Fixed Income Instruments In India And The Us Finance Essay - Free Essay Example

Sample details Pages: 19 Words: 5605 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? Treasury Bills (T-Bills) Treasury Bills, are a variety of money market instruments available in both US and India. These are the zero coupon bond and doesnt pay any coupon. Thats why these are generally issued at discount and on maturity redeemed at the face value. In India, also called as Government Instruments (G-secs), it is issued by RBI and are backed by Government of India. These are short term debt instruments as the tenure of currently issued T bills is of 3 varietys: 91 day (3 months), 182 day (6 months) and 364 day (1year). For example, a 91 day Treasury Bill of Rs.100/- (face value) may be issued at a discount of say, Rs.1.80, that is Rs.98.20 and redeemed at the face value of Rs.100/-. The investors will get a return equal to difference between the maturity value or face value (i.e., Rs.100) and the issue price. Treasury Bills are issued through auctions managed by the Reserve Bank of India usually every Wednesday and payments for the Treasury Bills buyd have to be made on the following Friday. The Treasury Bills of 182 days and 364 days tenure are issued on alternate Wednesdays, that is, Treasury Bills of 364 day tenure are issued on the Wednesday preceding the reporting Friday while Treasury Bills of 182 days tenure are issued on the Wednesday prior to a non-reporting Friday. Currently, the notified amount for issuance of 91 day and 182 day Treasury Bills is Rs.500 crore each whereas the notified amount for issuance of 364 day Bill is higher at Rs.1000 crore. Government, at its discretion, can also choose to issue additional amounts of the Treasury Bills by issuing prior notice. An annual calendar of T-Bill issuances for the following financial year is released by the Reserve Bank 8 of India in the last week of March. The Reserve Bank of India also announces the issue details of Treasury bills by way of press release every week. Don’t waste time! Our writers will create an original "Fixed Income Instruments In India And The Us Finance Essay" essay for you Create order In US it is issued by Fed and is backed by US government. Tenure of US T-bills is 4 weeks, 13 weeks, 26 weeks, or 52 weeks. Generally these are issued in the denomination of USD 1000 and are issued at discount since these are zero coupon bonds. Dated Government Instruments Dated Government Instruments are the Instruments which are longer in term than the T bills. These Instruments pay interest at fixed time periods (usually half yearly) called coupon on the face value and this can be either fixed or floating coupon. The tenor of these Instruments can be up to 30 years. In India, the Public Debt Office (PDO) of the RBI acts as the registry / depository of Government Instruments. This office takes care of all the dealings for these Instruments similar issue, interest payment and repayment of principal at maturity. We generally have fixed coupon Instruments. The nomenclature of a typical dated fixed coupon Government security has the following features coupon, name of the issuer, maturity and face value. e.g. If the bond is called 7.49% GOI 2017 then it would have these features. Date of Issue : April 16, 2007 Date of Maturity : April 16, 2017 Coupon : 7.49% paid on face value Coupon Payment Dates : Half-yearly (October16 and April 16) every year Minimum Amount of issue/ sale : Rs.10,000 Same as the case with Treasury Bills, dated Instruments of both Government of India and State Governments are issued by RBI through auctions. The Auctions are announced by the RBI a week in advance through Press Releases and paid advertisements in major dailies (for dated Instruments). Hence the investors get adequate time in order to plan for the buy of government Instruments through such auctions Varietys of Dated Instruments Fixed Rate Bonds As the name suggests the interest rate i.e. cupon rate is fixed on these bonds for the entire life of the bond. As already told, In india, most Government bonds are issued as fixed rate bonds. e.g. Lets say RBI issue 8.24%GS2018 on April 22, 2008 and the tenor of the bind is 10 years maturing on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12% (as the 8.24% is the total coupon and hence the half yearly payment being the half of it) of the face value and it will be paid on October 22 and April 22 of each year. Floating Rate Bonds As the name suggest these bonds dont have a fixed coupon rate and the coupon is re-set at pre-announced intervals based on a specified methodology. In these bonds the coupon of the bond is re-set at regular intervals and these interval are defined beforehand while issuing the security. The rate is generally calculated by adding a spread over a base rate. In India, most floating rate bonds issued by the GOI, the base rate is the weighted average cutoff yields of the last three 364 day Treasury Bill auction preceding the coupon re-set date. Floating Rate Bonds were first issued in September 1995 in India. For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, maturing on July 2, 2017. The base rate on the bond for the coupon payments was fixed at 6.50% being the weighted average rate of implicit yield on 364 day Treasury Bills during the preceding six auctions. Further, in the bond auction, a cut-off spread (markup over the benchmark rate) of 34 basis points (0.34%) was choosed. Hence the coupon for the first six months was fixed at 6.84%. At the next reset date after six months, assuming that the average cutoff yield in the preceding six auctions of 364 day Treasury Bill is 6.60%, coupon applicable for the next half year would be 6.94%. Zero Coupon Bonds Zero coupon bonds are bonds without any coupon payments. Similar to Treasury Bills, they are issued at a discount to face value. These Instruments were issued by the Government of India in the 1990s, but after that no such issue was made. Capital Indexed Bonds In these instruments, the principal is linked to an accepted index of inflation. The aim is to protect the investor from inflation. A capital indexed bond was issued in December 1997. These bonds then matured in 2002. Steps are now being taken to revive the issuance of the Inflation Indexed Bonds wherein payment of both the coupon and principal payments on the bonds will be linked to an Inflation Index (Wholesale Price Index). Bonds with Call/ Put Options Bonds can also be issued with features of optionality wherein the issuer can have the option to buyback (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. A bond (viz., 6.72%GS2012) with call / put option was issued in India in the year 2002 which will mature in 2012. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buyback the bond (call option) at par value (equal to the face value) while the investor has the right to sell the bond (put option) to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007. Special Instruments In addition to Treasury Bills and dated Instruments issued by the Government of India under the market borrowing programme, the Government of India also issues, from time to time, special Instruments to entities similar Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash subsidies. These Instruments are usually long dated Instruments carrying coupon with a spread of about 20-25 basis points over the yield of the dated Instruments of comparable maturity.These Instruments are, however, not eligible SLR Instruments but are approved Instruments and are eligible as collateral for market repo transactions. The beneficiary oil marketing companies may divest these 11 Instruments in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising cash. Steps are being taken to begin new varietys of instruments similar STRIPS (Separate Trading of Registered Interest and Principal of Instruments). STRIPS are instruments wherein each cash flow of the fixed coupon security is converted into a separate tradable Zero Coupon Bond and traded. For example, when Rs.100 of the 8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12 each half year) will become coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash flows are traded separately as independent Instruments in the secondary market. State Development Loans (SDLs) State Governments also raise loans from the market. SDLs are dated Instruments issued through an auction similar to the auctions managed for dated Instruments issued by the Central Government (see question 3 below). Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Similar dated Instruments issued by the Central Government, SDLs issued by the State Governments capacitate for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF). Reserve Bank Of India Monetary Measures On the basis of the current analysis and in line with the policy stance the Central Bank announces the following policy measures: Bank Rate The Bank Rate has been maintained at 6.0 per cent. Repo Rate It has been decided to: Change the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.5 per cent to 5.75 per cent with immediate effect. Reverse Repo Rate It has been decided to: Change the reverse repo rate under the LAF by 50 basis points from 4.0 per cent to 4.50 % with immediate effect. Cash Reserve Ratio The cash reserve ratio (CRR) of scheduled banks has been maintained at 6.0 per cent of their net demand and time liabilities (NDTL). Anticipated Outcomes Monetary policy actions are anticipated to: a.  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   Mild inflation by controlling demand pressures and inflationary anticipations.   b.  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   Maintain financial conditions contributive to sustaining growth. c.  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   Generate liquidity conditions concordant with more impelling transmission of policy actions. d.  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   Change the volatility of short-term rates in a narrower corridor. Since October 2009, when it signalled the reversal of its policy stance, the Central Bank has cumulatively raised the CRR by 100 basis points and the repo and reverse repo rates under the LAF by 75 basis points each. The monetary policy response has been cautious on the basis of Indias specific growth-inflation dynamics in the fuller context of continual global uncertainty. Thus, central banks policy stand for 2010-11 has been influenced by three major approvals: First, domestic economic resurgence is firmly in place and is improving. The 7.4 per cent growth in 2009-10 despite weak global growth and the instriking contribution of the agriculture sector is a proof of the robustness of the Indian economy. Second, inflationary pressures have aggravated and become generalised, with demand-side pressures obviously evident. Third, despite the change in the policy rates by 75 basis points cumulatively, real policy rates are not concordant with the robust growth that the economy is now witnessing. Consequently, overnight call money interest rates have moved towards the higher bound of the LAF corridor, which is equivalent to impelling tightening of rates by 150 basis points. This has also brought the system closer to a point at which policy rate actions are likely to have greater traction. There is no single way to determine the enough width of the policy interest rate corridor. But the guiding principles are: (i) it should be full enough not to unduly incentivise market banks to place their surplus funds with the central bank; (ii) it should not be so full that it gives scope for greater interest rate volatility to deform the policy signal. The challenge, therefore, is to strike the right balance. Against the above stated backdrop, the stance of monetary policy is intended to: Contain inflation and anchor inflationary anticipations, while being prepared to respond to any further build-up of inflationary pressures. Maintain an interest rate regime concordant with price, output and financial firmness. Actively manage liquidity to ensure that it remains fully in balance so that extra liquidity does not dilute the impellingness of policy rate actions. THE MONETARY POLICY PROCESS The Technical Advisory Committee (TAC) on Monetary Policy reviews macroeconomic and monetary improvements and helps the Central Bank on the stance of monetary policy and monetary measures. The TACs role is advisory in nature and the responsibility, transparency and time path of decision-making remains entirely with the Reserve Bank It has been the endeavour of the Central Bank to make the policy making process more consultative. With effect from October 2005, the Central Bank has started pre-policy consultation meetings with the IBA, market banks (PDAI ,FIMMDA, FEDAI), leaders of trade and industry (CII, FICCI, ASSOCHAM and FIEO), credit rating agencies (CRISIL and ICRA), and other banks (RRBs, UCBs, SMEs, MFIs, rural co-operatives , NBFCs,). MONETARY POLICY OPERATIONS: REASONS Based on the overall analysis of the macroeconomic situation, the Policy Statement stressed the need to ensure a policy regime that would enable credit spreading out at viable rates while preserving credit quality so as to support the return of the economy to a high growth path. The monetary stance stressed the need to maintain a monetary and interest rate regime in sync of price firmness and financial firmness, taking into account the emerging lessons of the global financial crisis. Against the backdrop of global and domestic improvements, the Central Bank changed the LAF rates to their historically lowest levels. The repo rate and the reverse repo rate were changed by 25 basis points each Table III.1: Movements in Key Policy Rates in India (Per cent) Impelling since Reverse Repo Rate Repo Rate 1 2 3 April 26, 2008 6.00 7.75 May 10, 2008 6.00 7.75 May 24, 2008 6.00 7.75 June 12, 2008 6.00 8.00 (+0.25) June 25, 2008 6.00 8.50 (+0.50) Jul 5, 2008 6.00 8.50 Jul 19, 2008 6.00 8.50 Jul 30, 2008 6.00 9.00 (+0.50) Aug 30, 2008 6.00 9.00 October 11, 2008 6.00 9.00 October 20, 2008 6.00 8.00 (-1.00) October 25, 2008 6.00 8.00 November 3, 2008 6.00 7.50 (-0.50) November 8, 2008 6.00 7.50 December 8, 2008 5.00 (-1.00) 6.50 (-1.00) January 5, 2009 4.00 (-1.00) 5.50 (-1.00) January 17, 2009 4.00 5.50 March 4, 2009 3.50 (-0.50) 5.00 (-0.50) April 21, 2009 3.25 (-0.25) 4.75 (-0.25) February 13, 2010 3.25 4.75 February 27, 2010 3.25 4.75 March 19, 2010 3.50 (+0.25) 5.00 (+0.25) April 20, 2010 3.75 (+0.25) 5.25 (+0.25) April 24, 2010 3.75 5.25 Jul 2, 2010 4.00 (+0.25) 5.50 (+0.25) Jul 27, 2010 4.50 (+0.50) 5.75 (+0.25) Monetary Policy Statement 2010-11 The process of exit from monetary spreading out in India has been relatively smooth on account of the fact that there was no undue spreading out of the Reserve Banks balance sheet or deterioration in its quality. The Reserve Banks cautious approach to exit since October 2009 ensured that there was adequate liquidity available in the system, so that even while it addressed concerns regarding price firmness, the recovery march was not hampered. On balancing the policy scheduling during the exit phase, it had become important to raise the policy rates to the non-aligned levels in a cautious manner, in view of the changed growth-inflation mix by the end of 2009-10 LIQUIDITY MANAGEMENT In 2009-10, the Central Bank continued its policy of maintaining enough liquidity in the system so that all legitimate credit requirements for productive purposes were met, concordant with the objective of price and financial firmness. The management of liquidity was achieved through enough use of OMO, MSS, LAF and a slew of special facilities. The within-year dynamics of liquidity conditions showed the cautious policy response to the evolving macroeconomic and financial market environment, interspersed with the impact of quarterly advance tax outflows. The inter-bank liquidity conditions remained in the surplus mode, with average daily LAF fusing being around  1, 00,000 crore during 2009-10. Neutral Policy Rate Neutral interest rate, as an idea, generally refers to the level of interest rate at which monetary policy stance is neither expansionary nor contractionary. Policy stance can be deemed neutral when the real interest rate reaches a level that is concordant with 100% employment of resources over the medium-term, and hence full capacity output and price firmness. The idea of natural interest rate was first started into economics by the Swedish economist Knut Wicksell in 1898. This rate, theoretically, essentially relates to: (i) the interest rate that equates saving with investment; (ii) the marginal productivity of capital, and (iii) the interest rate that is concordant with aggregate price firmness. https://rbi.org.in/scripts/images/3MOPO240810_1.gif https://rbi.org.in/scripts/images/3MOPO240810_2.gif The daily fusing under the LAF which reached an intra-year peak (1,68,215 crore) on Sept 4, 2009, milded somewhat during the second half of Sept 2009, showing striking outflows on account of advance tax payments The Central Bank purchased G-secs quantitying to  `57,487 crore through the auction route during the first half of 2009-10, whereas MSS unwinding (including de-sequestering of  `28,000 crore on May 2, 2009) was placed at around`70,000 crore over this time. Federal Reserve Bank Policy techniques Open Market Operations OMOspurchases and sales of U.S. Treasury and government agency instrumentsare the Government Reserves principal tool for implementing monetary policy. The short-term objective for OMOs is specified by the  Federal Open Market Committee (FOMC ). This objective can be a desired quantity of portions or a desired price (the federal funds rate). The federal funds rate is the interest rate at which depository banks provide portions at the Government Reserve to other depository banks overnight.    The Discount Rate The discount rate is the interest rate charged to commercial banks and other depository banks on loans they receive from their regional Federal Reserve Banks providing facilitythe discount window. The FRBs offer three discount window facilities to depository banks: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully insured. Reserve Requirements Reserve requirements are the quantity of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole say over changes in reserve requirements. Depository banks must hold portions in the form of vault cash or deposits with FRBs.   Reserve Requirements Liability Type Requirement % of liabilities Net transaction accounts  1   Ãƒâ€šÃ‚  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   $0 to $10.7 Mn2 0   Ãƒâ€šÃ‚  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   More than $10.7 Mn to $55.2 Mn3 3   Ãƒâ€šÃ‚  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚   More than $55.2 Mn 10 Nonpersonal time deposits 0 Interest on Required Portions and Extra Portions https://www.federalreserve.gov/monetarypolicy/gifjpg/spacer_1_1.gif The FRBs pay interest on required reserve portionsportions held at Reserve Banks to satisfy reserve requirementsand on extra portionsportions held in extra of required reserve portions and contractual clearing portions. The Board of Governors has prescribed rules governing the payment of interest by FRBs in Regulation D (Reserve Requirements of Depository Banks, 12 CFR Part 204). Current Data: Third Quarter of 2010 Interest Rates Paid on Required Reserve Portions    Banks with 1-Week Maintenance Time    Maintenance Time (Ending on) Rate    Sept 1 .25    Aug 25 .25    Aug 18 .25    Aug 11 .25    Aug 4 .25    Jul 28 .25    Jul 21 .25    Jul 14 .25    Jul 7 .25    Term Asset-Backed Instruments Loan Facility The Term Asset-Backed Instruments Loan Facility (TALF) is a funding facility that will help market banks meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) mortgaged by loans of various types to consumers and businesses of all sizes. Under the TALF, the Federal Central Bank of New York (FRBNY) will provide up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will provide an quantity equal to the market value of the ABS less a haircut and will be insured at all times by the ABS. The U.S. Treasury Departmentunder the Troubled Assets Relief Facility (TARP) of the Emergency Economic Stabilization Act of 2008will provide $20 billion of credit protection to the FRBNY in relation with the TALF. Term Deposit Facility Term deposits will assist the working of monetary policy by providing a new tool by which the Federal Reserve can manage the aggregate quantity of reserve portions held by depository banks. Funds placed in term deposits are removed from the accounts of participating banks for the life of the term deposit and thereby drain reserve portions from the banking system. Reserve Banks will offer term deposits through the Term Deposit Facility (TDF), and all banks that are eligible to receive earnings on their portions at Reserve Banks may participate in the term deposit facility. Expired Policy Techniques During the financial crisis, the Federal Reserve established several facilities to provide liquidity directly to borrowers and investors in key credit markets. As the performance of financial markets has improved, the Government Reserve has closed down some of the facilities. The Money Market Investor Funding Facility expired on October 30, 2009, and the Asset-Backed CP Money Market Mutual Fund Liquidity Facility, the CP Funding Facility, the Primary Dealer Credit Facility, and the Term Instruments Providing Facility were closed on February 1, 2010. Also, the final Term Auction Facility auction was conducted on March 8, 2010. Monitory policy On balance over the first half of 2010, market banks scaled back their anticipated timing of the first increase in the target federal funds rate from its current range of 0  to 1/4  %, and they scaled back their anticipations of the pace with which monetary policy adjustment would be removed. Quotes on money market futures contracts mean that, as of mid-Jul 2010, investors anticipated trajectory for the federal funds rate rises more than the current target range in the first quarter of 2011, two quarters later than the quotes implied at the start of 2010. Investors also anticipate, on average, that the impelling federal funds rate will be around 1  % by the middle of 2012, about 1-1/4  %age points lower than anticipated at the starting of this year. Returns on longer-term nominal Treasury instruments fell strikingly, on net, over the first half of the year, while two-year returns fell somewhat less .Returns were generally little higher during the first quarter but dropped in the second quarter along with the decline in the anticipated path for monetary policy. Changed demand for Treasury instruments by investors looking for a haven from volatility in other markets has likely contributed to the decline in returns. On balance, over the first half of the year, returns on 2-year Treasury notes changed about 1/2  %age point to about 3/4  %, and returns on 10-year bonds fell about 3/4  %age point to about 3  %.   Chart of interest rates on selected Treasury securities, 2004 to 2010. Returns on Treasury inflation-protected instruments, or TIPS, declined markedly less than those on their nominal counterparts over the first half of the year, resulting in lower medium- and long-term inflation benefits. The decline in inflation benefits may have partly showed a drop in inflation anticipations given the depressed rates of growth in major price indexes over the time and indications that economic slowdown would remain substantial for some time. However, inferences about investors inflation anticipations based on TIPS have been complicated over recent years by special factors such as the safe-haven demands for nominal Treasury instruments and changes over time in the relative liquidity of TIPS and nominal Treasury instruments. Other Interest Rates In the CP market, over the first half of 2010, returns on lower-quality A2/P2-rated paper and on AA-rated asset-backed CP rose a bit from low levels, pushing up spreads over higher-quality AA-rated nonfinancial CP. Even so, spreads on both types of assets remain near the low end of the range observed since the fall of 2007. Returns on corporate bonds rated AA and BBB fell by less than those on comparable-maturity Treasury instruments over the first half of the year, resulting in a striking change in risk spreads. Returns on speculative-grade corporate bonds fell during much of the first quarter but rose striking during the second, leaving returns higher on net over the time and spreads somewhat more elevated. The widening of spreads appears to show a change in demand for risky assets stemming from concerns about improvements in Europe and the outlook for the global economy.   Chart of commercial paper spreads, 2007 to 2010.   Chart of spreads of corporate bond yields over comparable off-the-run Treasury yields, by securities rating, 1997 to 2010. Financial Market Working The working of financial market continued to improve during the first half of 2010. However, strains emerged in some markets. For example, the spread between the London interbank offered rate (Libor) and the rate on comparable-maturity overnight index swaps (OIS)a measure of stress in short-term bank funding marketsincreased over the first half of the year .The changes in Libor-OIS spreads were more pronounced at longer maturities. In instruments financing markets, bid-asked spreads and haircuts applied to collateral fell marginally.    Financial Banks   Credit default swap (CDS) spreads for banking bankswhich primarily show investors analysis of and willingness to bear the risk that those banks will default on their debt obligationschanged on net over the first half of the year, particularly for larger banking organizations. The widening in CDS spreads reportedly showed uncertainty about the outcome of legislation to reform the financial system With loan demand reportedly continuing to be weak and credit conditions remaining tight, total loans on banks books contracted during the first half of the year, though less rapidly than they had during the second half of 2009 after adjusting for the effects of changes in the accounting treatment of securitizations, all major categories of loans posted sizable downfall. Instruments holdings rose, on balance, showing substantial accumulation of Treasury instruments   Chart of spreads on credit default swaps for selected U.S. banks, 2007 to 2010.   Chart of change in total bank loans, 1990 to 2010.   Chart of selected interest rates, 2007 to 2010. Techniques for the Withdrawal of Monetary Policy Accommodation The Government Reserve has developed a number of techniques that will assist the removal of policy accommodation and change the quantity of portions held by the banking system at the enough time. These techniques include (1)  raising the interest rate paid on extra reserve portions (the IOER rate), (2)  executing term reverse repurchase agreements (RRPs) with the primary dealers and other counterparties, (3)  issuing term deposits to depository banks through the Term Deposit Facility (TDF), (4)  redeeming maturing and prepaid instruments held by the Government Reserve without reinvesting the proceeds, and (5)  Selling instruments held by the Government Reserve. All but the first of these techniques would shrink the supply of reserve portions; the last two would also change the size of the Federal Reserves balance sheet. Interest on Extra Portions Rate In their discussion of the IOER rate at the January meeting, all banks agreed that raising that rate and the target for the federal funds rate would be a key element of a move to less-accommodative monetary policy. Most banks thought that it likely would be enough to change the supply of reserve portions, to some extent, before raising the IOER rate and the target for the federal funds rate, in part because reducing the supply of reserve portions would tighten the link between short-term market rates and the IOER rate. However, several banks noted that draining operations might be seen as a predecessor to tightening and should be undertaken only when the Committee judged that an increase in its target for the federal funds rate would soon be enough. For the same reason, a few believed that it would be better to drain portions concurrently with the eventual change in the IOER and target rates. Reverse Repurchase Agreements At the January meeting, staff reported on successful tests of the Government Reserves ability to conduct term RRPs with primary dealers by arranging several small-scale transactions using Treasury instruments and agency debt as collateral; staff anticipated that the Government Reserve would be able to execute term RRPs against MBS later in the year and would have the capability to conduct RRPs with an spread outed set of counterparties shortly thereafter. The staff updated the Committee on the status of work on RRPs at following meetings. Term Deposit Facility In late December 2009, the  Government Register  published a notice requesting the publics input on a proposal for a TDF. At the January FEDERAL OPEN MARKET COMMITTEE meeting, Government Reserve staff indicated that they would analyze comments from the public in the coming weeks and then prepare a final proposal for the Boards approval. On April  30, the Government Reserve Board announced that it had approved amendments to Regulation  D (Reserve Requirements of Depository Banks) authorizing the Reserve Banks to offer term deposits to banks that are eligible to receive earnings on their portions at Reserve Banks. On May  10, the Government Reserve Board authorized up to five small-value offerings of term deposits under the TDF, which were designed to ensure the impellingness of TDF operations and to provide eligible banks with an opportunity to gain familiarity with the procedures. The first of these offerings, for $1  billion in 14-day term d eposits, was conducted on June 14. The auction had a stop-out rate of 27 basis points and a bid-to-cover ratio of marginally more than 6. The second offering, for $2  billion in 28-day deposits, was conducted on June 28. That auction had a stop-out rate of about 27 basis points and a bid-to-cover ratio of about 5-1/2. The third, for $2  billion in 84-day term deposits, was conducted on Jul 12. That auction had a stop-out rate of 31 basis points and a bid-to-cover ratio of about 3-3/4. Asset Redemptions and Sales Over the course of the FEDERAL OPEN MARKET COMMITTEE meetings conducted in the first half of 2010, banks discussed the eventual size and composition of the Government Reserves balance sheet and longer-run decisions for asset redemptions and sales. Banks agreed that any longer-run strategy for asset sales and redemptions should be concordant with the achievement of the Committees objectives of maximum employment and price firmness. Policymakers were also unanimous in the view that it will be enough to shrink the supply of reserve portions and the size of the Government Reserves balance sheet markedly over time. Moreover, they agreed that it will eventually be enough for the System Open Market Account to return its domestic holdings to only instruments issued by the U.S. Treasury, as was the case before the financial crisis. Meeting banks also agreed that sales of agency debt and agency MBS should be implemented in accordance with a framework communicated well in advance and be conduct ed at a gradual pace that potentially could be adjusted in response to improvements in economic and financial conditions. Monetary Aggregates The M2 monetary aggregate rose only modestly in the first half of 2010  Liquid deposits spread outed mildly, likely showing heightened household demand for safe and liquid assets. The monetary baseroughly equal to the sum of currency in circulation and the reserve portions of depository banks held at the Government Reservechanged at a 3-1/2  % annual rate in the first half of 2010, well below the 30  % rate posted in the second half of 2009. The low growth rate was largely attributable to the more gradual spreading out in reserve portions as the Government Reserves facility of large-scale asset buying came to an end.   Chart of M2 growth rate, 1990 to 2010. Comparative analysis Date    Repo rate RBI Fed 26-Oct-05    6.25 4.75 01-Nov-05    6.25 5 13-Dec-05    6.25 5.25 24-Jan-06    6.5 5.25 31-Jan-06    6.5 5.5 28-Mar-06    6.5 5.75 10-May-06    6.5 6 08-Jun-06    6.75 6 29-Jun-06    6.75 6.25 25-Jul-06    7 6.25 30-Oct-06    7.25 6.25 31-Jan-07    7.5 6.25 30-Mar-07    7.75 6.25 17-Aug-07    7.75 5.75 20-Sep-07    7.75 5.25 31-Oct-07    7.75 5 11-Dec-07    7.75 4.75 22-Jan-08    7.75 4 30-Jan-08    7.75 3.5 17-Mar-08    7.75 3.25 18-Mar-08    7.75 2.5 30-Apr-08    7.75 2.25 12-Jun-08    8 2.25 25-Jun-08    8.5 2.25 30-Jul-08    9 2.25 08-Oct-08    9 1.75 20-Oct-08    8 1.75 29-Oct-08    8 1.25 03-Nov-08    7.5 1.25 08-Dec-08    6.5 1.25 16-Dec-08    6.5 0.5 05-Jan-09    5.5 0.5 05-Mar-09    5 0.5 21-Apr-09    4.75 0.5 18-Feb-10    4.75 0.75 19-Mar-10    5 0.75 20-Apr-10    5.25 0.75 02-Jul-10    5.5 0.75 27-Jul-10    5.75 0.75 Date    Reverse Repo Rates RBI (RR Rates) US Fed (RR Rates) 29-Apr-05    5 2.75 26-Oct-05    5.25 3.75 24-Jan-06    5.5 4.25 31-Jan-06    5.5 4.5 28-Mar-06    5.5 4.75 10-May-06    5.5 5 08-Jun-06    5.75 5 29-Jun-06    5.75 5.25 25-Jul-06    6 5.25 18-Sep-06    6 4.75 31-Oct-06    6 4.5 11-Dec-06    6 4.25 22-Jan-08    6 3.5 30-Jan-08    6 3 18-Mar-08    6 2.25 30-Apr-08    6 2 08-Oct-08    6 1.5 29-Oct-08    6 1 08-Dec-08    5 1 16-Dec-08    5 0.25 05-Jan-09    4 0.25 05-Mar-09    3.5 0.25 21-Apr-09    3.25 0.25 19-Mar-10    3.5 0.25 20-Apr-10    3.75 0.25 02-Jul-10    4 0.25 27-Jul-10    4.5 0.25 Year Inflation rate (consumer prices) (%) US(CPI) 2000 2.2 2001 3.4 2002 2.8 2003 1.6 2004 2.3 2005 2.5 2006 3.2 2007 2.5 2008 2.9 2009 3.8 Date Prime Lending Rate India (PLR) 19-Feb-01 11.5 01-Apr-02 11 01-Nov-02 10.75 5-May-03 10.5 01-Jan-04 10.25 1-May-06 10.75 02-Aug-06 11 27-Dec-06 11.5 20-Feb-07 12.25 9-Apr-07 12.75 16-Feb-08 12.5 27-Feb-08 12.25 27-Jun-08 12.75 12-Aug-08 13.75 10-Nov-08 13 01-Jan-09 11.75 Appendix 1.  Selected components of the Government Reserve balance sheet, 2009-10 (Mns of dollars) Instruments held outright Balance sheet item Dec. 30, 2009 Jul 7, 2010 Total assets 2,237,258 2,335,457 Selected assets    Credit extended to depository banks and dealers    Primary credit 19,111 17 Term auction credit 75,918 ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦ Central bank liquidity swaps 10,272 1,245 Primary Dealer Credit Facility and other broker-dealer credit 0 ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦ Credit extended to other market banks    Asset-Backed CP Money Market Mutual Fund Liquidity Facility 0 ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦ Net portfolio holdings of CP Funding Facility LLC 14,072 1 Term Asset-Backed Instruments Loan Facility 47,532 42,278 Support of critical banks    Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC1 65,024 66,996 Credit extended to American International Group, Inc. 22,033 24,560 Preferred interests in AIA Aurora LLC and ALICO Holdings LLC 25,000 25,733 Instruments held outright    U.S. Treasury instruments 776,587 776,997 Agency debt instruments 159,879 164,762 Agency mortgage-backed instruments (MBS)2 908,257 1,118,290 MEMO    Term Instruments Providing Facility3 0 ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦ Total liabilities 2,185,139 2,278,523 Selected liabilities    Government Reserve notes in circulation 889,678 907,698 Reverse repurchase agreements 70,450 62,904 Deposits held by depository banks 1,025,271 1,061,239 Of which: Term deposits ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦ 2,122 U.S. Treasury, general account 149,819 16,475 U.S. Treasury, supplemental financing account 5,001 199,963 Total capital 52,119 56,934 CENTRAL BANK OF INDIA BALANCE SHEET AS AT 30TH  JUNE 2010 ISSUE DEPARTMENT (Rupees thousands) 2008-09 LIABILITIES 2009-10 2008-09 ASSETS    Notes held in the       Gold Coin and Bullion: 21,25,80 Banking Department 32,61,51    38326,27,06 (a) Held in India 48577,21,52 701655,32,71 Notes in Circulation 842008,36,40    (b) Held outside India          662064,41,42 Foreign Instruments 792300,92,96 701676,58,51 Total Notes issued 842040,97,91 700390,68,48 Total          239,47,03 Rupee Coin          1046,43,00 Government of India  Rupee Instruments          Internal Bills of Exchangeand other CP 701676,58,51 Total Liabilities 842040,97,91 701676,58,51 Total Assets BANKING DEPARTMENT 2008-09 LIABILITIES 2009-10 2008-09 ASSETS 5,00,00 Capital paid-up 5,00,00 21,25,80 Notes 6500,00,00 Reserve Fund 6500,00,00 4,77 Rupee Coin 18,00,00 National Industrial Credit(Long Term Operations) Fund 19,00,00 3,41 Small Coin 192,00,00 National Housing Credit(Long Term Operations)Fund 193,00,00          Deposits       Bills Purchased and Discounted :    (a)Government    (a) Internal 22990,42,88 (i) Central Government 36457,41,08 (b) External 41,34,50 (ii) State Governments 41,33,15 (c) Government Treasury Bills    (b)Banks          250664,49,62 (i) Scheduled Commercial Banks 307759,41,00       3520,91,11 (ii) Scheduled State Co-operative Banks 4065,43,76 512320,77,65 Portions Held Afull 3489,08,20 (iii) Other Scheduled Co-operative Banks 4986,76,82       67,07,47 (iv) Non-Scheduled State Co-operative Banks 68,63,80 151675,42,39 Investments 6671,76,11 (v) Other Banks 9224,79,62       16475,59,86 (c)Others 12807,72,53    Loans and Advances to :          (i) Central Government          (ii) State Governments 195,86,03 Bills Payable 79,45,62    Loans and Advances to:          280,00,00 (i) Scheduled Commercial Banks          (ii) Scheduled State Co-operative Banks          (iii) Other Scheduled Co-operative Banks          (iv) Non-Scheduled State Co-operative Banks          (v) NABARD          11102,82,48 (vi) Others 395707,55,24 Other Liabilities 328809,35,60    Loans, Advances and Investments from NationalIndustrial Credit (Long Term Operations) Fund:             (a) Loans and Advances to:          (i) Industrial Development Bank of India          (ii) Export Import Bank of India          (iii) Industrial Investment Bank of India Ltd.          (iv) Others             (b) Investments in bonds/ debenturesissued by:          (i) Industrial Development Bank of India          (ii) Export Import Bank of India          (iii) Industrial Investment Bank of India Ltd.          (iv) Others             Loans, Advances and Investments from NationalHousing Credit (Long Term Operations) Fund:          (a) Loans and Advances to National Housing Bank          (b) Investments in bonds/ debentures issued by National Housing Bank          31138,74,52 Other Assets 706539,11,02 Total Liabilities 711017,32,98 706539,11,02 Total Assets