money mkts

8/10/2019 Money Mkts

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MONEY MARKETS


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To recapitulate

Financial markets are the markets in which

financial assets are created or transferredThese assets represent a claim to thepayment of a sum of money sometime in thefuture and/or periodic payment in the form ofinterest or dividend


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Classification of markets

Money market (short term instrument)

Capital markets (long term instruments)

The above is classified on the basis ofmaturity period


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Money market defined

As per RBI a market for short term financial

assets that are close substitute for money,facilitates the exchange of money in primaryand secondary market The money market is a mechanism thatdeals with the lending and borrowing of shortterm funds (less than one year)


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The money market is a segment of the

financial market in which financialinstruments with high liquidity and very shortmaturities are traded.


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It doesnt actually deal in cash or money but

deals with substitute of cash like trade bills,promissory notes and government paperswhich can be converted into cash withoutany loss at low transaction cost.

It includes all individuals, institutions andintermediaries.


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Money Market Features

A market for short-term funds or financial

assets called near moneyDeals with financial assets having a maturityperiod less than one year onlyTransaction in money market are slightlydifferent than in stock exchange


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Transactions conducted largely on a one-to-

one basis without the help of brokersIt is not a single homogeneous marketIt comprises several submarkets like callmoney market, acceptance and bill market


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Components of money market include

commercial banks, acceptance houses andnon-banking financial companies (NBFCs)


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The need/objective for money market

A parking place for short term surplus funds

Provide room for overcoming short termdeficitsTo enable the central bank to influence andregulate liquidity in the economy through itsintervention in this market


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To provide a reasonable access to users of

short-term funds to meet their requirementquickly, adequately at reasonable cost


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Benefits provided by money market

Development of trade and industry

Smooth functioning of the commercial banksEffective central bank controlFormulation of appropriate monetary policy

Non inflationary source of finance to thegovernment


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The main function is to channelise savings

into short term productive investments likeworking capital


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The composition

Call money market

Commercial bills market or discount market Acceptance marketTreasury bill market


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In the beginning

Till 1986 the Indian money market had T-bills

Money at call and short notice in the call loanmarket

Commercial bills, promissory notes in the billmarket


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Later additions include

Commercial paper

Certificates of depositInter-bank participation certificatesRepurchase agreement

Bankers acceptance Money market mutual fund


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Call money market

Day to day surplus funds of banks are traded

Short term in natureMaturity of these loans vary from 1 day to 15daysLent for 1 day Call moneyLent for more than 1 day but less than 15days Notice money


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Call money market

It is a highly liquid loan repayable on demand


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Borrowing

Commercial banks allowed to invest basedon an average fortnightly borrowing of some% of capital funds (


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Lending

Commercial banks have an average fortnightlylending of some % of capital funds (


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As of November 2010, the overnight

borrowing rates touched a high of 7% and alow of 5.7%


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Promissory Note

Note payable in accounting

A contract detailing the terms of a promise byone party (the maker) to pay a sum pf moneyto the other (the payee)The obligation may arise from the repaymentof a loan or from another form of debt


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In the sale of a business, the purchase price

might be a combination of an immediatecash payment and one or more promissorynotes for the balance


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Treasury Bills (T-Bills)

Most marketable money market security

Issued with 3-month (91 days), 6-month (182days) and 1-year (364 days) maturitiesPurchased for a price less than their par(face) value; on maturity the government

pays the holder the full par valueMost popular of the money marketinstruments


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Auction for 364 day T-Bills on a fortnightlybasis (every alternate Wednesday)

Auction for 91 day T-Bills on a weekly basis(every Wednesday)Notified value of bills available for the auctionof 91 day; no specified amt for auctionpertaining to 364-day T Bills


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Multiple Price Auction

RBI invites bids by priceBidders have to quote the price (per Rs 100face value) at which they desire to purchaseRBI then decides the cut-off price at whichthe issue would be exhausted

Bids above the cut-off price are allottedsecuritiesEach winning bidder pays the price that is bid


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Uniform Price auction

RBI invites bids in descending order

Accepts those that fully absorb the issueamountEach winning bidder pays the same (uniform)price decided by RBI

All winning bidders are awarded the auctionamount at the same price


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Primary Dealers (PDs)

Introduced by RBI in 95 to strengthen themkt infrastructure of Govt. Securities and putin place an improved, efficient secondary mkttrading system

Also referred to as Merchant Bankers to GOI

as only they are allowed to underwriteprimary issues of govt. securities other thanRBI


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PDs not allowed to undertake broking inequity, commodities, gold and foreignexchangeTotal inv pattern should include minimum50% in govt. securities

Permitted to borrow, lend and trade in themoney mkt including call money mkt, andparticipate in Repos


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Some developments

In 2006-07 RBI gave banks the option toundertake Primary Dealership businessdepartmentallyDFHI set up by RBI along with public sectorbanks and FIs in March 88

Got the status of PD in Feb 96 RBI divested stake and DFHI becamesubsidiary of SBI


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SBI also set up a subsidiary in 96 for doingPD business namely SBI Gilts LimitedBoth these cos. merged in 2004 to becomethe largest PD in the country in terms of networth (Rs. 1059 cr as on Mar 31, 2008)


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Stand Alone PDs

Deutsche Securities (India) Pvt LtdICICI Securities Primary Dealership LtdSTCI Primary Dealer LtdIDBI Gilts LtdSBI DFHI Ltd

PNB Gilts LtdMorgan Stanley India PD Pvt LtdNomura Fixed Income Securities Pvt Ltd


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Bank PDs

ABN Amro Bank N.V

Bank of America, Bank of BarodaCanara Bank, Citibank N.ACorporation Bank, HDFC Bank Ltd.HSBC, J P Morgan Chase Bank N.AKotak Mahindra Bank Ltd.Standard Chartered Bank


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Certificates of Deposit (CD)

Time deposit with a bankFunds cannot be withdrawn before maturitywithout paying a penaltyHave specific maturity date, interest rate andit can be issued in any denomination

Safety is a major attraction of CDsOne can earn more than a savings accountinterest


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Scheme introduced in July 89 to enablebanking system to mobilise bulk depositsfrom the mkt, which they can have atcompetitive rates of interestMin 7 days and Max 1 year

For FIs min 1 year and max 3 years


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CDs (cont..)

Greater flexibility to investors in thedeployment of surplus fundsPermitted by RBI to banksTransferable in natureFree negotiability, limited flexibility


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No lock-in periodIssued in denominations of Rs. 1 lac and in multiplesof Rs 1 lac thereafterIssued at a discount rate freely determined by theissuer and the market/investorsIn Jun 2010, the rates were in the range of 4.73 to7.50 per cent

As of Sep/Oct, these rates were around 8 per cent


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In 2009-10, CD issuance was around Rs.16,700 crTill Jul 2010 the issuance placed around Rs.20,600 cr


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Commercial Paper

CP is a short term unsecured loan issued bya corporation typically financing day to dayoperationsIt is a very safe investment since the financialsituation of a company can easily be

predicted over a few monthsOnly companies with high credit ratings issueCPs


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Introduced in 1990 with a view to enablehighly rated corporate borrowers to diversifytheir sources of short-term borrowings and toprovide an additional instrument to investorsCorporates, PDs and FIs are eligible to issue

CPMin credit rating is P-2 of CRISIL or suchequivalent rating by other agencies


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Maturities between a minimum of 15 daysand maximum of up to one year from thedate of issue

Aggregate amt of CP from issuer shall bewithin limit approved by its Board of Directors

or the quantum indicated by the credit ratingagency for he specified rating, whichever islower


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Issued in denominations of Rs. 5 lakh ormultiples thereofIndividuals, banking companies, othercorporate bodies regd or incorporated inIndia, NRIs, FIIs can invest in CPs.

Amt invested by single investor should not beless than Rs. 5 lakh (face value)


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CP issued in the form of a promissory note or indematerialised formCP issued at discount to face value as may bedetermined by the issuerIn June 2010, the range of discount varied from 4.75to 8.65 per centSignificant rise in the share of mfg cos. in theoutstanding amt of CPs (43.4%); Leasing andFinance next at 42.7%


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Sold directly by the issuers or through agentslike merchant banks and security housesLow interest rates compared to banksGives some financial stability to the system


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Money market mutual funds

Invest primarily in money market instrumentsof very high qualityRBI and public financial institutions can sell iteither directly or through its existingsubsidiaries


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Repurchase agreement (Repos) A form of overnight borrowing and is used bythose who deal in government securitiesVery short term repurchase agreements,from overnight to 30 daysShort term maturity and government backingusually mean that the lenders are exposed tovery low riskRepos are safe collateral for loans


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Bankers Acceptance (BA) BA is a short-term credit investment created by anon-financial firmBAs are guaranteed by a bank to make payment

Acceptances are traded at discounts from face valuein the secondary market

Acts as a negotiable time draft for financing imports,exports or other transactions in goodsUseful when the credit worthiness of a foreign tradepartner is unknown


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Organised structure of money market

Reserve Bank of India

Commercial banksa) Public sector banks (SBI and its

subsidiaries, cooperative banks,nationalised banks)

b) Private banks (Indian banks, Foreign banks)


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Development banks (include IDBI, IFCI,NABARD, LIC, GIC, UTI, etc.)


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Unorganised sector

Indigenous banks

Money lendersChitsNidhis


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Cooperative sector

State cooperative (primary agri creditsocieties, primary urban banks)State land development banks (primary landdevelopment banks and central landdevelopment banks)


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Some limitations in the money market

No contact with foreign money markets

Secondary market is limitedParticipants are also limited


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In a developed money market

Banking system is well organised

Notable presence of the central bank Availability of proper credit instrumentsExistence of sub-marketsSecondary market that is activeDemand and supply of funds


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Some developmentsIntegration of unorganised sector with theorganised sectorWidening of call money marketEntry of MMMFsSetting up credit rating agencies

Establishment of DFHISetting up of Security Trading Corporation ofIndia (STCI)


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Liquidity

SafetyLow return

money mkts

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