Money Market

M.PADMINIASST.PROFESSOR

MKCE

• Meaning

• Structure of Indian Money Market

• Features of Money Market

• Features of developed Money Market

• Importance of Money Market

• Composition of Money Market

• Money Market Instruments

• Features or deficiencies of Indian Money Market

• Recent development in Money Market

Meaning

• A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from

several days to just under a year.

Features of Money Market• Market Purely for short term funds• It has a maturity period of up to one yr.• The assets are easily converted to cash with

minimum transaction cost.• Transactions take place through phone and there is

no formal place.• Transactions made without help of brokers.• It is not a singly homogeneous market .

Features of developed Money Market

• Highly organized banking system.

• Presence of a central bank.

• Availability of proper credit instruments.

• Existence of sub-markets.

• Ample resources.

• Existence of secondary market.

• Demand and supply of funds.

Importance of Money Market

• Development of trade and industry• Development of capital market• Smooth functioning of commercial banks• Effective central bank control• Formulation of suitable monetary policy.• Non-inflationary source of finance to government

Composition of Money Market

• Call money market

• Commercial bills market or discount market

• Acceptance market

• Treasury bill market

Call Money Market

MEANING• Call money is short-term finance repayable on

demand, with a maturity period of one day to fifteen days, used for inter-bank transactions.

• The money that is lent for one day in this market is known as "call money" and, if it exceeds one day, is referred to as "notice money."

Advantage of CMM

• High liquidity

• High profitability

• Maintenance of SLR

• Safe and cheap

• Assistance to central bank operations

Drawbacks

• Uneven development

• Lack of integration

• Volatility in call money rates

Commercial bills market or discount market

• An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person  or to the bearer of the instrument”.

Types of bills

• Demand and usuance bills ( no time payment and time payment mentioned)

• Clean bills and documentary bills (with out accompany any document that’s clean bill and bill accompanied by documents of title of goods eg. railway receipt, lorry receipt)

• Inland and foreign bills ( drawn/payable in India and fb drawn in India payable in or outside India)

• Export bills and import bills (Ebill drawn exporter or importer outside India and IB drawn importer in India exporter outside India)

• Indigenous bills ( drawn and accepted according to native custom or usage of trade)

• Accommodation bills and supply bills (AB not arise genuine trade two parties draw the bill for mutual financial accomodation and SB drawn by suppliers for the purpose of getting advances from commercial banks)

Advantage

• Liquidity

• Certainty of payment

• Ideal investment

• Simple legal remedy

• High and quick yield

• Central bank control

Draw backs

• Absence of bill culture

• Stamp duty

• Absence of secondary market

• Limited foreign trade

• Attitude of banks

Acceptance market

• The acceptance market refers to the market where short term genuine trade bills are accepted by financial intermediaries.

Treasury bill market

• It refers to the market where treasury bulls are bought and sold.

• Types : ordinary –issued to public

Adhoc – there no tender and auction, purchased from

RBI

ON THE BASIS OF PERIOD : 91,182,364 days

Participants : RBI and SBI, commercial bank, state govt,financial institutions etc

Merits: safety,liquidity,ideal short term investment,statutory liquidity requirement,source of short term funds

Demerits: poor yield, absence of competitive bids,absence of active trading

MONEY MARKET INSTRUMENTS

• Commercial paper :Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

• Certificate of deposit: CD are short term deposit instruments issued by banks and financial institutions to raise large sums of money

Feature of Indian money market

• Existence of unorganized sector

• Absence of integration

• Diversity in money rates of interest

• Seasonal stringency of funds

• Absence of bill market

• No contact with foreign money market

• Limited instruments

• Limited secondary market

• Limited participants

Recent development in MM

• Integration of unorganized sector with the organized sector

• Widening of call money market

• Introduction of innovative instruments

• Offering of market rates of interest

• Promotion of bill culture

• Entry of money market mutual funds

• Setting up of credit rating agencies

• Adoption of suitable monetary policy

• Establishment of DFHI

• Setting up of STCI