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BUSINESS AND ECONOMIC ENVIRONMENT

SCHOOL OF MANAGEMENT STUDIES,NIT CALICUT

DEVELOPING THE MONEY MARKET ININDIA

PRESENTED BY:

SHEETANSHU SHEKHAR

PRADEEP KUMAR

ASWATHY M.

DATE: 1ST MARCH 2011

PRESENTED TO:

Dr. MUHAMMAD SHAFIASSISTANT PROFESSOR

NIT CALICUT


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CONTENTS

What is money market?

Features of Money Market

Objective of Money Market Importance of Money Market

Structure of Indian Money Market

Composition of Money Market

Instrument of Money Market


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CONTENTS

Necessary Conditions for Developing The

Money Market

Developing The Money Market Disadvantage of Money Market

Summary


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What is Money Market?

As per RBI definitions A market for short termsfinancial assets that are close substitute for money,facilitates the exchange of money in primary andsecondary market.

The money market is a mechanism that deals with thelending and borrowing of short term funds (less thanone year).

A segment of the financial market in which financialinstruments with high liquidity and very shortmaturities are traded.


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What is Money Market?

It doesnt actually deal in cash or money but deals

with substitute of cash like trade bills, promissory

notes & government papers which can converted into

cash without any loss at low transaction cost.

It includes all individual, institution andintermediaries.


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It is a market purely for short-terms funds or financial

assets called near money.

It deals with financial assets having a maturity period less

than one year only.

In Money Market transaction can not take place formal

like stock exchange, only through oral communication,

relevant document and written communication transaction

can be done.


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Transaction have to be conducted without the help ofbrokers.

It is not a single homogeneous market, it comprises ofseveral submarket like call money market, acceptance& bill market.

The component of Money Market are the commercialbanks, acceptance houses & NBFC (Non-bankingfinancial companies).


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Objective of Money Market

To provide a parking place to employ short termsurplus funds.

To provide room for overcoming short term deficits.

To enable the central bank to influence and regulateliquidity in the economy through its intervention in thismarket.

To provide a reasonable access to users of short-termfunds to meet their requirement quickly, adequately atreasonable cost.


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Importance of Money Market

Development of trade & industry.

Development of capital market.

Smooth functioning of commercial banks. Effective central bank control.

Formulation of suitable monetary policy.

Non inflationary source of finance togovernment.


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Structure of Indian Money Market

ORGANISED STRUCTURE

1. Reserve bank of India.

2. DFHI (discount and finance house of India).

3. Commercial banksi. Public sector banks:SBI with 7 subsidiariesCooperative banks20 nationalized banks

ii. Private banks:Indian BanksForeign banks

4. Development bankIDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.


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Composition of Money Market

Money Market consists of a number of sub-

markets which collectively constitute the

money market. They are:

1. Call Money Market

2. Commercial bills market or discount market3. Acceptance market

4. Treasury bill market


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Call Money Market

Under call money market, funds are transacted on overnight basis and

under notice money market, funds are transacted for the period between 2

days and 14 days.

Banks borrow in this money market for the following propose.:

1. To fill the gaps or temporary mismatches in funds.

2. To meet the CRR & SLR Mandatory requirements as stipulated by the

Central bank.

3. To meet sudden demand for funds arising out of large outflows .

Thus call money usually serves the role of equilibrating the short-term

liquidity position of banks


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Commercial bills market

It is a market for Bills of Exchange arising out of

genuine trade transactions.

In the case of credit sale, the seller draws a Bill of

Exchange on the buyer and once the buyer

accepts this bill, the seller can discount it with a

bank and receive cash.

Discount and Finance House of India wasset up in 1988 to promote secondary

market in bills.


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Acceptance market

Investment market based on short-term credit

instruments.

An acceptance is a time draft or bill of exchange

that is accepted as payment for goods.

A banker's acceptance, for example, is a time

draft drawn on and accepted by a bank, which is a

common method of financing short-term debts ininternational trade including import-export

transactions.


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Instrument of Money Market

A variety of instrument are available in a developed

money market. In India till 1986, only a few

instrument were available.

They were

Treasury bills

Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market.


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New Instruments

Now, in addition to the above the following newinstrument are available:

1. Commercial papers.2. Certificate of deposit.

3. Inter-bank participation certificates.

4. Repo instrument

5. Banker's Acceptance6. Repurchase agreement

7. Money Market mutual fund


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Treasury Bills (T-Bills)

(T-bills) are the most marketable money marketsecurity.

They are issued with three-month, six-month

and one-year maturities. T-bills are purchased for a price that is less than their

par(face) value; when they mature, the governmentpays the holder the full par value.

T-Bills are so popular among money marketinstruments because of affordability to the individualinvestors.


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Sample Treasury Bill(UK)


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Advantages of investing in T-Bills

No Tax Deducted at Source (TDS)

Zero default risk as these are the liabilities of GOI

Liquid money Market Instrument

Active secondary market thereby enabling holder to

meet immediate fund requirement.


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Commercial paper (CP)

Commercial paper was introduced into the Indian money market

during the year 1990, on the recommendation of Vaghul Committee.

Now it has become a popular debt instrument of the corporate

world.

A commercial paper is an unsecured short-term instrument issued by

the large banks and corporations in the form of promissory note,

negotiable and transferable by endorsement and delivery with a

fixed maturity period to meet the short-term financial requirement.

There are four basic kinds of commercial paper: promissory notes,

drafts, checks, and certificates of deposit.


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Issue Mechanism: CP


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Volumes and Discount Rates


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Advantages & Disadvantages

Advantage of commercial paper:

Wide range of maturity provide more flexibility.

It does not create any lien on asset of the company. Tradability of Commercial Paper provides

investors with exit options.

Disadvantages of commercial paper:

Its usage is limited to only blue chip companies.

A high degree of control is exercised on issue of

Commercial Paper.


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Certificate of deposit (CD)

Certificate of deposit are unsecured, negotiable,

short-term instruments in bearer form, issued by

commercial banks and development financial

institutions.

Like most time deposit, funds can not withdrawnbefore maturity without paying a penalty.

CDs have specific maturity date, interest rate and itcan be issued in any denomination.


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Certificate of deposit (CD)

The scheme of certificates of Deposits (CDs) was

introduced by RBI as a step towards deregulation of

interest rates on deposits.

Under this scheme, any scheduled commercial banks,co-operative banks excluding land development banks,

can issue certificate of deposits for a period of not less

than three months and up-to a period of not more than

one year. Certificate of deposits rates are usually higher than the

term deposit rates, due to the low transactions costs.


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Sample Certificate of Deposit


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Volume and Rates


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Repurchase agreement (Repos)

The major function of the money market is to provide

liquidity. To achieve this function and to even out liquidity

changes, the Reserve Bank uses repos.

Repo is a money market instrument, which enables

collateralized short term borrowing and lending through

sale/purchase operations in debt instruments.

Under a repo transaction, a holder of securities sells them to

an investor with an agreement to repurchase at a

predetermined date and rate.


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Developing The Money Market:

Necessary Conditions Banks and other financial institutions should be commercially

motivated to respond to incentives to actively manage risk and

maximize profit.

Sound banks and other financial institutions.

Shift from direct to indirect monetary policy instruments.

Sound government cash management and co-ordination with

the RBI.


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Developing The Money Market Stability oriented monetary policy.

Liquidity management of central bank.

RBI operating procedures

Affect the stability of money market

Affects the incentives to use the money market to manage

risk.

Standing facilities

Penalty rates should provide incentive for interbank

activity.

Wide enough corridor should encourage trading.


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Developing The Money Market

Open Market Operations

Fosters the development of secondary markets.

Fosters collateralized money markets

Need for co-ordination

Reserve Requirements

Trading in overnight market will be determined by:

Length of reserve maintenance period.

Averaging provisions for meeting reserve requirements.

Penalties for accessing RBIs lending and deposit facilities.


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Developing The Money Market

Ways of co-ordination

RBI acts as fiscal agent information of debt

calendar is available.

Government shares cash flow projections with

RBI on a daily basis and promptly informs about

new information(liquidity forecasting committee

can be useful). Uncertainty is reduced when overdraft is limited or

prohibited and government deposits are not held

with RBI.


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Disadvantage of Money Market

Purchasing power of your money goes down,in case of up in inflation.

Absence of integration.

Absence of Bill market.

No contact with foreign Money markets.

Limited instruments.

Limited secondary market.

Limited participants.


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Summary

The money market specializes in debt securities thatmature in less than one year.

Money market securities are very liquid, and areconsidered very safe. As a result, they offer a lowerreturn than other securities.

The easiest way for individuals to gain access to themoney market is through a money market mutualfund.

T-bills are short-term government securities thatmature in one year or less from their issue date.

T-bills are considered to be one of the safestinvestments.


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Summary

Factors for money market development

Profit oriented and sound banks. Monetary operations through market based

instruments.

Incentive structure for interbank trading provided

through RBIs operating procedure.

Co-ordination between government cash

management and monetary operations.


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THANKYOU

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