Capital
Market : 91-day Treasury Bills
Alex
K. Mathews, Research Head
RBI has given the final nod to start trading on the 91-day
Treasury bill, issued by the Government of India. It will help both the risk-lovers and risk-averse. Speculators and investors who have knowledge
on the short term interest rate movement can make good profits. On the other
hand corporates and other business houses that carry
the interest rate risk can avoid it through 91-day Treasury bills.
The 91-day treasury bills contracts are settled in cash. Earlier
the long term maturity government bonds were settled through physical delivery
system, which rarely attracted the investor community. After the RBI’s decision
to start cash settlement, it is widely expected to infuse high liquidity and
higher participation.
As the interest rate shows highly volatile movements, the
introduction of 91-day Treasury bills will help financial institutions to hedge
their short term interest rate risks. The maximum tenor of the contract is 12
months comprising three monthly contracts followed by three contracts with March,
June, September and December maturities.
As mentioned earlier, the contracts are settled in cash, and
the contract would expire on the last Wednesday of every month or on the
previous day in case Wednesday is a trading holiday. The minimum size of the contact
is Rs. 2 lakh and would be
traded from 9 AM till 5 PM. According to SEBI directive 91-day Treasury bills
will be traded on the currency derivative segment of stock exchanges.
The contract would be quoted on a 100 minus futures discount
yield basis. For a future discount yield of 5 per cent the quote would be 100- 5
= 95. A change in one basis point in futures discount yield would be equal to Rs. 5 money terms.
It has been decided by the RBI that the weighted average
discount yield would be publicly disclosed by the RBI. The final settlement
price of the contract shall be based on the weighted average price/yield
obtained in the weekly auction of the 91-day Treasury bills on the date of
expiry of the contract. The formula for arriving at the weighted average
discount yield shall be:
As the interest rate is a key concern for a developing
country like