Markets for CD that were introduced in 1989 and CP that were introduced in 1990 exhibit contrasting behavior. Activity in the CP market booms amidst ample liquidity condition whereas that in CD market shots up in tight market conditions. In order to examine the relationship between the sizes of CD and CP markets, the Augmented Dickey Fuller (ADF) test was conducted to verify stationarity of the series of the outstanding amounts. The Johanson-Juselius's Cointegration Test and VAR model of order 2 are used to identify the nature and degree of long-run relationship between them during the period of ten years from April 1993 to March 2004. The test results demonstrate that outstanding amounts of CD and CP are not cointegrated.
Certificate of Deposit (CD) is a marketable receipt in registered or bearer form of funds deposited in a
bank for a specified period at specified rate of interest. Commercial Paper (CP) is an unsecured money
market instrument issued in the form of a promissory note and transferable by endorsement and
delivery. Like Treasury Bills (TBs), it is typically a discount security; the investor purchases notes at less
than face value and receives the face value at maturity. Interest rates on CPs are usually quoted on a
discount basis.
The introduction of CDs in 1989 and CPs in 1990 in India is a sequel to the work done and the
framework suggested by Vaghul Working Group (Working Group on Money Market) Report (RBI,
1987). The market for CD and CP has come a long way since inception of these instruments in India.
In view of this, it has become imperative to study the market for these securities.
As per RBI, Annual Report, 2002-03, “Commercial Papers (CPs) and CDs exhibit contrasting
behavior. Activity in the CP market picks up amidst ample liquidity conditions when eligible entities
can raise funds through CPs at an effective rate of discount lower than the lending rate of banks”.
Whereas issues of CDs increase during tight liquidity condition, as banks are desperate to raise funds
from wholesale players even at marginally high interest rates. Graphical representation of outstanding amount of CD and CP gives an appearance that they move in the opposite direction. |
