Indian Money Market is divided into two main segments, i.e., the Lending and Borrowing Segment, where securities and cash are lent and borrowed to meet short-term requirements, and the asset segment, where securities are purchased and sold for short-term up to one year.

The asset money market segment includes treasury bills, commercial papers, certificates of deposit, and cash management bills.

Cash management bills and treasury bills are issued only by the central government in India. In contrast, commercial papers are issued by corporates, and banks issue certificates of deposit.

What are Cash Management Bills?

Cash Management Bills are non-standard short-term debt instruments issued by the Government of India to manage temporary cash flow mismatches.

The tenor for these money market instruments is up to 90 days and is similar to treasury bills that have a maturity between 91 days to 364 days.

Cash management bills are zero coupon instruments that pay no interest since they are issued at a discount and redeemed at face value at maturity. For example, A 14-day cash management bill of ₹100 may be issued at ₹98.40, a discount of ₹1.60, and the investor receives the face value of ₹100 at maturity.

These short-term money market instruments are allotted and credited on a T+1 basis with a minimum investment order value of ₹10,000 and multiples of ₹10,000 thereafter.

The Reserve Bank of India sells these securities through auctions, and market participants such as banks, primary dealers, and other institutional investors can participate in these auctions.

The central bank does not allow non-competitive bidding for cash management bills, like Treasury bills.

Cash management bills are traded and reported in the secondary market through Negotiated Dealing System-Order Matching, provided and settled by the Clearing Corporation of India Ltd.

Issuance So Far

In August 2009, the Government of India decided to issue cash management bills as a new short-term instrument in consultation with the RBI.

On May 12, 2010, the first cash management bills were sold by the RBI for the tenure of 35 days with notified amount of ₹60 billion at a 3.8729% cut-off yield. Post the success of the issue; these instruments have been issued as and when required.

The cash management bills have been issued so far with a maturity of 7 days to 84 days in India.

The last issuance of cash management bills was during COVID-19 lockdown on May 28, 2020, for ₹800 billion with a tenure of 84 days to help meet the government with cash flow stress.

The government also has another similar method to get short-term money through Ways and Means Advances, where the RBI gives temporary loan facilities for up to 90 days to central and state governments as a banker to the government.

Banks and mutual funds are generally major investors in this non-standard money market instrument. Banks invest in cash management bills as they are eligible securities for maintaining their Statutory Liquidity Ratio as per section 24 of the Banking Regulation Act, 1949.

Mutual funds invest in these cash management bills as it offers the avenue to park funds received through liquid mutual fund schemes.

Pros & Cons

Cash management bills provide several benefits for the government, central bank, and investors.

For the central government, issuing cash management bills helps manage short-term cash balances effectively. The RBI uses these instruments to manage short-term liquidity in the economy.

For investors, these securities are considered a low-risk investment and highly liquid instrument in the secondary market. However, cash management bills have limited maturity and are not suitable for corporate and financial institutions looking for long-term investments. The RBI sells these extremely short-term instruments only on a need basis.

Overall, CMBs play a crucial role in the liquidity management of the government and the financial system in India.

Sources:The Reserve Bank of India,The Clearing Corporation of India Ltd, Media Reports