Money Market

1 What is Money Market?

As per RBI definition “ 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.

CONTINUED…..

It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost.

It includes all individual, institution and intermediaries.

Features of Money Market

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).

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.

Functions

Balancing mechanism for demand & supply of money

Provide the focal point to central bank to provide liquidity

Provide reasonable access to suppliers & user of short term funds to fulfill the requirements.

Structure

Commercial bank forms the main structure of the money market, known as Inter bank market ,it is an active segment where cash surplus bank lead to lend money.

FIs and corporate are other active participant.

T-Bill market is another market ,the government issued treasury bills are purchased by the FIs and bank.

Segments of money market

The notice money segments deals with loan for a period of 2-14 days.

Term money market is deals with loans for a period above 14days.

Other short term securities have a maturity less than one year.

Participants

Dated securities.-The G-Secs and state development loans

T-Bills are sold by the RBI through public auctions in the money market.

Key players are-RBI and commercial banks

Others are:- Individuals Corporates

RRBs. Cooperative banks Trusts Insurance companies Mutual funds

In money market primary dealers are important intermediaries.

Primary dealers are institution licensed by RBI to support the book building process in primary auctions of G-Secs and provide liquidity to secondary market.

PDS play the role of merchant bankers to the government of India in marketing the G-secs.

Example of primary dealer SBI,DFHI Ltd.

There are 18 such PDs in India. PDs offer firm Buy and sell quoted

for TB and dated securities. The activities of PDs are:-

Dealing and underwriting in government securities/PSU/FI bond/debenture.

Providing broking services in government security.

Investment in CPs. Investment in CDs.

Importance of money market1.It helps in development of trade and

industry.2.It helps in smooth functioning of

commercial bank.3.Development of capital market.4.Effective functioning of central bank.5.Helps in determining the interest rates.

6.Acts as a guide to formulating an effective monetary policy from time to time.

7.helps the government to raise short term fund at ease.

8.Strives to help the central bank to manage liquidity in the economy.

Money Market Instruments

T- bills CP CDs Call/Notice Money market Repos Dated Government securities.

Treasury Bills

Short term instruments issued by RBI on behalf of GOI to raise the capital to meet the gap between receipt & Expenditure.

Difference between amount purchased & matured is known as Discount.

T-bill are the “IOUs” (I owe yous) of the government

Issued to raise short term funds. T-Bills are auctioned by RBI

regularly There are three types of TBs:- 91 days 182 days 364 days

Discount represent the interest rate on the instrument.

They are risk free security as issued by the government.

TB are highly liquid instrument which guarantees easy conversion into cash.

In case of TB no TDS occurs. No TB issued by the state

government.

T-Billls are available for a minimum amount 25000 and I n the multiples of 25000 and are issued on auction basis.

91 days T bills are auctioned every week on Wednesday.

182 days and 364 days TB are auctioned every alternate week on Wednesday.

Features of T Bills

Negotiable Highly liquid Absence of default risk Assured yield & eligible In SLR 91 days- 182 days-364 days Minimum amt is 25000

Types of T Bills

1. Ordinary Treasury Bills 2. Ad Hoc Treasury Bills –‘ad hocs’

1. Ordinary Treasury Bills- Issued to public ,bank and other FI to meet short term financial need.

2.Ad hocTreasury Bills- Issued in favour of RBI only. They are not sold through

tender/auction. They are purchased by RBI only These are not marketable in India.

Commercial paper

A Commercial paper is unsecured short term promissory note issued by the corporates.

Issues of CPs is one of the method of raising short term borrowings available to the corporate and other institutions.

Introduced in India in 1990. It is an unsecured short term borrowing by

the reputed companies , and FIs. The issuers of the credit, can directly

approach the investors in the financial market.

Commercial paper

A CP is issued to Individual, Bank, companies.

Maturity: min. of 7 days and a maximum of upto one year from the date of issue

Bank, individuals ,money market mutual funds another MF are the investor in CPs.

Only financial sound companies allow to issue CPs not all the companies.

The companies should have :- Minimum net worth of issuing firm should be

4 crore. Minimum credit rating”P2 “(rating symbol of

CRISIL for short term instrument) Rating grades represent s ‘investment

grades. Denomination:- min. of 5 lakhs and multiple

thereof.

Certificate of Deposit

CDs are promissory notes issued by the bank .

CDs are alike as deposits/FD but the difference that they are negotiable.

The maturity ranges from 7 days to 1 year.

CDs are introduced in India in June 1989. Issue of CDs is subject to stamp duty

being payable as per the Stamp Act,1899.

Certificate of Deposit

CDs are short term tradable time deposits issued by commercial banks & FIs.

There is only one difference - FD are not tradable & transferable.

Banks need when tide liquidity & high Interest rates

Features of CD

(i) CDs can be issued by all scheduled commercial banks except RRBs(ii) selected all india financial institutions, permitted by RBI Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac CDs are transferable by endorsement CRR & SLR are to be maintained CDs are to be stamped CDs may be issued at discount on face

value

Call money Market

It is the market for the very short term funds payable at demand with a maturity period varying from one day to fortnight.

When money lent or borrow for a day then it is called as call money while more than a day to 14 days is called Notice money.

Call Money Market It is the market for short time period. Highly liquid. The loans are repayable on demand at the

option of either the lender and the borrower. Located in major industrial towns like

chennai ,Delhi, Mumbai, Ahmedabad etc. The special feature of this market is that

interest rate varies from day to day. Even from hour to hour and from centre to centre.

It is very sensitive to changes in demand and supply of call loans.

Call Money Market

Banks borrow in this market for the following purpose

To fill the gaps or temporary mismatches in funds

To meet the CRR & SLR mandatory requirements as stipulated by the Central bank

To meet sudden demand for funds arising out of large outflows.

Commercial bill It arise in trade transactions. When goods are sold on credit , the

seller of goods writes a bill of exchange and the buyer of goods accept the same.

These BOE is called trade bills. When the bills are accepted by the

bank is called Commercial bills. The commercial bill may have the

maturity period of 60 – 90 days.

Dated government securities Government both state and

central ,regularly raise resources by issuing market loans

Since the date is specified inthese securities,they are described as “dated securities”.

For example 8.24%GOI 2018 Bond is central government security maturing in 2018,and it carries a coupon rate of 8.24%,payable half yearly.

The dated security are sold through the NDS(negotiable dealing system).

NDS facilitates the electronic submission of bid/application by member for primary issuance of G-Secs by RBI.

The repayment of the dated securities is done by the RBI and therefore they are considered as risk free investment.

Repos

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods.

In the banking system one bank may need the securities to fulfill the SLR requirements and there may be another bank that is in need of cash, it arise repo transaction.

A repo is a repurchase agreement which involves the sale of security with the commitment by the seller to repurchase the security at specified price ,at future date.

Repo may be overnight repo/term repo.

Reverse repo

Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term.

A transaction viewed from the purchaser’s angle.

This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate.

The RBI wants to make it more expensive for banks to borrow money, it increases the repo rate.

Recent development in Money Market

Integration of unorganized sector with the organized sector

Widening of call Money market Introduction of innovative instrument Offering of Market rates of interest Promotion of bill culture Entry of Money Market Mutual Funds Setting up of credit rating agencies Adoption of suitable monetary policy Establishment of DFHI Setting up of Security Trading Corporation of India ltd.

(STCI)