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 doesnt 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 market

1.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 ratingP2 (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 GSecs 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
purchasers 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)