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CONTENTSCONTENTS

What is Money Market?What is Money Market?

Features of Money Market?Features of Money Market?

Importance of Money Market?Importance of Money Market?

Composition of Money Market?Composition of Money Market?

Instrument of Money Market?Instrument of Money Market? Structure of Indian Money Market?Structure of Indian Money Market?

Disadvantage of Money Market?Disadvantage of Money Market?

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Continued.Continued.

Characteristic features of a developedCharacteristic features of a developedmoney Market?money Market?

Recent development in Money Market?Recent development in Money Market?

ummaryummary

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1! What is Money Market?1! What is Money Market?

AsAs perper RBIRBI definitionsdefinitions AA marketmarket forfor shortshort termstermsfinancialfinancial assetsassets thatthat areare closeclose substitutesubstitute forformoney,money, facilitatesfacilitates thethe exchangeexchange ofof moneymoney ininprimaryprimary andand secondarysecondary marketmarket..

TheThe moneymoney marketmarket isis aa mechanismmechanism thatthat dealsdealswithwith thethe lendinglending andand borrowingborrowing ofof shortshort termtermfundsfunds (less(less thanthan oneone year)year)..

A A segmentsegment ofof thethe financialfinancial marketmarket inin whichwhichfinancialfinancial instrumentsinstruments withwith highhigh liquidityliquidity andand veryveryshortshort maturitiesmaturities areare tradedtraded..

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Continued.Continued.

ItIt doesntdoesnt actuallyactually dealdeal inin cashcash oror moneymoneybutbut dealsdeals withwith substitutesubstitute ofof cashcash likelike tradetradebills,bills, promissorypromissory notesnotes && govtgovt paperspapers

lossloss atat lowlow transactiontransaction costcost..

ItIt includesincludes allall individual,individual, institutioninstitution andandintermediariesintermediaries..

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2 ! Features of Money Market?2 ! Features of Money Market?

ItIt isis aa marketmarket purelypurely forfor shortshort--termsterms fundsfunds ororfinancialfinancial assetsassets calledcalled nearnear moneymoney..

periodperiod lessless thanthan oneone yearyear onlyonly..

InIn MoneyMoney MarketMarket transactiontransaction cancan notnot taketake placeplace

formalformal likelike stockstock exchange,exchange, onlyonly throughthrough oraloralcommunication,communication, relevantrelevant documentdocument andand writtenwrittencommunicationcommunication transactiontransaction cancan bebe donedone..

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Continued..Continued..

TransactionTransaction havehave toto bebe conductedconducted withoutwithout thethehelphelp ofof brokersbrokers..

ItIt isis notnot aa singlesingle homogeneoushomogeneous market,market, ititcomprisescomprises ofof severalseveral submarketsubmarket likelike callcall moneymoneymarket,market, acceptanceacceptance && billbill marketmarket..

TheThe componentcomponent ofof MoneyMoney MarketMarket areare thethe

commercialcommercial banks,banks, acceptanceacceptance houseshouses && NBFCNBFC(Non(Non--bankingbanking financialfinancial companies)companies)..

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3 ! Objective of Money Market?3 ! Objective of Money Market?

ToTo provideprovide aa parkingparking placeplace toto employemploy shortshort termtermsurplussurplus fundsfunds..

ToTo provideprovide roomroom forfor overcomingovercoming shortshort termterm

deficitsdeficits..

ToTo enableenable thethe centralcentral bankbank toto influenceinfluence andandregulateregulate liquidityliquidity inin thethe economyeconomy throughthrough itsitsinterventionintervention inin thisthis marketmarket..

ToTo provideprovide aa reasonablereasonable accessaccess toto usersusers ofof shortshort--termterm fundsfunds toto meetmeet theirtheir requirementrequirement quickly,quickly,adequatelyadequately atat reasonablereasonable costcost..

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4 ! Importance of Money Market?4 ! Importance of Money Market?

oo DevelopmentDevelopment ofof tradetrade && industryindustry..

oo DevelopmentDevelopment ofof capitalcapital marketmarket..

..oo EffectiveEffective centralcentral bankbank controlcontrol..

oo FormulationFormulation ofof suitablesuitable monetarymonetary policypolicy..

oo NonNon inflationaryinflationary sourcesource ofof financefinance totogovernmentgovernment..

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5 ! Composition of Money Market?5 ! Composition of Money Market?

MoneyMoney MarketMarket consistsconsists ofof aa numbernumber ofof subsub--marketsmarkets whichwhich collectivelycollectively constituteconstitute thethemoneymoney marketmarket.. TheyThey are,are,

Commercial bills market or discountCommercial bills market or discount

marketmarket

Acceptance marketAcceptance market Treasury bill marketTreasury bill market

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6 ! Instrument of Money Market?6 ! Instrument of Money Market?

AA varietyvariety ofof instrumentinstrument areare availableavailable inin aa developeddevelopedmoneymoney marketmarket.. InIn IndiaIndia tilltill 19861986,, onlyonly aa fewfewinstrumentinstrument werewere availableavailable..

They wereThey were

Treasury billsTreasury bills

Money at call and short notice in the call loanMoney at call and short notice in the call loan

market.market. Commercial bills, promissory notes in the billCommercial bills, promissory notes in the bill

market.market.

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New instrumentNew instrument

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

.. Certificate of deposit.Certificate of deposit. InterInter--bank participation certificates.bank participation certificates. Repo instrumentRepo instrument Banker's AcceptanceBanker's Acceptance Repurchase agreementRepurchase agreement Money Market mutual fundMoney Market mutual fund

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Treasury Bills (TTreasury Bills (T--Bills)Bills)

(T(T--bills)bills) areare thethe mostmost marketablemarketable moneymoney marketmarketsecuritysecurity..

TheyThey areare issuedissued withwith threethree--month,month, sixsix--monthmonth

-- .. TT--billsbills areare purchasedpurchased forfor aa priceprice thatthat isis lessless thanthan

theirtheir par(face)par(face) valuevalue;; whenwhen theythey mature,mature, thethegovernmentgovernment payspays thethe holderholder thethe fullfull parpar valuevalue..

TT--BillsBills areare soso popularpopular amongamong moneymoney marketmarketinstrumentsinstruments becausebecause ofof affordabilityaffordability toto thetheindividualindividual investorsinvestors..

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Certificate of deposit (CD)Certificate of deposit (CD)

AA CDCD isis aa timetime depositdeposit withwith aa bankbank..

LikeLike mostmost timetime deposit,deposit, fundsfunds cancan notnotwithdrawnwithdrawn beforebefore maturitymaturity withoutwithout payingpaying

aa enaltenalt .. CDsCDs havehave specificspecific maturitymaturity date,date, interestinterest

raterate andand itit cancan bebe issuedissued inin anyanydenominationdenomination..

TheThe mainmain advantageadvantage ofof CDCD isis theirtheir safetysafety.. Anyone Anyone cancan earnearn moremore thanthan aa savingsaving

accountaccount interestinterest..

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Commercial paper (CP)Commercial paper (CP)

CPCP isis aa shortshort termterm unsecuredunsecured loanloan issuedissued byby aacorporationcorporation typicallytypically financingfinancing dayday toto daydayoperationoperation..

CPCP isis veryvery safesafe investmentinvestment becausebecause thethe financialfinancialsituationsituation ofof aa companycompany cancan easilyeasily bebe predictedpredictedoverover aa fewfew monthsmonths..

OnlyOnly companycompany withwith highhigh creditcredit ratingrating issuesissuesCPsCPs..

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Repurchase agreement (Repos)Repurchase agreement (Repos)

RepoRepo isis aa formform ofof overnightovernight borrowingborrowing andand isisusedused byby thosethose whowho dealdeal inin governmentgovernmentsecuritiessecurities..

eyey areare usua yusua y veryvery s ors or ermerm repurc asesrepurc asesagreement,agreement, fromfrom overnightovernight toto 3030 daysdays ofof moremore..

TheThe shortshort termterm maturitymaturity andand governmentgovernmentbackingbacking usuallyusually meanmean thatthat ReposRepos provideprovide

lenderslenders withwith extreamlyextreamly lowlow riskrisk.. ReposRepos areare safesafe collateralcollateral forfor loansloans..

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Banker's AcceptanceBanker's Acceptance

A A bankersbankers acceptanceacceptance (BA)(BA) isis aa shortshort--termtermcreditcredit investmentinvestment createdcreated byby aa nonnon--financialfinancialfirmfirm..

BAsBAs areare guaranteedguaranteed byby aa bankbank toto makemake

.. AcceptancesAcceptances areare tradedtraded atat discountsdiscounts fromfrom faceface

valuevalue inin thethe secondarysecondary marketmarket.. BABA actsacts asas aa negotiablenegotiable timetime draftdraft forfor financingfinancing

imports,imports, exportsexports oror otherother transactionstransactions inin goodsgoods..

ThisThis isis especiallyespecially usefuluseful whenwhen thethe creditcreditworthinessworthiness ofof aa foreignforeign tradetrade partnerpartner isisunknownunknown..

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7 ! Structure of Indian Money7 ! Structure of Indian Money

Market?Market?

I :I :-- ORGANISED STRUCTUREORGANISED STRUCTURE

1. Reserve bank of India.1. Reserve bank of India.

2. DFHI (discount and finance house of India).2. DFHI (discount and finance house of India).3. Commercial banks3. Commercial banks

..SBI with 7 subsidiariesSBI with 7 subsidiariesCooperative banksCooperative banks20 nationalised banks20 nationalised banks

ii. Private banksii. Private banksIndian BanksIndian Banks

Foreign banksForeign banks4. Development bank4. Development bank

IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

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Continued..Continued..

II. UNORGANISED SECTORII. UNORGANISED SECTOR

1. Indigenous banks1. Indigenous banks2 Money lenders2 Money lenders3. Chits3. Chits4. Nidhis4. Nidhis

III. COIII. CO--OPERATIVE SECTOROPERATIVE SECTOR

1. State cooperative1. State cooperativei. central cooperative banksi. central cooperative banks

Primary Agri credit societiesPrimary Agri credit societies

Primary urban banksPrimary urban banks2. State Land development banks2. State Land development banks

central land development bankscentral land development banksPrimary land development banksPrimary land development banks

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8 ! Disadvantage of Money Market8 ! Disadvantage of Money Market

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

Absence of integration.Absence of integration.

Absence of Bill market.Absence of Bill market.

No contact with foreign Money markets.No contact with foreign Money markets.

Limited instruments.Limited instruments.

Limited secondary market.Limited secondary market. Limited participants.Limited participants.

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9 ! Characteristic features of a9 ! Characteristic features of a

developed money Market?developed money Market?

Highly organaised banking systemHighly organaised banking system

Presence of central bankPresence of central bank

Existence of subExistence of sub--marketmarket

Ample resourcesAmple resources

Existence of secondary marketExistence of secondary market Demand and supply of fundDemand and supply of fund

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10 ! Recent development in10 ! Recent development in

Money MarketMoney Market

Integration of unorganised sector with theIntegration of unorganised sector with theorganised sectororganised sector

Widening of call Money marketWidening of call Money market Introduction of innovative instrumentIntroduction of innovative instrument

Offering of Market rates of interestOffering of Market rates of interest Promotion of bill culturePromotion of bill culture Entry of Money market mutual fundsEntry of Money market mutual funds Setting up of credit rating agenciesSetting up of credit rating agencies

Adoption of suitable monetary policyAdoption of suitable monetary policy Establishment of DFHIEstablishment of DFHI Setting up of security trading corporation of IndiaSetting up of security trading corporation of India

ltd. (STCI)ltd. (STCI)

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11 !11 ! SummarySummary

TheThe moneymoney marketmarket specializesspecializes inin debtdebt securitiessecuritiesthatthat maturemature inin lessless thanthan oneone yearyear..

MoneyMoney marketmarket securitiessecurities areare veryvery liquid,liquid, andand areareconsideredconsidered veryvery safesafe.. AsAs aa result,result, theythey offeroffer aalowerlower returnreturn thanthan otherother securitiessecurities..

TheThe easiesteasiest wayway forfor individualsindividuals toto gaingain accessaccess totothethe moneymoney marketmarket isis throughthrough aa moneymoney marketmarketmutualmutual fundfund..

TT--billsbills areare shortshort--termterm governmentgovernment securitiessecuritiesthatthat maturemature inin oneone yearyear oror lessless fromfrom theirtheir issueissuedatedate..

TT--billsbills areare consideredconsidered toto bebe oneone ofof thethe safestsafestinvestmentsinvestments..

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Continued.Continued.

AA certificatecertificate ofof depositdeposit (CD)(CD) isis aa timetime depositdeposit withwith aabankbank.. AnnualAnnual percentagepercentage yieldyield (APY)(APY) takestakes intointo accountaccount

compoundcompound interest,interest, annualannual percentagepercentage raterate (APR)(APR)doesdoes notnot..

CDsCDs areare safe,safe, butbut thethe returnsreturns aren'taren't great,great, andand youryourmoneymoney isis tietie upup oror t et e engtengt oo t et e CDCD..

CommercialCommercial paperpaper isis anan unsecured,unsecured, shortshort--termterm loanloanissuedissued byby aa corporationcorporation.. ReturnsReturns areare higherhigher thanthan TT--billsbills becausebecause ofof thethe higherhigher defaultdefault riskrisk..

BankersBankers acceptanceacceptance (BA)(BA) areare negotiablenegotiable timetime draftdraft

forfor financingfinancing transactionstransactions inin goodsgoods.. RepurchaseRepurchase agreementagreement (repos)(repos) areare aa formform ofof

overnightovernight borrowingborrowing backedbacked byby governmentgovernmentsecuritiessecurities..

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