Financial market (specific to money market)

(with detailed study of Money Markets and its
various instruments)

Any marketplace where buyers and sellers participate in the trade of
financial securities, commodities, and other items of value at low
transaction costs. Securities include stocks and bonds, and
commodities include precious metals or agricultural goods.
There are both general markets (where many commodities are traded)
and specialized markets (where only one commodity is traded).
Defined as Institutional arrangements for dealing in financial assets
and credit instruments of various types. Eg. Currency cheque, bank
deposits, bills, etc.
Classified as:• Negotiated loan markets (Lender and borrower personally negotiate
terms of loan agreement)
• Standardized securities treated in large values
Financial Markets cater to various credit needs of individuals, firms
and institutions. (Short and Long term)

A Financial system is a composition of various
instruments, markets, regulations and practices,
money manager, analysts, transactions and claims
and liabilities.
According to Robinson , the primary function of the
financial system is “to provide a link between savings
and investment for the creation of new wealth and to
permit portfolio adjustment in the composition of an
existing wealth”.

Lenders

Financial
Intermediary

Financial
Markets

Borrowers

•Banks

•Interbank

•Individuals

•Insurance
Companies

•Stock
Exchange

•Companies

•Pension
Funds

•Money Market

•Central
Government

•Mutual
Funds

•Foreign
Exchange

•Individual
•Companies

•Bond Market

•Municipalities
•Public
Corporations

 Facilitates creation and allocation of credit and liquidity.
 Intermediaries for mobilization of savings.
 Assists the process of balanced economic growth.
 Provides financial convenience.
 supports the credit needs of business houses.

FINANCIAL
MARKETS

MONEY
MARKET

CAPITAL
MARKET

Money Market

The money market is a component of the financial markets for assets
involved in short-term borrowing, lending, buying and selling with
original maturities of one year or less. It brings together lenders who
have surplus investable short-term funds and borrowers who need
money for a short-term.
Lenders- Central Bank, Commercial Banks, Insurance companies,
Financial concerns.
Borrowers- Merchants, Traders, Manufacturers, Business concerns,
Brokers, Government Institutions.

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.

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 be converted
into cash without any loss at low transaction cost
It’s simply an arrangement that brings about direct or

indirect contact between the lender and the borrower. It
includes all individual, institution and intermediaries.

 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.

I.

Facilitates adjustment of liquidity position of commercial banks, business
corporations and other NBFCs (Non-banking Financial Concerns)

II.

Provides outlet to commercial banks, business corporations, NBFCs and
other investors for their short-term surplus funds.

III.

Provides short-term funds to various borrowers such as businessmen,
industrialists, traders, etc

IV.

Provides ST Funds even to the government institutions.

V.

Constitutes highly effective mechanism for credit control. Serves as a
medium through which Central Banks of the country exercises control on
the creation of credit.

VI.

Enables business to invest their temporary surplus for a short-period.

VII. Plays a vital role in the flow of funds to the most important uses.

Instruments of Money Market
Each deals in different type of short-term credit

Call-money market
Collateral Loan Market

Acceptance Market
Bill Market (Bills of Exchange and Treasury Bills)
Commercial Papers
Certificate of Deposit

Organised Money Market

Market for very short time.
Bill brokers and dealers in stock exchange usually borrow money at call
from commercial banks. These are given for a very small period (24 hours).
No demand of collateral securities against call money.
They process high liquidity, borrowers are required to pay as and when
asked for.
Meets the need of liquidity but not profitability.
It is the form of secondary cash reserves for the commercial bank for which
they can earn income too.
– for a period of 7-14 days. Rest is similar to
call money.

Company Logo

 Borrowers are generally dealers in stocks and

shares. (even smaller banks may borrow from bigger
banks)
 Advanced by commercial banks to private parties in

the market. These loans are backed by securities,

stocks and bonds. govt bonds)
 Money returned when the loan is repaid. Else

security retained by the bank if borrower unable

to pay.
 Given for a few months.

 Refers to banker’s acceptances involved in trade transactions. (Draft drawn by an

individual or a business firm upon a bank and accepted by the bank, whereby it is ordered
to pay to the order of a designated party or to bearer a certain sum of money at a specific
time in future)
 It is a common method of financing short-term debts in international trade including

import-export transactions. Generally for exporters to get paid faster.


A banker’s acceptance (BA) is a short-term credit investment created by a non-financial

firm.


BA’s are guaranteed by a bank to make payment.



Acceptances are traded at discounts from face value in the secondary market.



BA acts as a negotiable time draft for financing imports, exports or other transactions in
goods.



This is especially useful when the credit worthiness of a foreign trade partner is unknown.



Short term papers or bills are bought or sold.

(1) Bills of Exchange


(2) Treasury Bills

Bills of Exchange: Commercial papers, unconditional written order which is
signed by drawer requiring the drawee to pay a certain amount at a fixed future
time. Once the buyer signifies, it becomes legal.



Treasury Bills: Govt papers/ securities for short period (91 days). These are
promissory notes of the government to pay a specified sum after a specified
period. Sold by central bank on behalf of the govt.



No fixing of Rate of Interest beforehand.



Since they are govt papers, they inspire public confidence in the minds of the
investors, no risk involved. They have assured yield and negligible risk of default



T-bills are purchased for a price that is less than their par (face) value; when they
mature, the government pays the holder the full par value.



T-Bills are so popular among money market instruments because of affordability to
the individual investors.

Advantages of Treasury Bill
 Treasury notes are issued by the governments

and are considered the safest investment in the
world. The fixed interest ensures that all
investors will earn every couple of months &
during its maturation period.
 treasury notes can be traded electronically
hence there are no papers and contracts to
store.
 Profits gained on treasury notes is subject only
to federal income tax that means higher profits
for the buyer.

Disadvantages of Treasury bills
 Treasury notes have relatively low yield to

maturity compared to other investment vehicles.
Interest rates are expressed annually.
 They are exposed to political risk. While
governments can print new money to avoid
defaulting on this credit, they must continually
issue new debt to payoff maturing treasury

notes.

 New Addition in Money Market- 1990 onwards
 A commercial paper in India is the monetary instrument issued at

discount in the form of promissory note. It acts as the debt instrument to
be used by large corporate companies for borrowing short-term
monetary funds in the money market. (before 1990, the corporate
companies had to depend upon the crude and traditional method of
borrowing working capital from the commercial banks by pledging the
inventory of raw materials as Collateral security)
 Effective instrument for these corporate companies to avail the short-

term funds from the money market within shortest possible time limit by
avoiding the hassles of direct negotiation with the commercial banks for
availing the short-term loans.
 The main issuers of Commercial paper in this market are incorporated

manufacturers and the main subscribers to the Commercial papers are
the banking companies
 The maturity period of Commercial paper in the Commercial Paper

market ranges between minimum of 7 days and maximum of 1 year
from the date of issue

Since Commercial paper is unsecured debt instrument in Indian money market,
the issuers of Commercial paper are required to maintain relatively higher Credit
rating. According to Reserve Bank of India norms, the issuers of Commercial
Paper are eligible to issue Commercial Papers only if they have P2 or equivalent
credit rating from any of the credit rating agencies in India.
The main agencies are:


Credit Rating Information Services of India Limited (CRISIL),



Credit Analysis and Research Limited (CARE),



Investment Information and Credit Rating Agency of India Limited (ICRA).



FITCH Ratings India Pvt. Ltd.
This credit rating is essential for the issue of Commercial papers because a
Commercial paper is not backed by any collateral and so only corporate with
high-quality credit ratings will easily find buyers without having to offer a
substantial discount (higher cost) for the issue of Commercial paper.

 a. the tangible net worth of the company, as per the latest

audited balance sheet, is not less than Rs. 4 crore
 b. company has been sanctioned working capital limit by
bank/s or all-India financial institution/s; and
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.
CP can be issued in denominations of Rs.5 lakh or multiples
thereof

 RBI definition: “Certificate of Deposit (CD) is a negotiable money

market instrument and issued in dematerialised form or as a
Promissory Note against funds deposited at a bank or other

eligible financial institution for a specified time period.”
 The main purpose of CD is to enable the commercial banks to

raise funds from the market. The CDs maturity period ranges from

7 days to 1 year. The CDs are issued at a discount to its face
value. The CDs are issued in any denomination.


They are different from savings accounts in that the CD has a specific, fixed term

(often monthly, three months, six months, or one to five years), and, usually, a
fixed interest rate. It is intended that the CD be held until maturity, at which time
the money may be withdrawn together with the accrued interest

A repurchase agreement, also known as a repo,
RP, or sale and repurchase agreement, is the
sale of securities together with an agreement for
the seller to buy back the securities at a later
date. The repurchase price should be greater
than the original sale price, the difference
effectively representing interest, sometimes
called the repo rate. The party that originally
buys the securities effectively acts as a lender.
The original seller is effectively acting as a
borrower, using their security as collateral for a
secured cash loan at a fixed rate of interest.

Unorganized Money Market
1.

Indigenous Bankers (IBs): The IBs are individuals or private firms
who receive deposits and give loans and thereby they operate as
banks. Unlike moneylenders who only lend money, IBs accept
deposits as well as lend money.

2.

Money Lenders (MLs): They lend money in rural areas as well as
urban areas. They normally charge an invariably high rate of interest
ranging between 15% p.a. to 50% p.a. and even more.

3.

Chit Funds and Nidhis: They collect funds from the members for
the purpose of lending to members (who are in need of funds) for
personal or other purposes.

4.

Finance Brokers: They act as middlemen between lenders and
borrowers. They charge commission for their services.

5.

Finance Companies: They operate throughout the country. They
borrow or accept deposits and lend them to others. They provide
funds to small traders and others. They operate like indigenous
bankers.

Financial market (specific to money market)

Financial market (specific to money market)

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Financial market (specific to money market)