Fixed income securities

1. Introduction to Fixed Income Securities Market
The slope at the shorter end of the Curve is very steep => excessive funding is
available in the market and people are not sure about Long term. The difference in
91D TB rate and a 5 Year G-Sec is about =5.80% - 3.50% = 2.3%. (Excessive money
is available creating abnormal demand scenario)
Medium term 6YR to 13 Years the Spread is about 6.70%-6.2%=0.5% (people are
generally indifferent and are not seeking substantial premia)
And Long Term 14Years to 40 years = 7.15%-6.2%=0.95% (people are generally
indifferent and are not seeking substantial premia)
Why people are taking a short term view and not really exploring to the Long Term
asset creations?
Major investors in Sovereign papers are Banking system => SLR but also for their
own diversification requirements and short term parking of resources with RBI or
Government and when the Credit Offtake (demand for Loans) will increase, the
banks would move to the Loan market and liquidate their safe assets like G-Sec
investments beyond SLR requirements.
FISM1-16/10/2021
Saturday, October 16, 2021 10:35 AM
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2. What are the sources?
Foreign Exchange market???
RBI Net Buying is about 26000USD Million = 26000000000*73.45=1.91E12 =
1.91E12/10000000=191000CR = RBI must have paid about 200000CR for its
Buying of USD.
RBI has to sterilize this flow of excess funds to the system otherwise excess funds
will further reduce interest rate and destabilize the market with the creation of
bubbles in the financial system (the lendi9ng entities are likely to take excessive
risk in creating assets when excess funds are not sterilized and demand for loans
do not rise for structural reasons).
Flow of this money gets into the Money Market. It is the short term market where
RBI / central Banks around the world play an important role in directing the
economic activity using Monetary policy. RBI / Central banks must work for
creating of Effective Demand / Aggregate Demand for goods and Services at
appropriate price to kick start the economy.
RBI moderates the Money Supply or the availability of funding at appropriate rates
i9n the financial system for the economic activity to prosper.
RBI in the Money Market either absorbs excess liquidity from the market or it
pumps / injects liquidity into the system if the market is under squeeze (shortage).
Accepts funds from the banking system => Reverse Repo
Giving funds to the Banking system => Repo
Hence, RBI Monetary policy revolves around the Repo Rate => The rate at which
RBI will supply or absorb funds.
Money Market is a short term Market. There are 2 parts of this Market. (a) RBI is
on one side and Banks and Primary Dealers are on the other side (extremely
captive market). (b) Only Institutions like Banks, Insurance Companies, Primary
Dealers, Mutual Funds, etc. are dealing with each other and here no RBI role in
direct form. RBI only deals with banks and primary Dealers. However, at the time
of need, RBI creates special window to fund the stressed entities (economy is at
stake (NBFC crisis or Mutual Funds crisis for investment in Realty sector) but that
funding is only done through the banks (Banks will accept the risk on lending to
these entities but RBI will only take exposure against the Banks through special
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3. these entities but RBI will only take exposure against the Banks through special
Lending which will be outside the calculations for a Bank - for example, a Bank is
allowed to access 1% of its NDTL from RBI window for its own operations, but
when RBI announces a special scheme, this will be outside the scope of the 1%
explained above). RBI market is about -7.5lakh net Injection (RBI has taken money
from the banking system as banks cannot manage the excess liquidity available
with them). Hence, RBI is in a way giving some kind of subsidy by taking this
money as the "Banker of the Last Resort". Otherwise, Banking system possible
would be stressed as they would run negative spread on deposits. Again, the
second part of the market has about 4.50lakh crores. Total excess liquidity in short
term is 12Lakh Crores.
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