CMBs: Purpose & Benefits

CMBs: Purpose & Benefits

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Cash management bills (CMBs) are short-term debt instruments issued by the RBI on behalf of the government. They are issued for less than 91 days and are sold at a discount from their face value. The main purpose of cash management bill is to help governments manage their cash balances. They are typically issued when the government needs to raise cash quickly, such as during a budget shortfall or when there is a need to finance a specific project. CMBs are an important tool for governments to maintain their liquidity and manage their cash flows effectively.

There are several benefits of cash management bill. First, they provide investors with a safe and secure investment option as they are backed by the government. Second, they have a short duration, which means that investors can earn returns on their investment quickly. Third, CMBs typically offer higher yields than other short-term debt instruments such as savings accounts or certificates of deposit (CDs). Lastly, CMBs provide governments with a flexible way to manage their cash balances so that they can avoid liquidity problems.

A typical example of cash management bill is when a government needs to raise cash quickly to finance a specific project and then it issues CMBs with a maturity of 91 days or less to raise the required funds. The maturity amount and issuing date are determined by the temporary cash requirements of the government. The CMBs will be sold at a discount from their face value, which means that investors will earn a return when the bills mature.

While CMBs offer several benefits, there are also some shortcomings of cash management bill. First, the minimum investment amount for CMBs is typically higher than other short-term debt instruments, which may not be suitable for all investors. Second, CMBs are not as liquid as other short-term debt instruments which mean that investors may have to hold onto their investment until maturity to earn a return. Third, CMBs are subject to interest rate risk, which means that their value may decrease if interest rates rise. Thus, cash management bills are short-term debt instruments issued by the RBI to manage government’s cash balances and meet short-term obligations. They are an important tool for maintaining liquidity and managing cash flows effectively. While CMBs offer several benefits, investors should also consider their shortcomings before investing.