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Money markets
The document provides an overview of the Indian money market, including definitions, key participants, instruments, and objectives. The money market deals with short-term lending and borrowing of funds (less than one year) through instruments like treasury bills, commercial paper, certificates of deposit, and repurchase agreements. It aims to provide short-term borrowers access to funds and investors with safe and liquid assets to park surplus funds. The Reserve Bank of India plays an important role in regulating the money market and managing liquidity.
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Money markets
- 1. MONEY MARKETSPROF. PARVEENSULTANA
- 2. MONEY MARKETAs perRBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.
- 3. The money marketis a mechanism that deals with the lending and borrowing of short term funds (less than one year).
- 4. A segment of thefinancial market in which financial instruments with high liquidity and very short maturities are traded.
- 5. It doesn’t actuallydeal 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.
- 6. It includes allindividual, institution and intermediaries.The DefinitionMoney Market is "the centre for dealings, mainly short-term character, in money assets. It meets the short-term requirements of borrower and provides liquidity or cash to the lenders. It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising Institutions, individuals and also the Government itself" Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year. A well functioning money market provides a relatively safe and steady income-yielding avenue.Allows the investor institutions to optimize the yield on temporary surplus funds.Instrument of Liquidity adjustment by Central Bank.
- 7. FORM OFFINANCIALMARKETSTIME PERIOD
- 8. OVERVIEW OF FINANCIALMARKETS
- 9. Features of MoneyMarketTransaction have to be conducted without the help of brokers.
- 10. It isnot a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market.
- 11. The componentof Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).
- 12. In MoneyMarket transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done. Objective of Money MarketTo provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.
- 13. To provide aparking place to employ short term surplus funds.importance of Money MarketDevelopment of trade & industry.
- 14. Development ofcapital market.
- 15. Smooth functioningof commercial banks.
- 16. Effective centralbank control.
- 17. Formulation ofsuitable monetary policy.
- 18. Non inflationarysource of finance to government.the PlayersReserve Bank of India
- 19. SBI DFHI Ltd(Amalgamation of Discount & Finance House in India and SBI Gilts in 2004)
- 20. Commercial Banks, Co-operativeBanks and Primary Dealers are allowed to borrow and lend.
- 21. Specified All-India FinancialInstitutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders
- 22. Individuals, firms, companies,corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs. Composition of Money MarketMoney Market consists of a number of sub-markets which collectively constitute the money market. They are, Call Money Market
- 23. Commercial billsmarket or discount market
- 24.
- 25. Treasury billmarketThe Products & ProcessCertificate of Deposit (CD) Commercial Paper (CP)Inter Bank Participation Certificates Inter Bank term Money (Repo rates) Treasury Bills Call Money
- 26. Instrument of MoneyMarketA variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.They were Treasury bills
- 27. Money atcall and short notice in the call loan market.
- 28. Commercial bills,promissory notes in the bill market.NEW INSTRUMENTSNow, in addition to the above the following new instrument are available:Commercial papers.
- 29. Certificate ofdeposit.
- 30. Inter-bank participationcertificates.
- 31.
- 32.
- 33.
- 34. Money Marketmutual fundCertificate of DepositCDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year.
- 35. CD is subjectto payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act)
- 36. They are likebank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits
- 37. A CD isa time deposit with a bank.
- 38. Like most timedeposit, funds can not withdrawn before maturity without paying a penalty.
- 39. CD’s have specificmaturity date, interest rate and it can be issued in any denomination.
- 40. The main advantageof CD is their safety.
- 41. Anyone can earnmore than a saving account interest.Features of CDCDs can be issued by all scheduled commercial banks except RRBsMinimum period 15 daysMaximum period 1 yearMinimum Amount Rs 1 lac and in multiples of Rs. 1 lacCDs are transferable by endorsementCRR & SLR are to be maintainedCDs are to be stamped
- 42. Commercial PaperCommercial Paper(CP) is an unsecured money market instrument issued in the form of a promissory note. CP is a short term unsecured loan issued by a corporation typically financing day to day operation.
- 43. CP is verysafe investment because the financial situation of a company can easily be predicted over a few months.
- 44. Only company withhigh credit rating issues CP’s.
- 45. Who can issueCommercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) Eligibility for issue of CP The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;The working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and the borrowable account of the company is classified as a Standard Asset by the financing bank/s.
- 46. Rating RequirementAll eligibleparticipants should obtain the credit rating for issuance of Commercial Paper Credit Rating Information Services of India Ltd. (CRISIL) Investment Information and Credit Rating Agency of India Ltd. (ICRA) Credit Analysis and Research Ltd. (CARE) Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies
- 47. MaturityCP can beissued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day. CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). To whom issued
- 48. Repo Rates andReverse Repo RatesRBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system It helps banks to invest surplus cashIt helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better ratesAn SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously.
- 49. Meaning of RepoItis a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).
- 50. Repurchase agreement (Repos)Repois a form of overnight borrowing and is used by those who deal in government securities.
- 51. They are usuallyvery short term repurchases agreement, from overnight to 30 days of more.
- 52. The short termmaturity and government backing usually mean that Repos provide lenders with extreamly low risk.
- 53. Repos are safecollateral for loans.Call Money MarketThe call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days.The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".
- 54. Call Money MarketBanksborrow in this market for the following purposeTo 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.
- 55. Banker's AcceptanceA banker’sacceptance (BA) is a short-term credit investment created by a non-financial firm.
- 56. BA’s areguaranteed by a bank to make payment.
- 57. Acceptances aretraded at discounts from face value in the secondary market.
- 58. BA actsas a negotiable time draft for financing imports, exports or other transactions in goods.
- 59. This isespecially useful when the credit worthiness of a foreign trade partner is unknownTreasury BillsTreasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. (T-bills) are the most marketable money market security.
- 60. They areissued with three-month, six-month and one-year maturities.
- 61. T-bills arepurchased for a price that is less than their par(face) value; when they mature, the government pays the holder the full par value.
- 62. T-Bills areso popular among money market instruments because of affordability to the individual investors. Who can invest in T-BillBanks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.
- 63. Gilt edged securitiesTheterm government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.
- 64. Structure of IndianMoney MarketORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India).3. Commercial banksi. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
- 65. Structure of IndianMoney MarketUNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. NidhisIII. CO-OPERATIVE SECTOR 1. State cooperativei. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks
- 66. ! Disadvantageof Money MarketPurchasing power of your money goes down, in case of up in inflation.
- 67. Dichotomized and looselyintegrated
- 68. Irrational structure ofinterest rates
- 69.
- 70. Seasonal stringency ofloan able funds
- 71. Lack of fundsin the money market
- 72. Inadequate banking facilitiesCharacteristicfeatures of a developed money MarketHighly organized banking system
- 73.
- 74. Availability of propercredit instrument
- 75.
- 76.
- 77. Existence of secondarymarket
- 78. Demand and supplyof fundRecent development in Money MarketIntegration of unorganized sector with the organized sector
- 79. Widening of callMoney market
- 80. Introduction of innovativeinstrument
- 81. Offering of Marketrates of interest
- 82. Promotion of billculture
- 83. Entry of Moneymarket mutual funds
- 84. Setting up ofcredit rating agencies
- 85. Adoption of suitablemonetary policy
- 86. Establishment of DFHI
- 87. Setting up ofsecurity trading corporation of India ltd. (STCI)The NeedNeed for short term funds by Banks.Outlet for deploying funds on short term basis Need to keep the SLR as prescribedNeed to keep the CRR as prescribedOptimize the yield on temporary surplus fundsRegulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market
- 89.