Indian Money MarketB.V.Raghunandan, SVS College, Bantwal

PG Department of Economics,

St.Aloysius College,

Mangalore.

October 4, 2010

Financial Market

• A market where the funds are borrowed and lent

• Two Components: Money Market and Capital Market

• Money Market: Market where funds are borrowed for 364 days and less

• Capital Market: Market where funds are borrowed for a period of one year and more

Study of a Market

• Players in the market• Institutions involved• Intermediaries• Instruments• Mechanism• Role and its importance• Basic Terminology

Basic Terminology

• Instrument: A loan document executed by a single borrower simultaneously to thousands or lakhs of lenders

• Security: When the instrument has a ready market. it is called a security

• Primary Market: A market where the funds are borrowed directly from the lender

• Secondary Market: A market where the securities are traded among investors

Money Market: Definition

• Praveen N. Shroff ,

”institutions such as discount houses, merchant banks, and sometimes even the government’s central bank , which deal in very short-term loans, such as treasury bills, bills of exchange, commercial paper, certificates of deposits etc.,”.

Money Market: Features

• Market for Short-term Funds

• Tenure of Instruments• Wholesale Market• Direct Market• Daily Settlement• Huge Volumes

• Large Size Transaction

• RBI Regulation• Administered Interest

Rates• Credit Control

Measures• Telephone Market• Many Players

Players in the Money Market

• Central Government• Public Sector Undertakings• Insurance Companies• Mutual Funds• Banks• Corporates• Others: PFs, Pension Funds, NBFCs,

Primary Dealers, Discount Houses etc

Money Market Instruments

• Treasury Bill• Liquidity Adjustment Facility: Repurchase

Option (Repo) & Reverse Repo• Call Money• Collateralised Borrowing & Lending

Obligation(CBLO)• Certificate of Deposit• Commercial Paper• Commercial Bills (Bill Market)

Treasury Bill

• Borrower: the central government. The RBI issues the TBs

• Investors: banks, insurance companies like LIC, GIC etc., NABARD and UTI, corporates and (FII).

• Tenure: 14 days, 91 days, 182 days or 364 days.

• Mode of sale: The RBI sells the TBs by auction to banks and others.

 

Mode of Operation

Banks maintain two types of accounts with the RBI: Current a/c for cash operations and Subsidiary General Ledger A/c (SGL) for securities. While selling securities to banks, RBI debits the current a/c of the concerned bank and credits its SGL A/c. While buying the securities, the RBI credits the current A/c of the bank and debits the SGL A/c.

Importance of TBs

• eligible securities for maintenance of Statutory Liquidity Ratio of banks.

• used for the Repo operation of the central bank. • Corporates also park their funds in TBs because there is

no risk of default • a high level of liquidity in terms of refinance from SBI-

DFHI • a ready market in National Stock Exchange.• discount rate on 91-Day TB is the benchmark interest

rate for money market, risk-free interest rate for investment analysis and pricing of futures contract

Liquidity Adjustment Facility

• Introduced in 2000, it brought under its fold the already existing two instruments

• The instruments are:

-Repurchase Option (REPO)

-Reverse REPO• Rates on these instruments were intended

to form the interest rate corridor for the short-term funds

REPO

• An instrument to increase the liquidity of a day• For simplicity, lending by RBI to banks• In reality, buying securities from the banks and

squaring up the transaction by selling the securities back to them

• In 1992, one-day and two-day repo• In 1993, 14-day repo• Participants are commercial banks, financial

institutions, primary dealers, SBI-DFHI and Securities Trading Corporation

Reverse Repo

• For draining the liquidity from the market• Simple meaning, borrowing by RBI from

banks• In reality, selling securities to banks and

buying them back from them subsequently• Introduced in 1994-95• Increased the profitability of bankers by

borrowing from CBLO and lending in Reverse Repo

Call Money

• money lent for an extremely short-period, generally not exceeding one day.

• In India, money borrowed by one bank from another for a day

• Banks have to maintain the cash reserve ratio. When they run short of cash, they borrow from other banks. When they have surplus, they lend

Participating Institutions in Call Money Market

• Commercial Banks• Co-operative Banks• Foreign Banks• SBI-DFHI• Securities Trading Corporation of India• Primary Dealers• In addition to the above, UTI, LIC, GIC,

IDBI, NABARD etc., are allowed to lend in the call money market.

Lending Mechanism

-Conveying the Intention to SBI-DFH

intention to lend or borrow.

-Acceptance by SBI-DFHI

- minimum amount to be lent per transaction is Rs. 3 crore.

-Call Deposit Receipt issued to the lender on receiving the cheque

-Next day, the lender gets the money back by surrendering the Call Deposit Receipt

Collateralised Borrowing & Lending Obligation (CBLO)

• Introduced by Clearing Corporation of India Ltd (CCIL) in 2003

• CBLO is a money market instrument of borrowing against securities held in custody by the CCIL.

• The tenure is generally one day, but can go upto 364 days.

• For CBLO, borrower should deposit Treasury bill or Govt. Securities with CCIL.

• participants can be banks, financial institutions, insurance companies, mutual funds, Primary Dealers, Non-Banking Finance Companies, and corporates.

Certificate of Deposit

• Certificate of Deposit (CD) is a negotiable certificate issued by a bank on the receipt of a large deposit. CD is a negotiable certificate payable to bearer. CDs appeared in the U.S.A., in 1961.

• In India, the RBI permitted banks to issue CDs from June 1989.

Features of CDs

• Borrower: Borrower is any scheduled bank other than RRBs

• Lenders: corporates, institutions, HNI, trust funds or NRIs

• Tenure: three months to one year. The common tenure is three months.

• Denomination: Rs. 25 lakh and in multiples of Rs. 5 lakh thereafter.

Commercial Paper

• Commercial Paper (CP) is a short-term unsecured promissory note issued by well established corporates with the requisite credit rating.

• CP has been in existence in the US for more than 100 years

• In India, CP made its appearance from January 1990

Features of Commercial Paper

Borrower: joint stock companies whose shares are listed on a recognized stock

exchange. • Lenders: other joint stock companies, public sector companies or corporations,

banks etc. Insurance Companies and Term-Lending institutions I• Networth of Issuing Company: The networth of the company (Capital+reserves)

should not be less than Rs. 4 crore. The working capital limit of the company should also be not less than Rs. 4 Crore.

• 4) Denomination of CPs: The minimum denomination for a single investor is Rs. 25 lakh. Thereafter, it should be in multiples of Rs 5 lakhs

• Tenure: CPs are issued for periods ranging between 15 days to 1 year. CPs of 3 months maturity are popular. CPs of 30 days are also gaining popularity.

• 7) Negotiability: CP is a negotiable instrument. It is freely transferable and payable to bearer. This feature is the added advantage of CP to the investor.

• 8) Credit Rating: Credit Rating from any of the credit rating agencies lmat: CPs can be issued in the form of a promissory note. It can also be issued in the dematerialized form. The demat form is convenient, when a large number of CPs are issued to many investors.

•  

Commercial Bills Market

• Arising out of trade• Most of them are documentary bills• Acceptance function has not become

popular• Only discounting• Secondary market is not developed• Mainly SBI-DFHI

THANK YOU