money and capital marekt

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Money and Capital market

Money Market : concept and type



Money Market Concept and Type

Money market meets the short term requirements of the economy

The money market is expected to discharge following functions

1. Equilibrating mechanism to even out demand and supply of shortterm funds.

2. A focal point for central banks intervention for influencingliquidity and general level of interest in the economy.

3. Providing reasonable access to user and provider the short termborrowing and investment requirement.

(Y.V.Reddy Monetary and Financial Reforms in India (2000)UBS Publisher and Distributors , New Delhi



Money Market Concept and Type

� Indian money market has two parts

1. Unorganized money market

2. Organized Money market .

The RBI is the apex institution of the money

market



Unorganized money market

Unregulated and un-integrated

Unregulated non banking financial

institutions (A) Loan companies (B) loan

companies ,(C ) Chit funds and Nidhi,(d)

Indigenous banker and money lender

This sector has very high rate of interest

No systematic data on this sector are available.

This sector is thriving on the weakness of the

organized sector .



Organized money market Concept

and issuesThe organized money market comprises of RBI,

commercial banks , cooperative banks, Discount and

Finance House of India Ltd (DFHI), Finance

Corporation, Mutual Funds and Foreign Banks.

� The money market is not coordinated and some

critics are of the view that there is no national

money market, there is Mumbai Money market ,

Kolkata Money market and o on but no Indian

money market



Organized money market : issues

� Lack of rational interest structure

� Absence of organized commercial bill market

� Seasonal stringency of funds and fluctuationin interest.

� Inadequate banking facility 15900 person

per bank in India, compared to 1200 personper bank in USA.



Organized Money Market : Principal Constituents

1. Call Money market

Borrowing and landing transactions are

carried out for one day

1. This market bring together the borrowing

and lending banks i.e the banks which has

surplus fund and the banks which are in

deficit.

2. This market is also called inter bank call moneymarketThe Scheduled Commercial banks, Discount and Finance House of

India(DFHI) and Co-operative Banks are main player- the borrowers and

lender. The LIC, GIC , IDBI and NABARD also participate but only aslender




1. Call Money market

� Call money market is highly sensitive and reflective

of the liquidity situation.

� The deficit and surplus in banks emerges because of

fluctuations in CRR and also because of the medium

term investment that banks make by borrowing from

call money market.

� Since establishment of DFHI in 1988, on the

recommendation of Vaghual Committee has

contributed in the development of call money

market




2. The Treasury Bill Market

Treasury bills are issued by governments to

meet its temporary deficit.

There are no measure holders of treasury billsother than RBI, which is a captive holder of

treasury bills i.e. it is obliged to purchase all

treasury bills issued by the government and is

bound to discount the bills presented to it.

RBI auctions treasury bills at regular interval




2. The Treasury Bill Market

Presently there are following types of treasury bills

� 91 days treasury bills, weekly auction basis by RBI

�

182 days treasury bills are auctioned on Wednesday, preceding non reporting Fridays

� 364 days treasury bills are auctioned on Wednesday ,

preceding reporting Fridays

� Available on the multiples of Rs 25000/-

� Almost risk less , as they are guaranteed by

Government of India.




3.The Repo Market

� Under a repo transactions , securities are sold

by their holders to an buyer with an

agreement to re-purchase them at a

predetermined rate and date.

� Under reverse repo transaction securities

are purchase with a simultaneous agreement

to sell at a predetermined rate and date




4.The Repo Market

� Initially repo was allowed in the central

government treasury bills and dated securities

created by converting some of the treasury

bills, later this provision has been extended to

all government securities and treasury bills of

all maturities and now state govt. securities ,

PSUs bond and securities and privatecorporate securities have also been allowed

in this transactions.




5 .Commercial Bill market

� Commercial bill is drawn by one merchant

firm on other.The legitimate purpose of

commercial bill is reimburse the seller while

the buyer delays payment.

� The commercial bill market in India is less

developed because of popularity of cash

transactions and the unwillingness of thelarger buyers to bind themselves to payment

disciplines.




5 .Commercial Paper Market.

� Commercial paper is an unsecured promissory note

with fixed maturity issued by a corporation .

� Unlike commercial bill is not related with underlying

self liquidating trade . Usually the borrower and lend

adopt the maturity as per their needs.

� CP was introduced in India in 1990, on the

recommendation of Vaghul Committee

( working group on Money market 1987)� The CP can be issued by any listed company which

has a working capital of Rs 5 crore in the multiple of

Rs 25 lakhs subject to a minimum size of Rs 25 lakhs




5 .Commercial Paper Market.

The issuing company must have the creditrating of A2 by Investment Information and

Credit Rating Agency of India Ltd (ICRA ) or P2

of Credit Rating and Information Services of

India Ltd(CRISIL).




6 .The money Marekt Mutual Funds (MMFS)

� MMF introduced in 1992 to provide short

term avenues for investment to individual

investors.

� Banks, Public Finance Institutions and also

private sectors too can setup MMFs.

� MMFs has been brought under the regulatory

authority of SEBI.



Capital market : Concepts

� The capital market deals with long term lending and

borrowing .

� There is inter dependence between short term and

long term market

� The suppliers serve in money as well as capital

market.

�

The short term and long term rate of interest areinterdependent , however it is short term interest

rate which changes first and the long term follows

after wards



Capital market : Concepts

� The capital market can be divided in two

categories :

�

(1) The financial institutions like IFCI, EXIMbank , SIDBI, IDFC, SFC, LIC etc provide long

term loans.

� (2) Securities Market it is further divided in

two parts the gilt -edged securities and

corporate securities



The gilt -Edged securities ( of the

Best quality )� Risk free

� Securities guaranteed by government

principal as well as interest.� The issue market - RBI does all the issues of

central as well as of the state governments .

�

Secondary market : Large stockbrokers dealsin old issues and the RBI keeps securities of

various maturities and interest rates to meet

the demand



The gilt -Edged (Best quality ) securities

� The dealers in gilt edged market are mainly

institutions who have the statutory requirements to

invest their funds in the government securities like

LIC, GIC Provident funds . These institutions mobilizesavings and invest in these securities. These are

called captive market.

� Discriminatory auctions : The process of auctioning a

single unit to the highest bidder and also the

multiple units to the highest bidder till the stock

exhaust.



The gilt -Edged ( Best quality ) securities

� The private investors are also entering in this

market to attract to the middle income group

investors generally averse of taking risk.

� The investor base of government securities

has expanded rapidly since 1991.

Primary issuance Rs 12000/ - cr ---- 1991-92

Rs 99,630/ cr -------1999-2000

Gross market borrowing of central and state

government in 2006-07 Rs 2,00198 cr



Corporate Security Market

� Corporate security market : Primary market

and secondary market.

�

Capital can be raised from general public byprospectus, offer sale ( shares are taken in

bulk by third and later sold to public ) private

placement and by offering right issues (

shareholders have right to have certainnumber of shares in proportion to present

holdings )



Growth of Capital Market

� Rapid expansion of government security

market, 12,000 crs in 1991-92 to 99630 cr in

1999-2000 and 2,00 198 cr in 2006-07

secondary market of gilt edge securities has

also been increased to 5,01808 in 2007-08.

� In 1990-91 total private issue was 364 and the

fund raised was just Rs 4321 cr whichincreased to 2006-07 31,600 cr



Growth of Capital Market : issues

� Popularity of Shares : Prior to 1991

debentures were popular and constituted 70

percent of the fund raised through new issues.

which has now been changed qualitatively as

in 2007 the contribution of share capital in

total fund raised was 87.6 percent. And

among shares preference share accounts anominal fraction of the total capital raised



Resource mobilization through

primary market (Rs crs)



Growth of Capital Market : issues

� Debt market: The debt market is dominated by

government bonds

� The growth of Mutual funds have been significant

resources mobilized in 1987-88 when public sectorbanks was allowed to have mutual funds was Rs

2310 crs which increased to 93,985 cr in 2006-07.

� The mutual funds are of four types Unit Trust of

India, MF subsidiaries of Public sector banks, MF

subsidiaries of investment institutions and private

sector MF



Growth of capital market in India

Year 1975-

76

85-86 97-98 2000-01 2005-06 2006-07

No of stock

exchange

8 14 22 23 22 21

Market value of Capital

(Rs cr)

3273 25302 560235 625553 3022189 35,45,041

Capital issues

(Rs cr)

98 1745 34755 49028 78813 115818

Capital raised

as percentageof gross

domestic saving

0.7 3.4 9.6 10.0 7.5 8.8



Market capitalization in some

countries 2007

money and capital marekt

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