Day Count Convention
Day count convention is the rule that specifies how the number of days in an interest accrual period is counted relative to a year, affecting accrued interest, coupon calculations, and derivative valuations across different instrument types and markets.
Different markets use different day count conventions, and misapplying the convention leads to mispriced transactions. In India, the dominant convention for government securities (G-Secs and SDLs) is Actual/Actual (ICMA), which uses the actual number of calendar days in both the numerator (days elapsed since last coupon) and the denominator (days in the full coupon period). This convention minimises distortion from leap years and irregular month lengths.
For money market instruments — Treasury Bills, commercial paper, certificates of deposit, and call money — India follows the Actual/365 (Fixed) convention, sometimes written as Act/365 or Actual/365F. The denominator is always 365, regardless of whether the year is a leap year. This means a 91-day T-Bill's yield, when annualised, divides by 365. Practitioners should not confuse this with the 30/360 or Actual/360 conventions used in US and European money markets.
The 30/360 convention — common in the US corporate bond market — treats every month as having 30 days and the year as having 360 days. This simplification was originally designed for manual computation and has persisted through convention. Under 30/360, a 6-month period from 1 January to 1 July is always exactly 180 days. Applied to actual/actual, the same period would be 181 or 182 days depending on the year.
For interest rate swaps (IRS) in India denominated in rupees, the standard is Act/365 for the fixed leg and Act/365 for the floating leg (typically linked to MIBOR or overnight indexed swap rates). Cross-currency swaps and foreign currency interest rate swaps may use the USD Actual/360 convention on the USD leg and Act/365 on the INR leg, requiring careful reconciliation in pricing.
The CCIL's settlement system and the RBI's NDS-OM platform are programmed with the relevant conventions for each instrument type. Front-office traders and risk management teams must ensure their systems apply matching conventions to avoid systematic mispricing of positions. Auditors of financial institutions also verify that accrual calculations comply with SEBI/RBI guidelines and relevant Ind AS standards on financial instrument measurement.