Cash Management Bill (CMB) are short-term money market instruments introduced by the Government of India in 2010 in collaboration with the Reserve Bank of India. These bills cater to the Government's immediate cash requirements by addressing temporary cash flow gaps. Compared to T-bills, CMBs possess comparable characteristics but are issued for less than 91 days. This article overviews cash management bills meaning and key features. It also emphasises the history and working of cash management bills.
What is Cash Management Bill?
A Cash Management Bill (CMB) is a short-term bill issued by the central bank in collaboration with the Government. It helps to address temporary cash imbalances and provide emergency funding. These bills have a maturity period ranging from a few days to three months. It makes them highly flexible monetary market instruments that can be issued as needed.
By utilising CMBs, central banks can reduce the issuance of long-term notes and maintain lower cash balances. While CMBs offer lower interest expenses due to their shorter maturity, they tend to yield higher returns than fixed-maturity tenure bills.
CMB can be issued in fungible and non-fungible forms, with the former aligning the maturity date with already issued treasury bills. However, the participation of primary dealers is mandatory for fungible.
How Cash Management Bills Work
CMBs play a crucial role in managing the Government's cash flows and liquidity requirements. Here's how CMBs work in India:
● Purpose: CMBs are issued to meet the temporary mismatches in the Government's cash flows and bridge the short-term liquidity needs.
● Tenure: CMBs have a short tenure ranging from a few days to up to 90 days. They are issued at a discount to face value and redeemed at par upon maturity.
● Auction Process: The issuance of cash management bills follows an auction process conducted by the RBI. Authorised participants, such as banks, primary dealers, and select financial institutions, can participate in these auctions.
● Nominal Value: The nominal value of a Cash Management Bill is usually ₹1 crore or multiples thereof. Investors can bid for multiple units of CMBs based on their liquidity requirements.
● Competitive Bidding: The auction process involves competitive bidding, where participants submit their bids specifying the amount and yield they are willing to purchase the CMBs.
● Acceptance of Bids: The RBI accepts the bids starting from the lowest yield and progressively moves towards higher yields until the notified amount is reached.
● Allotment and Settlement: Successful bidders receive an allotment of CMBs at the accepted yield. The settlement occurs through the RBI's Core Banking Solution (E-Kuber) system.
● Secondary Market: CMBs can be traded in the secondary market before maturity. It allows investors to buy or sell the bills based on their liquidity requirements or investment strategies.
● Liquidity Management: CMBs aid in effective liquidity management by providing an additional instrument for market participants to deploy their short-term surplus funds.
● Risk-Free Investment: CMBs are backed by the sovereign guarantee of the Indian Government, making them a safe and risk-free investment option for eligible investors.
Features of CMBs
Here are the key features of Cash Management Bills introduced:
● Maturity: CMBs have a maturity period of less than 91 days.
● Discounted Redemption: Similar to Treasury Bills, CMBs are issued at a discount and redeemed at face value upon maturity. For instance, if a cash management bill has a face value of Rs 100, it can be acquired at Rs 97, and upon maturity, typically after 60 days, it can be redeemed for Rs 100. No interest payment is made, but the discount is the return on investment.
● Flexible Tenure: The tenure, total quantity of CMBs to be issued (notified amount), and date of issuance depend on the temporary cash requirements of the Government.
● SLR Eligibility: CMBs are eligible as Statutory Liquidity Ratio (SLR) securities. Banks can consider investment in CMBs as a valid investment in government securities for SLR purposes, as recognised under Section 24 of the Banking Regulation Act, 1949.
● Market Mechanism: Cash Management Bills are auctioned by the Reserve Bank of India. The announcement regarding the auction was made one day before through a separate press release.
● Settlement: The settlement for the auction follows a T+1 basis.
● Non-Competitive Bidding: Unlike Treasury Bills, CMBs are not covered under the non-competitive bidding scheme.
● Tradable Nature: CMBs are tradable and qualify for the ready-forward facility.
● Liquidity Management: Cash Management Bill facilitates the transfer of liquidity in the banking sector to the Government in a manageable form.
● Deepening Inter-Bank Market: These bills contribute to deepening the inter-bank term-money market. It helps mitigate the interest rate risks banks face when borrowing for the short term.
History of Cash Management Bills in India
The Cash Management Bill was first introduced in India on May 12, 2010. It supplements the existing short-term cash-raising instruments introduced by the Government of India in consultation with the Reserve Bank of India. The primary objective of CMBs is to help the Government manage its short-term cash flow requirements more effectively. The RBI conducts auctions on behalf of the Government to issue CMBs.
CMBs have become an integral part of the Indian money market, helping to address temporary cash flow mismatches. These share similarities with treasury bills and are sold based on pre-specified terms and conditions. Initially, CMB had a tenor of 91 days but was extended to 364 days to offer greater flexibility. Investors can earn interest on their investments as CMBs are issued at a discount and redeemed at face value. These bills are accessible to many investors, including individuals, companies, banks, and non-banking financial institutions.
The interest rate on CMBs is determined through competitive bidding in the auction process. CMBs are considered a safe and liquid investment option since the Government backs them. They are crucial in managing the Government's cash flow by bridging temporary mismatches between receipts and expenditures. The RBI has implemented measures to enhance liquidity and attractiveness, such as introducing secondary market trading and relaxing investment limits for certain categories of investors.
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Frequently Asked Questions
CMBs are short-term debt instruments issued by the Government. These bills help manage its short-term cash needs. They are typically issued for 91 days or less and serve as a way for the Government to bridge temporary gaps in cash flow.
The central bank issues Cash management bills in collaboration with the Government.
The pricing of Cash Management Bill is based on prevailing market conditions, including interest rates and investor demand. They are sold at a discount to their face value. The difference between the purchase price and the face value represents the investor's return.
CMBs are generally considered safe investments as the full faith and credit of the issuing Government back them. However, like any investment, there is still some risk involved, albeit relatively low, as their value can fluctuate with changes in interest rates.