Parking ₹50 Crore for 14 Days: Call Money, T-Bill or CD?
On a Friday morning, the treasury of a scheduled commercial bank has ₹50 crore of surplus funds that will not be needed for 14 days. Four placement options are on the table. (A) Interbank call money at 6.50% per annum, repayable on demand. (B) A 14-day Treasury bill quoted at a discount yield of 6.60% per annum on a 365-day basis. (C) A 14-day certificate of deposit at 6.65% per annum, with a one-time transaction cost of 0.10% of the amount invested. (D) Leaving the funds in the current account, which earns 3.50% per annum. The bank's internal liquidity policy requires at least ₹20 crore to remain in assets that qualify as High Quality Liquid Assets (HQLA) at all times. The dealer argues that the T-bill is unattractive because its quoted discount yield is lower than the CD's coupon. The treasury manager must compare actual investment yields, consider the liquidity policy, and decide where to place the ₹50 crore.
1. Compute the 14-day rupee return and effective annualized yield for each option. Which option ranks highest on return?
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Use 14/365 = 0.038356. Call money: 50 × 6.50% × 14/365 = ₹12.47 lakh; annualized yield 6.50%. T-bill: discount = 50 × 6.60% × 14/365 = ₹12.66 lakh. Price paid = 50 − 0.1266 = ₹49.8734 crore. Effective yield = 0.1266/49.8734 × 365/14 = 6.62%; rupee return ₹12.66 lakh. CD: gross interest = 50 × 6.65% × 14/365 = ₹12.75 lakh; transaction cost = 0.10% × 50 = ₹5.00 lakh; net = ₹7.75 lakh; net annualized = 7.75/50 × 365/14 = 4.04%. Current account: 50 × 3.50% × 14/365 = ₹6.71 lakh; 3.50%. Ranking by return: T-bill ₹12.66 lakh (6.62%), call ₹12.47 lakh (6.50%), CD ₹7.75 lakh net (4.04%), current account ₹6.71 lakh (3.50%). The dealer's comparison is flawed because the T-bill is quoted on a discount basis and the CD bears a 0.10% upfront cost. The T-bill earns about ₹19,000 more than call money over the 14 days.
2. How should the ₹50 crore be placed if the HQLA policy is binding? Consider the liquidity characteristics of each option.
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A 14-day T-bill is a Level 1 HQLA with zero haircut, so placing all ₹50 crore there leaves ₹50 crore in HQLA and satisfies the ₹20 crore floor. Call money is an unsecured interbank loan and generally does not count as HQLA. The CD's HQLA eligibility is less certain and its net return is the lowest of the market options. The T-bill also earns more than call money over the 14-day horizon. On the stated facts - no cash need for 14 days and a hard HQLA floor - the best choice is ₹50 crore in the 14-day T-bill, with a repo backup for unexpected liquidity. If the bank wanted daily liquidity, it could keep ₹20 crore in call money and place ₹30 crore in T-bill, but that gives up about ₹11,500 of return and weakens HQLA composition.
3. At what CD transaction cost would the CD match the T-bill's 14-day rupee return? Interpret the result.
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CD gross return is ₹12.75 lakh; T-bill return is ₹12.66 lakh. The CD's gross advantage is about ₹9,600 (0.000959 crore). Break-even cost = 9,600/50,00,00,000 = 0.0019% of principal. The actual cost is 0.10% (₹5 lakh), roughly 52 times the break-even. So the CD cannot match the T-bill unless its transaction cost is almost zero; even then it only matches, and it has weaker HQLA treatment. The manager should not choose the CD on the basis of its higher coupon.