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MONEY MARKET

&

ITS INSTRUMENTS

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MONEY MARKETyThe money market is a mechanism that

deals with the lending and borrowing of

short term funds.y Money market consists of financial

institutions and dealers in money or credit

who wish to generate liquidity.

y It is a wholesale debt market for low-risk,highly liquid, short term instruments.

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Money market instrumentsy Certificates of Deposit

y Commercial Paper

y Inter-bank participation certificates

y Inter-bank term moneyyTreasury Bills

y Bill rediscounting

y Call/notice/term money

y CBLO

y Market Repoy Bank Acceptance

y Federal Funds

y Commercial Bills

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Certificates of Deposity CDs are short-term borrowings in the form of UPN issued

by all scheduled banks and are freely transferable byendorsement and delivery.

y Introduced in 1989y Maturity of not less than 7 days and maximum up to a

year. FIs are allowed to issue CDs for a period between 1year and up to 3 years

y Subject to payment of stamp duty under the Indian StampAct, 1899

y Issued to individuals, corporations, trusts, funds andassociations

y They are issued at a discount rate freely determined by themarket/investors

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Commercial Papersy Short-term borrowings by corporates, financial

institutions, primary dealers from the money market

y Can be issued in the physical form (Usance Promissory

Note) or demat formy Introduced in 1990

y When issued in physical form are negotiable byendorsement and delivery and hence, highly flexible

y Issued subject to minimum of Rs. 5 lacs and in themultiple of Rs. 5 lacs .

y Maturity is 7 days to 1 year

y Unsecured and backed by credit rating of the issuingcompany

y Issued at discount to the face value

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Interbank participation certificateyThese instruments are used by scheduled

commercial banks other than Regional

Rural Bank, IBP with risk sharing is issuedfor 91 to 180 days in respect of advances

classified under health code status.

y IBP with out risk sharing can have a tenour

of 90 days.

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Money at call and short noticey Money at short notice is for a maturity of or

up to 14 days.

y Money for higher maturity is known asinter-bank deposit.

yThe participants are bank and all India

financial institutions permitted by RBI

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Treasury BillyThe Treasury bills are short-term money market

instrument to finance the short term requirements

of Government of India.

yThe purchase price is less than the face value.

y At maturity the government pays the Treasury Bill

holder the full face value.

y The Treasury Bills are marketable, affordable and

risk free. The security attached to the treasury billscomes at the cost of very low returns.

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Types of TBy A) 14-day TB- maturity is 14 days, its auction is on

every Friday of every week, the notified amount is

Rs 100 crores.

y B) 91 days TB, auction is on every Friday, amount

100 crores.

y C) 182 days TB, auction is on every alternate

wednes day, notified amount 100 crores.

y D) 364 days TB, auction is on every alternatewednes day, notified amount is Rs. 500 crores.

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Market Reposy Repo (repurchase agreement) instruments enable

collateralized short-term borrowing through theselling of debt instruments

y A security is sold with an agreement to repurchaseit at a pre-determined date and rate

y Reverse repo is a mirror image of repo and reflectsthe acquisition of a security with a simultaneouscommitment to resell

y Average daily turnover of repo transactions (otherthan the Reserve Bank) increased from Rs.11,311crore during April 2001 to Rs. 42,252 crore in June2006.

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Collateralised Borrowing and

Lending Obligation (CBLO)y Operationalised as money market instruments by

the CCIL in 2003

y Follows an anonymous, order-driven and onlinetrading system

y On the lenders side main participants are mutualfunds, insurance companies.

y Major borrowers are nationalized banks, PDs andnon-financial companies

yThe average daily turnover in the CBLO segmentincreased from Rs. 515 crore (2003-04) to Rs. 32,390 crore (2006-07)

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Call/notice/ term moneyy Money borrowed or lent on demand for

short period.

y Money is borrowed/lent for a day callmoney.

y When money is borrowed or lent for more

than a day and up to 14 days- notice

money.

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Commercial Billsy Negotiable instruments accepted by buyers for

goods or services obtained by them on credit.

y Bill of exchange .y Promissory notes.

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Federal Fundsy 1. Term is generally over night/week-end

y 2. Not backed by collateral - unsecured loans

y 3. Highly liquid markety 4. Depository institutions use this market to

buy/sell excess deposits in order to manage their

liabilities.

y 5. For banks, this is sometimes referred to as hot

money

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Bankers Acceptancey Banks guarantee payments to secure orders

of goods from manufacturers.

y Are a type of letter of credit thatguarantees a payment by the bank on a

specific date

y Particularly useful between foreign trading

partners where there is a high level ofasymmetric information.

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Bill Rediscountingy Under this seller draws a bill of exchange & the

buyer accepting it , there after the seller get it

discounted with the bank collects the money

against the bill.

y In case of borrowers having working capital limit

of Rs 5 crores and above, al least 25% of this for

financing inland credit sales should be by way of a

bill finance.y Banks have a facility to rediscount the bill with RBI

and other approved institutions like LIC,GIC, UTI,

ICICI, IFCI, ETC.