MONEY MARKET

CONTINUED FROM YESTARDSY..........
Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are
transactions or short term loans in which two parties agree to sell and repurchase the same
security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can
be done only between the parties approved by RBI and in RBI approved securities viz. GOI
and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under
repurchase agreement the seller sells specified securities with an agreement to repurchase the
same at a mutually decided future date and price. Similarly, the buyer purchases the securities
with an agreement to resell the same to the seller on an agreed date at a predetermined price.
Such a transaction is called a Repo when viewed from the perspective of the seller of the
securities and Reverse Repo when viewed from the perspective of the buyer of the securities.
Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which
party initiated the transaction. The lender or buyer in a Repo is entitled to receive
compensation for use of funds provided to the counterparty. Effectively the seller of the
security borrows money for a period of time (Repo period) at a particular rate of interest
mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of
interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties
independently of the coupon rate or rates of the underlying securities and is influenced by
overall money market conditions.
Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short
term unsecured promissory note issued by corporates and financial institutions at a
discounted value on face value. They are usually issued with fixed maturity between one to
270 days and for financing of accounts receivables, inventories and meeting short term
liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period 6
months. It will not be able to liquidate its receivables before 6 months. The company is in
need of funds. It can issue commercial papers in form of unsecured promissory notes at
discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has
strong credit rating and finds buyers easily. The company is able to liquidate its receivables
immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They
yield higher returns as compared to T-Bills as they are less secure in comparison to these
bills; however chances of default are almost negligible but are not zero risk instruments.
Commercial paper being an instrument not backed by any collateral, only firms with high
quality credit ratings will find buyers easily without offering any substantial discounts. They
are issued by corporates to impart flexibility in raising working capital resources at market
determined rates. Commercial Papers are actively traded in the secondary market since they
are issued in the form of promissory notes and are freely transferable in demat form.
TO BE CONTINUED TOMORROW...........
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