What is Money Market? As per RBI definitions A market for short
terms financial assets that are close substitute for money,
facilitates the exchange of money in primary and secondary market.
The money market is a mechanism that deals with the lending and
borrowing of short term funds (less than one year). A segment of
the financial market in which financial instruments with high
liquidity and very short maturities are traded.
Slide 3
Continued. It doesnt actually deal in cash or money but deals
with substitute of cash like trade bills, promissory notes &
govt papers which can converted into cash without any loss at low
transaction cost. It includes all individual, institution and
intermediaries.
Slide 4
Features of Money Market? It is a market purely for short-terms
funds or financial assets called near money. It deals with
financial assets having a maturity period less than one year only.
In Money Market transaction can not take place formal like stock
exchange, only through oral communication, relevant document and
written communication transaction can be done.
Slide 5
Continued.. Transaction have to be conducted without the help
of brokers. It is not a single homogeneous market, it comprises of
several submarket like call money market, acceptance & bill
market. The component of Money Market are the commercial banks,
acceptance houses & NBFC (Non-banking financial
companies).
Slide 6
Objective of Money Market? To provide a 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 through its intervention in this market.
To provide a reasonable access to users of short-term funds to meet
their requirement quickly, adequately at reasonable cost.
Slide 7
Importance of Money Market? o Development of trade &
industry. o Development of capital market. o Smooth functioning of
commercial banks. o Effective central bank control. o Formulation
of suitable monetary policy. o Non inflationary source of finance
to government.
Slide 8
Composition of Money Market? Money Market consists of a number
of sub-markets which collectively constitute the money market. They
are: Call Money Market Commercial bills market or discount market
Acceptance market Treasury bill market
Slide 9
Instrument of Money Market? A variety of instrument are
available in a developed money market. In India till 1986, only a
few instrument were available. They were: Treasury bills Money at
call and short notice in the call loan market. Commercial bills,
promissory notes in the bill market.
Slide 10
New Instruments Now, in addition to the above the following new
instrument are available: Commercial papers. Certificate of
deposit. Banker's Acceptance Repurchase agreement Money Market
mutual fund
Slide 11
CALL MONEY MARKET Call money market is that part of the
national money market where the day to day surplus funds, mostly of
banks are traded in. They are highly liquid, their liquidity being
exceed only by cash. The loans made in this market are of the short
term nature.
Slide 12
Continued.. Banks borrow from other banks in order to meet a
sudden demand for funds, large payments, large remittances, and to
maintain cash or liquidity with the RBI. Thus, to the extent that
call money is used in India for the purpose of adjustment of
reserves.
Slide 13
Participants in the call money market Scheduled commercial
banks Non-scheduled commercial banks Foreign banks State, district
and urban, cooperative banks Discount and Finance House of India
(DFHI) Securities Trading Corporation of India (STCI). The DFHI and
STCI borrow as well as lend, like banks and primary dealers, in the
call market.
Slide 14
CALL RATES The rate of interest paid on call loans is known as
call rate. Call rate is highly variable from day to day, often from
hour to hour. It is very sensitive to changes in demand for and
supply of call loans. Eligible participants are free to decide on
interest rates in call/notice money market. Calculation of interest
payable would be based on FIMMDAs (Fixed Income Money Market and
Derivatives Association of India).
Slide 15
CALL RATE IN INDIA CALL RATE IN INDIA has reached as high a
level as 30% in December 1973. It is an alarming level for any
short-term rate of interest to reach, and as bank defaulted in a
major way in respect of cash and liquidity requirements at that
time due to the prohibitively high cost of call money, it became
necessary to regulate call rates within reasonable limits. Indian
Banks Association (IBA) in 1973 fixed a ceiling of 15% on the level
of call rate.
Slide 16
Continued The IBA lowered this ceiling of 15% to 12.5% in March
1976, 10 % in June 1977, and 8.6% in March 1978, and 10.0% in April
1980. And current call rate in India is 8%. There are now two call
rates in India: one, the interbank call rate, and the other, the
lending rate of DFHI.
Slide 17
DEALING SESSION Deals in the call/notice money market can be
done up to 5.00 pm on weekdays and 2.30 pm on Saturdays or as
specified by RBI from time to time. LOCATION OF CALL MONEY MARKET
IN INDIA Mumbai, Calcutta, Chennai, Delhi, and Ahmadabad.
Slide 18
TREASURY BILLS MARKET Treasury bills (TBs), offer short-term
investment opportunities, generally up to one year. They are thus
useful in managing short-term liquidity. Types of treasury bills
through auctions 91- Day, 182- day, 364- day, and 14- day TBs
Slide 19
91- DAY TREASURY BILL Treasury bills are not self-liquidating
in the way genuine trade bills are, although the degree of their
liquidity is greater than that of trade bills. If we were to
arrange short-term financial instruments according to their
liquidity, the descending order would be cash, call loans, treasury
bills and commercial bills.
Slide 20
Continued. Treasury bills are highly liquid because there
cannot be a better guarantee of repayment then the one given by the
government and because the central bank of country is always
willing to purchase or discount them. As unlike ordinary trade
bills, treasury bills are claims against the government, they do
not require any gardening or further endorsement or acceptance
Slide 21
Important qualities of treasury bills The high liquidity
Absence of risk of default Ready availability Assured yield Low
transaction cost Eligibility for inclusion in statutory liquidity
ratio (SLR) Negligible capital depreciation
Slide 22
TYPES OF TREASURY BILLS Ordinary TBs Ad hoc TBs The ordinary
TBs are issued to the public and the RBI for enabling the
government to meet the needs of supplementary short-term finance.
TBs, also known as ad hocs in short, has been discontinued through
the signing of two agreements between the government and the
RBI.
Slide 23
Continued The instrument of ad hoc Treasury bill and the system
of issuing it were introduced in India in 1937. Government shall
maintain with the RBI a cash balance of not less than Rs.50crore on
Fridays and Rs.4 crore on other days free of obligation to pay
interest.
Slide 24
Continued whenever the balance falls below these minimums, the
government account would be replenished by the creation of ad hocs
in favour of the RBI. The government issued these bills to
replenish their cash balance. They also provide a medium to the
state governments, semi- governments, and foreign central banks to
invest their temporary surpluses.
Slide 25
182- DAYS TREASURY BILLS MARKET With a view to widening the
short-term money market, and to providing more outlets for
temporary surplus fund, the authorities in India had introduced, in
November 1986, a major innovation in the form of new money market
instrument- the 182-day Treasury bill. It used to be sold in the
market by the RBI in auctions which were monthly in the beginning;
they were made fortnightly from July 1988.
Slide 26
Continued.. It is important to note that no specific amount of
funds was sought to be raised through the auctions of these bills.
The amount raised in each auction suspended upon the funds
available with the market participants, and the funds they desired
to invest in these bills. Thus, the new bill had become a handy
instrument for banks, financial institution.
Slide 27
The 182-day bills could be purchased by any person resident in
India, including individuals, firms, companies, banks, and
financial institutions. The 182-day bill was quit liquid because of
the availability of refinance facility against it and the existence
of the secondary market in it.
Slide 28
364-DAY TREASURY BILL MARKET Upon discounting the 182-day
Treasury bill the authorities introduced a new money market
instrument, namely 364-day TBs with effect from April 1992. It is
being auction regularly every fortnight. Its features are very
similar to those which the 182-day bill had. The RBI dose not
purchase and rediscount this bill.
Slide 29
14-DAYS TREASURY BILLS MARKET With a view to further diversify
the TBs market; the authorities have introduced recently two types
of 14-day TBs: On April 1, 1997 which is known as intermediate
treasury bill (ITB) Second on may 20, 1997. ITB has replaced the
91-day tap Treasury bill.
Slide 30
Continued.. It is sold only to state governments, foreign
central banks, and other specified bodies in order to provide them
with alternate arrangements in place of 19-day tap TBs for
investment of their temporary cash surplus. It is issued in a book
entry from i.e. by credit to subsidiary general ledger account. It
can be repaid/renewed at par on the expiration of 14 days from the
date of issue. The disadvantage of 14-day ITB is that it is not
tradable or transferable.
Slide 31
Summary of TBs 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). 91-day
T-bills are auctioned every week on Wednesdays. 182-day and 364-day
T-bills are auctioned every alternate week on Wednesdays.
Slide 32
Continued T-bills auctions are held on the Negotiated Dealing
System (NDS) and the members electronically submit their bids on
the system. DEFECTS OF TREASURY BILLS Poor Yield Absence of
Competitive Bids Absence of Active Trading
Slide 33
Type ofDay of T-billsAuctionPayment* 91-dayWednesdayFollowing
Friday 182-day Wednesday of non- reporting week Following Friday
364-dayWednesday of reporting week Following Friday
Slide 34
COMMERCIAL BILLS MARKET Funds for working capital required by
commerce and industry are mainly provided by banks through cash
credits, overdrafts, and purchase/discontinuing of commercial
bills. BILL OF EXCHANGE The financial instrument which is traded in
the bill market of exchange. It is used for financing a transaction
in goods that takes some time to complete.
Slide 35
It shows the liquidity to make the payment on a fixed date when
goods are bought on credit. Accordingly to the Indian Negotiable
Instruments Act, 1881, it is a written instrument containing as
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.
Slide 36
INLAND BILLS Be drawn or made in India, and must be payable in
India Be drawn upon any person resident in India FOREIGN BILLS
Drawn outside India and may be payable in and by a party outside
India, or may be payable in India or drawn on a party resident in
India Drawn in India and made payable outside India. A related
classification of bills is export bills and import bills
Slide 37
For what purpose bill of exchange used? Commercial bills may be
used for financing the movement and storage of goods between
countries, before export (pre- export credit), and also within the
country. In India the use of bill of exchange appears to be in
vogue for financing agricultural operations, cottage and small
scale industries, and other commercial and trade transactions.
Slide 38
BANKERS ACCEPTANCE A banker's acceptance is a short-term
investment plan created by a company or firm with a guarantee from
a bank. It is a guarantee from the bank that a buyer will pay the
seller at a future date. A good credit rating is required by the
company or firm drawing the bill. This is especially useful when
the credit worthiness of a foreign trade partner is unknown.
Slide 39
The terms for these instruments are usually 90 days, but this
period can vary between 30 and 180 days. Companies use the
acceptance as a time draft for financing imports, exports and
trade. In India, there are neither specialised acceptance agencies
for providing this service on a commission basis nor is it provided
to any significant extent by commercial banks. Under the bill
market schemes introduced by RBI in 1952, banks are required to
select the borrowers after careful examination of their means,
respectability, and dealings for conversion of their advances in to
bills.
Slide 40
Banks maintain opinion registers on different drawers of bills
and they get reports from time to time on these drawers of bills.
BA acts as a negotiable time draft for financing imports, exports
or other transactions in goods. Acceptances are traded at discounts
from face value in the secondary market. BAs are guaranteed by a
bank to make payment.
Slide 41
DISCOUNT MARKET DISCOUNTING SERVICE The central banks help
banks in their liquidity management by providing them discounting
and refinancing facilities. The RBI are in abundance liquidity
(funds) to banks on occasions when liquidity shortages threaten
economic stability. The central bank performs his function through
its discount window or discounting mechanism.
Slide 42
Bank borrow funds temporarily at the discount window of the
central bank. They are permitted to borrow or are given the
privilege of doing so from the central bank against certain types
of eligible paper, such as the commercial bill or treasury bill,
which the central bank stands ready to discount for the purpose of
financial accommodation to banks.
Slide 43
DISCOUNT AND FINANCE HOUSE OF INDIA The question of setting up
of discount house in India was considered by the banking commission
in the early 1970s. DISCOUNT HOUSE FUNCTION It should be the sole
depository of the surplus liquid funds of the banking system as
well as the non-banking financial institutions.
Slide 44
Continued It should use surplus funds to even out the imbalance
in liquidity in the banking system subject to the RBI guidelines.
It should create ready market for commercial bills, treasury bills,
and government guaranteed securities by being ready to purchase
from and sell to the banking system such securities.
Slide 45
COMMERCIAL PAPER Commercial Paper (CP) is an unsecured money
market instrument issued in the form of a promissory note. It was
introduced in India in 1990 with a view to enabling highly rated
corporate borrowers/ to diversify their sources of short-term
borrowings and to provide an additional instrument to
investors.
Slide 46
Only company with high credit rating issues CPs Subsequently,
primary dealers and satellite dealers were also permitted to issue
CP to enable them to meet their short-term funding requirements for
their operations. Primary dealers (PDs) and the All-India Financial
Institutions (FIs) are eligible to issue CP. CP is very safe
investment because the financial situation of a company can easily
be predicted over a few months.
Slide 47
CP can be issued for maturities between a minimum of 15 days
and a maximum up to one year from the date of issue. The aggregate
amount of CP from an issuer shall be within the limit as approved
by its Board of Directors or the quantum indicated by the Credit
Rating Agency for the specified rating, whichever is lower. As
regards FIs, they can issue CP within the overall umbrella limit
fixed by the RBI i.e., issue of CP together with other instruments
viz., term money borrowings, term deposits, certificates of deposit
and inter-corporate deposits should not exceed 100 per cent of its
net owned funds, as per the latest audited balance sheet.
Slide 48
Only a scheduled bank can act as an IPA for issuance of CP.
Individuals, banking companies, other corporate bodies registered
or incorporated in India and unincorporated bodies, Non-Resident
Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can
invest in CPs. Amount invested by single investor should not be
less than Rs.5 lakh (face value). However, investment by FIIs would
be within the limits set for their investments by Securities and
Exchange Board of India
Slide 49
Continued.. CP will be issued at a discount to face value as
may be determined by the issuer. The investor in CP is required to
pay only the discounted value of the CP by means of a crossed
account payee cheque to the account of the issuer through IPA.
Slide 50
CERTIFICATES OF DEPOSIT With a view to further widening the
range of money market instruments and give investors greater
flexibility in deployment of their short-term surplus funds,
Certificates of Deposit (CDs) were introduced in India in 1989.
Certificate of Deposit (CD) is a 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
Slide 51
CDs can be issued by Scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs) Select
all-India Financial Institutions that have been permitted by RBI to
raise short-term resources within the umbrella limit fixed by
RBI.
Slide 52
AGGREGATE AMOUNT on CD Banks have the freedom to issue CDs
depending on their requirements. An FI may issue CDs within the
overall umbrella limit fixed by RBI, i.e., issue of CD together
with other instruments, viz., term money, term deposits, commercial
papers and inter-corporate deposits should not exceed 100 per cent
of its net owned funds, as per the latest audited balance
sheet.
Slide 53
MINIMUM SIZE OF ISSUE AND DENOMINATIONS Minimum amount of a CD
should be Rs.1 lakh, i.e., the minimum deposit that could be
accepted from a single subscriber should not be less than Rs.1 lakh
and in the multiples of Rs. 1 lakh thereafter. INVESTORS CDs can be
issued to individuals, corporations, companies, trusts, funds,
associations, etc. Non- Resident Indians (NRIs) may also subscribe
to CDs, but only on non-repatriable basis, which should be clearly
stated on the Certificate. Such CDs cannot be endorsed to another
NRI in the secondary market.
Slide 54
MATURITY The maturity period of CDs issued by banks should be
not less than 7 days and not more than one year. The FIs can issue
CDs for a period not less than 1 year and not exceeding 3 years
from the date of issue.
Slide 55
Other aspect of CD CDs may be issued at a discount on face
value. Banks / FIs are also allowed to issue CDs on floating rate
basis provided the methodology of compiling the floating rate is
objective, transparent and market-based. Banks have to maintain
appropriate reserve requirements, i.e., cash reserve ratio (CRR)
and statutory liquidity ratio (SLR), on the issue price of the CDs.
CDs in physical form are freely transferable by endorsement and
delivery.
Slide 56
Structure of Indian Money Market? I. ORGANISED STRUCTURE 1.
Reserve bank of India. 2. DFHI (Discount And Finance House of
India). 3. Commercial banks i. Public sector banks SBI with 7
subsidiaries Cooperative banks Nationalised banks ii. Private banks
Indian Banks Foreign banks 4. Development bank IDBI, IFCI, ICICI,
NABARD, LIC, GIC, UTI etc.
Slide 57
II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3.
Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperative i.
central cooperative banks Primary Agri credit societies Primary
urban banks 2. State Land development banks central land
development banks Primary land development banks