JP Morgan
Product Brief J.P.
Morgan India Treasury Bill Index (JPM ITBI) �
The Index tracks returns on Indian
treasury bills, which
constitute the most liquid segment of Indian Money
Markets ·
The Index is a constant duration price
index, sub- indices
available for 1 month, 3 month and 6 month benchmark
maturities ·
Index history is available from the
base date : April 1, 1996
Introduction J.P.
Morgan India Treasury Bill Index (JPM ITBI) is the first short-term
index for the Indian domestic markets and is a part of
the J.P. Morgan global series of indices. The Index is aimed
at capturing returns on a portfolio invested in domestic short-term
instruments. The increasing activity at the near end (<
1 year) of the market highlights the increased importance of
these instruments as cash management and liquidity enhancing
tools. This index is an attempt to provide the market
participants (both domestic as well as international) a convenient
and easily available instrument to capture and analyse
the market movements in the less than one-year maturity
segment of Indian markets. This brief details
the methodology of the JPM ITBI, a total returns
index that tracks the returns in the traded treasury bills market.
Keeping with J.P. Morgans goal of index transpar- ency,
this brief is designed to give investors insights into the construction
of the Index. Transparent calculations are especially
relevant for emerging markets like India, where market
nuances and peculiarities necessitate the use of certain assumptions
to capture the total returns of a particular instrument.
Features of JPM ITBI
The JPM ITBI has been designed to capture the most liquid
segment of Indian money markets: the treasury bills.
Treasury Bills constitute nearly 50% of
the outstanding face value in the domestic
money market segment and contribute to more than
90% of trading volumes. Also, registered Foreign Institutional
Investor (FIIs) have recently been permitted to invest
in Indian treasury bills, broadening the eligible investor base
in the treasury bills segment of the money markets. Further,
the returns on other short-term instruments, like Commercial
Paper and Certificates of Deposit, are highly correlated
to the returns on the treasury bills making it the most
representative instrument in capturing the movements in this
segment of the market. The Index tracks the yield and price
movements of all the outstanding treasury bills: 14 day, 91
day, 364 day and other treasury bills (as and when issued). The
JPM ITBI is a composite index which tracks the returns on
a portfolio of instruments, where each instrument tracks the yields
at a particular benchmark maturity. A series of sub- indices
are also be available to indicate the returns at each of the
benchmark maturities, the 1 month, 3 month and 6 month. Uses
of the Index The JPM ITBI aids accurate
and timely monitoring of the Indian money
markets. The Index also serves as a reliable performance
benchmark for banks, money market mutual funds
or cash/liquid component of any other fund including a registered
FII. In addition, the sub indices can be used to historically
test investment strategies that involve cash or money
market instruments and can also be used in asset allocation
studies to determine optimal weights between various
asset classes. Further, the Index is a useful tool to track
volatility, charting correlation and developing hedging instruments.
Going forward the Index could even be a useful input
for the Monetary Conditions Index proposed by the Reserve
Bank of India (RBI) in its Annual Report. Index
characteristics To aid interpretation
and usage, we have tried to use a simple and
uncomplicated methodology for constructing the Index. The
construction methodology for JPM ITBI ensures the following
index characteristics : 1)
A constant index duration to aid meaningful
benchmarking of returns across investment horizons. The
Index duration is fixed at 150 days for the composite
index, while the sub-indices have a maturity of 30 days,
90 days and 180 days. 2)
Index performance that is independent of any specific
entry date or investment cycle. The Index portfolio is
marked to market and rolled over on a daily basis.
3) Primary dependence
on data available from actual trades. The
traded data provides the best estimate of market yields
specially due to lack of screen based trading 4)
Accurate and timely monitoring of the markets, which
takes into consideration the distortions in ill-liquid
phases of the market.