Cash Management refers to the efficient management of cash inflows and outflows, along with the assessment of market liquidity, cash flows, and investments. In order to address temporary cash balance mismatches and provide emergency funding, central banks often issue short-term bills known as Cash Management Bills. These bills are typically issued in consultation with the government and have a maturity period ranging from a few days to three months. Their flexible nature allows central banks to issue fewer long-term notes and maintain a lower cash balance.
Compared to fixed maturity tenure bills, Cash Management Bills generally offer a higher yield, despite their shorter maturity period. For instance, the United States issues Cash Management Bills with maturities ranging from a few days to six months. These bills can be issued in either fungible or non-fungible form.
When Cash Management Bills are issued in fungible form, their maturity date coincides with the maturity of an already issued treasury bill. Primary dealers are required to participate in the bidding process for these bills, similar to bonds or regularly scheduled treasury bills.
If you are interested in purchasing Cash Management Bills, you have several options. Individuals, fiduciaries, and corporate investors can acquire these bills through a broker, dealer, or financial institution during the auction process.
During the bidding process, you can choose to bid either noncompetitively or competitively. When bidding noncompetitively, you agree to accept the discount rate set at the auction. You will receive the full amount of your bid, up to $10 million. Noncompetitive bids can be placed through a broker, dealer, or financial institution.
Competitive bidding, on the other hand, allows you to specify the minimum discount rate you are willing to accept. Depending on the discount rate set at the auction, your bid will be treated differently:
If your bid is less than the auction’s rate, it will be accepted in full.
If your bid is equal to the auction’s rate, it will be partially accepted.
If your bid is higher than the auction’s rate, it will not be awarded.
Competitive bids must be placed through a broker, dealer, or financial institution.
In India, the Reserve Bank of India (RBI) and the Government of India introduced Cash Management Bills as a short-term money market instrument to address temporary cash flow mismatches. These bills, with a maturity period of less than 91 days, serve as discounted monetary market instruments. Cash Management Bills in India bear a resemblance to treasury bills and are subject to pre-specified terms and conditions during the sale.
The first issuance of Cash Management Bills in India took place on May 12, 2010. These bills were introduced to supplement existing short-term cash raising instruments like treasury bills and ways & means advances.
It’s important to note the differences between Treasury Bills, Ways & Means Bills, and Cash Management Bills. Treasury bills and ways & means advances are also issued for periods ranging from 91 days to 364 days, allowing the government to borrow from the Reserve Bank of India. However, ways & means advances have the same interest rate as the repo rate, while treasury bills have varying interest rates. Cash Management Bills, on the other hand, offer a lower interest rate compared to treasury bills and ways & means advances, reducing the government’s interest rate costs.
In conclusion, Cash Management Bills are valuable short-term instruments issued by central banks to address temporary cash flow mismatches and provide emergency funding. Investors can participate in the auction process through noncompetitive or competitive bidding, allowing them to acquire these bills through brokers, dealers, or financial institutions. Understanding the differences between Cash Management Bills and other short-term instruments such as treasury bills and ways & means advances is essential for making informed investment decisions.