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MONEY MARKET

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MONEY MARKET It is a market for short term loans and financial assets.

It deals with near money like trade bills, promissory notes and government treasury bills.

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DEFINITION OF MONEY MARKET

According to Geottery Crowther “the money market is the collective name given to the various firms and institutions that deal in various grades of near money”.

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FEATURES OF MONEY MARKET Deals with financial assets having

a maturity of less than one year. Deals with only those assets

which can be converted into cash readily without loss.

No formal place for this market No brokers involved Participants – central bank,

commercial banks, NBFCs etc.,

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OBJECTIVES To provide parking place to employ

short-term surplus funds. To provide room for overcoming short

term deficits To enable the central bank to influence

and regulate liquidity in the economy To provide a reasonable access to users

of short term funds to meet their requirements quickly, adequately and at reasonable costs.

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FEATURES OF A DEVELOPED MONEY MARKET  Highly Organized Banking System Presence of a Central Bank Availability of Proper Credit

Instruments and dealers in instruments

Existence of Sub-markets Ample Resources Existence of Secondary Market Large Demand and Supply of Funds

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FUNCTIONS OF MONEY MARKET Facilitate Liquidity Investment outlet for Short-Term Surplus Funds

Control of Creation of Credit

Economic Development

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COMPOSITION OF MONEY MARKET

Call money market Commercial bills market/ Discount market

Acceptance marketTreasury bills market

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CALL MONEY MARKET Market for extremely short

period loans Time duration of loans: one day

to fourteen days Loans are repayable on demand

at the option of either lenders or the borrower.

Major participants are commercial banks

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OPERATIONS IN CALL MARKET Borrowers and lenders contact each

other over telephone. Call rates are volatile and usually

high. After negotiations over the phone, the

borrowers and lenders arrive at a deal specifying the amount and the rate of interest.

The lender issues cheque in favour of the borrower.

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CALL LOANS ARE GIVEN To commercial banks to meet large

payments, to maintain liquidity. To the stock brokers and speculators to

deal in stock exchanges and bullion market To the bill market for meeting matured bills

to individuals of very high status to save interest on cash credit

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THE PARTICIPANTSclassified into two categories Those permitted to act as lenders

and borrowers of call loans Those permitted to act only as

lenders in the marketThe first category includes all commercial

banks, co-operative banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI,

NABARD, specified mutual find etc are included

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ADVANTAGES 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 market

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COMMERCIAL BILLS MARKET Commercial bills:-

“it is 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 the person or to the bearer of the instrument”

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TYPES OF BILLS Demand and usance bills Clean and documentary bills

(D/A and D/P) Inland and foreign bills Export and import bills Indigenous bills Accommodation bills and supply

bills Derivative Usance promissory

notes

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DISCOUNT MARKET It is a market for discounting short term

genuine trade bills. It is done by commercial banks or

specialised financial institutions. DFHI was established to activate the

market (now known as SBI-DFHI)

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ACCEPTANCE MARKET It is a market where short term genuine

trade bills are accepted Acceptance of bills earn a good name

and reputation and such bills can be discounted anywhere.

In london money market , there are specialised acceptance houses but in india commercial banks do the acceptcne of bills.

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TREASURY BILLS MARKET Treasury bills represent short term

borrowings of the central GOVT. Treasury bills market enables the

purchase and sale of TBs. It is usually issued at a discount from its

face value and matured at face value. The return on the treasury bills is the

lowest, because of its short term maturity and high degree of security.

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TYPES OF TREASURY BILLS1. Ordinary treasury bills

-issued to the public and financial institutions for meeting short term financial requirements of Govt. these can be bought and sold in the secondary market.

2. Adhoc treasury billsthese are issued always in favour of RBI only. It can be sold only back to RBI

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TYPES OF TREASURY BILLS Based on the duration of bills

91 days treasury bills182 days treasury bills364 days treasury bills

TBs are issued through auctions through Negotiated Dealing system.

TBs are issued by RBI through Public Debt Offices acting as an agent of the central Govt.

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TB ISSUE MECHANISM Treasury bills are available for a minimum

amount of Rs.25,000 and in multiples of Rs. 25,000.

Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).

AuctionsWhile 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays. 

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TB AUCTIONS Investors can participate in all T-bill

auctions either as competitive bidders or as non-competitive bidders.

Non-competitive bidders need not quote the price at which they desire to buy these bills.

The Reserve Bank allots bids to the non-competitive bidders at the weighted average price of the competitive bids accepted in the auction.

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TB AUCTIONS T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. Non-competitive bids are routed through the respective custodians or any bank 

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PARTICIPANTS IN TB MARKET Commercial banks Pension funds SBI-DFHI LIC, GIC, UTI,IDBI,IFCI etc., Companies individuals

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MONEY MARKET INSTRUMENTS TREASURY BILLS

short term borrowing instruments of the Central Government of the Country issued through the Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so attractive.

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MONEY MARKET INSTRUMENTS CERTIFICATES OF DEPOSITS

Negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period

Minimum amount of a CD should be Rs.1 lakh

Maturity period ranges from 7 days to one year for CDs issued by banks

For FIs maturity period ranges from 1 year to 3 years.

freely transferable by endorsement and delivery

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MONEY MARKET INSTRUMENTSREPOS: Under repurchase agreement the seller

sells specified securities with an agreement to repurchase the same at a mutually decided future date and price.

Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller

Market repos and RBI repos.

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MONEY MARKET INSTRUMENTSCommercial papers: short term unsecured promissory note issued

by companies and financial institutions Issued at a discount from its face value. issued with fixed maturity between 15 days to

one year. Issued for financing accounts receivables,

inventories and meeting short term liabilities not backed by any collateral. Issued at a minimum denomination of Rs5 lakh Tangible net worth of not less than Rs 5 crore. The company must have a minimum credit

rating of P2 of CRISIL and A2 (high saftey)of Investment Information and Credit Rating Agency of India Ltd.,(ICRA)

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INTER BANK PARTICIPATION CERTIFICATE (IBPC)

can be issued by schedule commercial bank and can be subscribed by any commercial bank

issued against an underlying advance, classified as standard.

two types of participation certificates, with risk to the lender and without risk to the lender

The certificates are neither transferable nor prematurely redeemable

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BILL REDISCOUNTING Rediscounting is a process by

which RBI discounts eligible short term securities from commercial banks.

The act of discounting a short-term negotiable debt instrument for a second time. Banks may rediscount these short-term debt securities to assist the movement of a market that has a high demand for loans.

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COLLATERALISED BORROWING AND LENDING OBLIGATION (CBLO) It is a discounted instrument available in

electronic book entry form for the maturity period 1 day to 19 days

It is an obligation to return the borrowed money at a specified future date and an authority to the lender to receive money lent with an option to transfer the authority to another person

It is offered to non-banking financial institutions.

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METHOD OF INVESTING IN MONEY MARKET

1. Money market mutual funds

2. Direct investment in money market instruments

3. Money market account with commercial banks

1. MM Transactional account2. MM investor account

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IMPORTANCE OF MONEY MARKET INSTRUMENTS Provision of liquidity Control money flow (inflation) Short term investment Eligible for CRR and SLR Flexibility Secured investments

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RESERVE BANK OF INDIA

Established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.

Originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.

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ROLE OF RBI IN MONEY MARKET Traditional Functions:- Note issue:

note issue in India was originally based upon "Proportional Reserve System".

difficult to maintain the reserve proportionately, it was replaced by "Minimum Reserve System “

The bank should now maintain a minimum reserve of Rs.200 crore worth of gold coins, gold bullion and foreign securities of which the value of gold coin and bullion should be not less than Rs.115 crore.

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ROLE OF RBIGovernment of India issues rupee coins in

the denomination of Rs.1, 2, and 5 to public. RBI presently issues notes of denominations

Rs.10 and above. Banker to the Government

"Ways and Means Advances" (WMA) is not a commercial bank credit. It is a system under which the RBI provides credit to Central and State Gov ernments for meeting temporary shortfall in government revenues as compared to the monthly expenditures.

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RBI FUNCTIONS TO GOVT Collects taxes and makes payments on behalf of the

Government Accepts deposits from the Government Collects cheques and drafts deposited in the

Government accounts. Provides short-term loans to the Government Provides foreign exchange resources to the

Government. Keep the accounts of various Government

Department. Maintains currency chests in treasuries at some

importance places for the conve nience of the government.

Advises governments on their borrowing programmes.

Maintains and operates Central Government's IMF accounts.

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ROLE OF RBI Banker to the Banks Acts as National Clearing House – inter

bank payments. Acts as the Controller of Credit

Bank Rate PolicyOpen Market OperationVariation of Cash Reserve RatioMoral Suasion Issue of DirectivesDirect Action

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ROLE OF RBI By using credit control RBI achieves the

following:Maintains the desired level of circulation of

money in the economy.Maintains the stability in the price level

prevailing in the economy. Controls the effects of trade cycles Controls the fluctuations in the foreign

exchange rate Channelize credit to the productive sectors

of the economy

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ROLE OF RBI Custodian of Foreign Exchange

Reserves

In order to minimize the undue fluctuations in the rates it may buy and sell foreign currencies depending upon the situations.

It may buy the foreign currency to build up adequate reserves or to arrest unwarranted rise in the value of rupee

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ROLE OF RBI Exchange Control

Foreign Exchange Regulation Act (FERA) 1973 was introduced from 1st January 1974.

Now this act is replaced with foreign exchange management Act.(FEMA)

Till 1993 the RBI uses to prescribe the Exchange Rate of Rupee. The external value of rupee is now determined by market forces.

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PROMOTIONAL FUNCTIONS

Promotion of Banking Habits Provides Refinance for Export

Promotion Facilities for Agriculture Facilities to Small Scale Industries Helps Co-operative Sector Prescription of Minimum Statutory

Requirements for Banks

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SUPERVISORY FUNCTIONS Granting License to Banks Function of Inspection and

Enquiry Implementing the Deposit

Insurance Scheme Controls the Non-Banking

Financial Corporations

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ROLE OF COMMERCIAL BANKS IN MONEY MARKET They form the nucleus of money market Major borrowers and lender of short

term funds. Mobilisation of savings and lending it to

business houses (short term loans) Making investments in money market

instruments Lending short term loans to Govt.