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A transaction in which two parties agree to sell and repurchase the same security is called ‘ready forward contract’ or ‘Repos’. It is also known as buyback deal. This arrangement provides for the seller to sell specified securities with an agreement to repurchase the same at a mutually pre-determined future date and price and the buyer to purchase the securities with an agreement to resell the same at a predetermined future date and the price.

Commercial Banks, Securities Dealers, DFHI, STCI, RBI, Cooperative Banks are allowed to participate in the repos market. Non-bank finance companies LIC, GIC, UTI and companies are also allowed to participate in this market from March, 2003. Repo transactions are arranged over the counter by telephone either by direct contact or through a group of market specialists. Repo transactions can be used in respect of CPs, CDs, Treasury Bills and Government dated securities. National Stock Exchange can also be used for currying out repo transactions. The

Repo contract provides the seller-bank to get money by parting with its security and the buyer-bank in turn to get the security by parting with its money. The prices of sale and repurchase of securities are determined before entering into the deal.

Repos, being collateralized loans, help to reduce counter party risk and fetch a low interest rate. It is possible to use repos as an effective hedge tool to arrange another repo or to sell them outright or to deliver them to another party to fulfill a delivery commitment in respect of a forward or future contract on a short sale. Repo is an almost risk-free instrument used to even out liquidity changes in the system. It offers safe short-term outlet for temporary excess cash at close to market interest rates. Repos are used to finance securities held in trading and investment accounts of security dealers to establish short positions, to implement arbitrage activities and meeting specific customer needs because of low-risk and flexible short-term instruments. They also offer low-cost investment opportunities with combinations of yields and liquidity. It is possible to enhance the safety of repo transaction by making the security price to the market and by providing a margin on the security value. The Repo arrangement serves as a short-term cash management tool. The RBI uses repos as a tool of liquidity control for absorbing surplus-liquidity from the banking system in a flexible way and thereby preventing interest rate arbitraging.

A Reverse Repo is the opposite of a repo transaction. It is a reverse purchase agreement. The counter party enters into a reverse repurchase agreement and makes a short-term collateralized loan to the bank, the primary dealer or the seller of securities. This is done by providing funds

in return for holding securities on the maturity of the reverse repurchase transaction, the counter party returns the same security to the same bank and the primary dealer receives back the funds from the buyer. The amount received by the buyer is the principal plus interest. The interest is termed as the repo rate. This arrangement allows banks to make efficient use of their funds.

CHAPTER 13 CHAPTER 13

Conclusion

Conclusion

CONCLUSION:

The Market in Government Securities is significant part of the Stock market in India. The marketable debt issued by Government and Semi-Government bodies which represents a claim on the Government is called Government Securities. A market where the Government Securities are bought and sold is called Government Securities market.

The securities of Central and State Government are issued in the form of Stock Certificates, promissory notes and Bearer bonds. A Treasury bill is a particular kind of finance bill or a promissory note put out by the Government of the country, Auctioning is a method of trading whereby merchants bid against one another and where the securities are sold to the highest bidder. Government Securities are unique and important financial instruments in the financial market.

The size of annual floatation’s of securities has gone up from 75 crores in 1960-61 to Rs. 7015 crores in 1988-89 in case of Central

Government Securities and from Rs. 67 crores to Rs. 2074 crores in case of State Government Securities in the same period. The preparation of Government Securities in the same period. The preparation of Government Securities owned by the RBI has gone down, In order to encourage wider participation of all classes of investors across the country in Government Securities, the government, RBI and SEBI have introduced trading in Government Securities through a nation-wide, anonymous, order-driven screen based trading system of Stock Exchanges. The participants in Government Securities are Central and State Government, banking sector Insurance, Companies, Provident funds and Special financial institutions. Joint Stock Companies, Local authorities, Trust and individuals as well as non-residents also participate in this market. The face value of the Government Securities is Rs. 100 or Rs. 1000 and there is a practice of issuing these Securities at a discount.

The gross redemption and running yields in Government Securities have been increasing and it is in the range of 8 to 10%. The management of gilt-edged market has a considerable bearing on the advances and liquidity of commercial bank so as to help the monetary policy. The RBI has undertaken various reforms in the Government Securities market in India.

BIBLIOGRAPHY

SR.N

O NAME OF THE SOURCE AUTHOR

1 FINANCIAL MARKETS Dr. P.K.

BANDGAR

2 SECURITIES MARKETS AND

PRODUCTS TAXMANN

3 INVESTMENT AND SECURITIES

MARKETS IN INDIA V.A.

AVADHANI

WEBLIOGRAPHY www.rbi.org.in

www.treasurydirect.gov