction of the CMB is be made by the RBI through press release issued one day prior to the date of auction.
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  • Investment in CMB is reckoned as an eligible investment in Government Securities by banks for SLR purpose.
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Forex Reserves

By: Punam Sharma

What are forex reserves?
 

  • Foreign exchange reserves (Forex reserves) are generally defined as assets held by RBI which is denominated in other foreign currencies.
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  • Forex reserves include foreign currency assets, gold, special drawing rights (SDR) and reserve position in IMF.
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  • Foreign currency assets are investments in foreign bonds, Tbills, deposits with foreign central banks etc.
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  • It is maintained in major currencies like US dollar, Euro, Pound sterling, Japanese Yen etc and valued in terms of US dollar.
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  • It accounts for around 89% of total forex reserves.
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  • Gold reserves are passively managed by RBI and accounts for around 9% of total reserves.
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  • SDR is international reserve created by IMF which is allocated as per the member country’s quota at IMF.
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  • Reserve position in IMF is a reserve where India can draw upon to purchase other foreign currencies from the fund.
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  • Generally, preferred level of forex reserves is that a country’s reserves should equal short-term external debt so that a country has enough reserves to resist a massive withdrawal of short term foreign capital1.
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  • RBI publishes data on forex reserves every week (on Friday).
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Why maintain forex reserves?
 

  • To enhance capacity to intervene in foreign currency market.
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  • To limit external vulnerability by proving foreign currency liquidity to help absorb shocks during times of crisis including national disasters or emergencies.
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  • For backing domestic currency.
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  • To maintain confidence in monetary and exchange rate policies.
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  • To provide confidence to the markets especially international credit rating agencies that external obligations can always be met, thus reducing the overall costs at which foreign exchange resources are available to all the market participants.
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Trend in Forex Reserves
 

  • Chart below shows the movement in composition of India’s forex reserves from 1991 to 2013.
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Trend in Forex Reserves

 

  • From the above chart, we can observe that India’s forex reserve has changed over the years.
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  • 1991, gold contributed to around 60% of the total forex reserves while foreign currency assets share was around 38%.
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  • This has drastically changed over the years with gold share dropping to around 9% and foreign currency assets share increasing to around 89% in 2013.
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  • Chart below shows trend in forex reserves from 1991 till 2013.
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Forex Reserves

 

  • From the above chart, it’s seen that India’s forex reserves have increased significantly since 1991.
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  • The level of forex reserves has steadily increased from US $ 5.8bn in 1991 to US $ 292bn in 2013.
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  • Two factors responsible for significant addition to forex reserves over the years can be attributed to lower level of current account deficit and high capital inflows2.
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  • However lately, the high current account deficit has resulted in decrease of forex reserves.
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  • For week ended August 2nd, forex reserves stand at US $ 277.17bn.
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  • Chart and table below shows forex reserves break up as on 31st March 2013.
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Forex Reserves Breakup

 

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Currency Leakage

By: Punam Sharma

What is currency leakage?
 

  • Currency with public refers to cash held with public rather than being deposited in bank.
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  • Outflow of money from the banking system is known as currency leakage and represents currency with public.
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  • Currency leakage impacts the money supply1 in the economy and creates liquidity issues for the banks.
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  • Currency leakage results into lesser deposits in the bank thereby reducing the amount bank can lend out resulting in lower money supply.
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  • Demand for currency with public generally follows a seasonal pattern.
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  • During April to June and October to March, we generally observe increase in currency with public.
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  • Currency with public can increase on account of advance tax, festivals etc.
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  • A ratio to understand currency leakage is currency to deposit ratio2.
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  • Currency to deposit ratio tells how much public is holding as cash and not re depositing in banks. Higher ratio means more cash is held by public.
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  • Charts below shows the seasonal pattern of currency with public as a relative percent of July3 month of the year as base and as currency deposit ratio (in %).
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Seasonal pattern of currency

 
Currency Deposit ratio

 

  • From above two charts, we can observe that currency with public follow a seasonal pattern.
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  • In the first chart (as a relative %), we can see that currency with public increases from October to June and then reduces from July to September and again starts increasing from October depicting seasonal pattern.
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  • Similarly in the second chart (currency deposit ratio), we can observe the same pattern with increase in the ratio during October to June depicting increase in currency with pattern and a falling ratio between July and September depicting reduction in currency with public.
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  • On an average around 1.32%4 of currency with public comes back in to the banking system.
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  • Over the few years currency deposit ratio has been declining as compared to a decade ago on account of the spreads in the banking system like electronic banking, credit cards etc. This can be observed in the chart below which shows annual currency deposit ratio from 1990 to 2013.
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currency deposit ratio

 

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