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.
 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.

 It is a market purely for short-terms funds or
financial assets called near money.
 It deals with financial assets having a maturity
period less than one year only.
 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.

 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).

 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.

o Development of trade & industry.
o Development of capital market.
o Smooth functioning of commercial banks.
o Effective central bank control.
o Formulation of suitable monetary policy.
o Non inflationary source of finance to
government.

I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (discount and finance house of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis
III. CO-OPERATIVE SECTOR
1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks

Money Market consists of a number of sub-
markets which collectively constitute the money
market. They are:
Call Money Market
Commercial bills market or discount market
Acceptance market
Treasury bill market

A variety of instrument are available in a developed
money market. In India till 1986, only a few
instrument were available. They were
•Treasury bills
•Money at call and short notice in the call loan
market.
•Commercial bills, promissory notes in the bill
market.

Now, in addition to the above the following new
instrument are available:
 Commercial papers.
 Certificate of deposit.
 Inter-bank participation certificates.
 Repo instrument
 Banker's Acceptance
 Repurchase agreement/Reverse Repo
 Money Market mutual fund

Call / Notice Money Market:
 The bank with deficit fund make a call for bank
with surplus fund in a Call / Notice Money Market
 Benefit received in terms of call rate range
between 7.50-9.70
 Call money Market- funds are transacted on
overnight basis.
 Notice money market- Funds are transacted for
the period between 2days to 14 days.
 Participants: Individuals , commercial Banks,
stock brokers financial institution and cooperative
banks

Advantages of Call / Notice Money Market:
1. Highly liquidity
2.Safe and cheap
3. Highly profitability
4.To meet SLR
Disadvantages of Call / Notice Money Market:
1.Uneven Development
2.Volatality in call money rates.

Treasury bill market: Just like commercial bill which
represents commercial debt,
Treasury bill represents short-term borrowing of
government(center and state)
 These were first issued in India in 1917.
Meaning : It is a promissory note issued by the
government under the discount for a specified period,
the government promises bearer to pay the specified
amount mentioned on the due date.
91 days Treasury bill – 4% discount rate
182 days Treasury bill
364 days Treasury bill issued on auction base (cut off rate)

There are two types of treasury bills
1.Ordinary bill
2. ‘Ad hoc’ bill
Operations and Participants:
 The date of Auction and the last date of submission of
tenders are notified by RBI through the press release.
 On the next working day of date of auction , the accepted
bids with the prices are displayed
 The successful bidders have to collect letter of acceptance
from the RBI and deposits the same amount along with
cheque within 24 hours.
 Participants: RBI and SBI, Commercial bank, state
government, DFHI, financial institutions like UTI, LIC, IDBI
and etc.

Advantages of T-Bills:
1. Safety
2. Liquidity
3. Ideal short term investment
4. Ideal fund management
5. CRR and SLR
6. Source of short term fund
7. Hedging facility.
Disadvantages of T-Bills:
1. Poor yield
2. Absence of competitive bills
3. Absence of active trading

Commercial papers:
An unsecured, short-term debt instrument issued by a
corporation, typically for the financing of accounts
receivable, inventories and meeting short-term liabilities.
Maturities on commercial paper rarely range any longer
than 270 days. The debt is usually issued at a discount,
reflecting prevailing market interest rates.
Issuers: all private sector company, public sector units,
NBFC’s and etc
Investors: Individuals banks ,corporates and also NRI’s

Features :
1. Short term money market instruments.
2. Unsecured corporate debt.
3. Issued at discount.
4. Issued directly by company to investors or through
merchant bankers/ Banks.
Advantages:
1. Simplicity
2. High returns
3. Flexibility
4. Easy to raise long term funds.
5. Movement of funds.
Disadvantages:
1. Unsecured corporate debt

Certificate Of Deposit – CD’s
A certificate of deposit is a promissory note issued by a bank.
It is a time deposit that restricts holders from withdrawing
funds on demand. Although it is still possible to withdraw
the money, this action will often incur a penalty.
Issuers: Banks, FI’s and etc.
Investors: Individuals , corporates , NRI’s and etc.
Features:
1. Issued at discount
2. Stamp duty
3. Freely transferable after 45 days
4. Repayable on fixed date without grace days

Repo Instrument - Repurchase
Repo Rate is the interest rate at which the Reserve Bank of
India lends money to the banks to meet their short-term
needs. Banks have to provide security for such loans
Banks borrow funds from RBI to bridge the gap between
loans demand and money supply.
Example: Suppose SBI Bank has a loan demand of Rs. 100,
while the bank has only Rs. 80 in its system. In this
scenario, SBI will borrow Rs. 20 from RBI at current Repo
Rate and will bridge the gap.

Reverse Repo RateReverse Repo Rate is the rate at which
the banks park their surplus money with RBI.
Example: Suppose SBI Bank has a loan demand of Rs. 80,
while the bank has Rs. 100 in its system. In this scenario, SBI
will park Rs. 20 in RBI at current Reverse Repo Rate.
The current Repo rate is 7.50% and Reverse Repo Rate is
6.50%.

 CDs are short-term borrowings in the form of
Stance Promissory Notes having a maturity of not
less than 15 days up to a maximum of one year.
 CD is subject to payment of Stamp Duty under
Indian Stamp Act, 1899 (Central Act)
 They are like bank term deposits accounts. Unlike
traditional time deposits these are freely
negotiable instruments and are often referred to
as Negotiable Certificate of Deposits
 Like most time deposit, funds can not withdrawn
before maturity without paying a penalty.
 CD’s have specific maturity date, interest rate and it
can be issued in any denomination.
 CDs are discounted instruments and are issued at a
discounted price and redeemed at par value.
 The main advantage of CD is their safety.

 CDs can be issued by all scheduled commercial
banks except RRBs – Regional Rural Banks
 Minimum period 15 days
 Maximum period 1 year
 Minimum Amount Rs 1 lac and in multiples of Rs.
1 lac
 CDs are transferable by endorsement/approval.
 CD are used to maintain CRR & SLR.
 CDs are to be stamped

 Commercial 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.
 CP is very safe investment because the financial
situation of a company can easily be predicted
over a few months.
 Only company with high credit rating issues CP’s.
 Who can issue Commercial Paper (CP)
Highly rated corporate borrowers, primary
dealers (PDs) and satellite dealers (SDs) and
all-India financial institutions (FIs)

a) The tangible net worth of the company, as per
the latest audited balance sheet, is not less
than Rs. 4 crore;
b) 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.

 CP can be issued 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).
Issued to whom

 RBI uses Repo and Reverse repo as instruments for
liquidity adjustment in the system
 It helps banks to invest surplus cash
 It helps investor achieve money market returns with
sovereign risk.
 It helps borrower to raise funds at better rates
 An SLR surplus and CRR deficit bank can use the Repo
deals as a convenient way of adjusting SLR/CRR positions
simultaneously.

 Repo rate or repurchase rate is the rate at
which banks borrow money from the central
bank (read RBI for India) for short
period by selling their securities (financial
assets) to the central bank with an
agreement to repurchase it at a future date
at predetermined price.
 It is similar to borrowing money from a
money-lender by selling him something, and
later buying it back at a pre-fixed price.

 Reverse repo rate is the rate of interest at which the
central bank borrows funds from other banks for a
short duration. The banks deposit their short term
excess funds with the central bank and earn interest
on it.
 Reverse Repo Rate is used by the central bank to
absorb liquidity from the economy. When it feels that
there is too much money floating in the market, it
increases the reverse repo rate, meaning that the
central bank will pay a higher rate of interest to the
banks for depositing money with it.

The 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 1 day.
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".
The money that is lend for more than 14 days is
referred to “Term Money”

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.

 (T-bills) are the most marketable money market
security.
 They are issued with three-month, six-month
and one-year maturities.
 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.

 Consumer finance in the most basic sense
of the word refers to any kind of lending to
consumers.
 One of the best ways to get the unsecured
loans is through the consumer finance.

 Television
 Washing Machine
 Air Conditioner
 DVD/VCD players
 Refrigerator
 Computers/laptops
 And other consumer durables

 Seasonal Demand
 Demand in Rural India
 Consumer Awareness & Preference for new
models
 Attractive consumers loan schemes
 Growth of Media
 Use of Internet by Market Functionaries

 Growth of GDP
 Opportunities in Rural Market
 Schemes of Banks & Financial Institutions
 Increasing Consumer Awareness

 It’s a home loan that enables you to convert
a portion of your home equity into tax-free
funds without having to sell your home, give
up title, or take on a new monthly payment.
 Instead of making monthly mortgage
payments, your mortgage pays you. That’s
the “reverse” part of a reverse mortgage.

 On borrower’s death or leaving the house
property permanently, loan is repaid along
with accumulated interest, through sale of
the house property
 SCB/Heirs can prepay the loan with interest.
 Mortgage on property can be released
 FM announced in 2007-08 Union Budget
 NHB issued Guidelines on May 31, 2007

 RML seeks to monetize the house as an asset
and specifically the owner’s equity in the
house
 Senior Citizen borrowers (SCB) mortgage the
house property to a Public Lending Institution
(PLI), who then makes periodic payments to
borrowers during the latter’s lifetime
 SCB not required to service the loan and
hence no EMIs – Principal or Interest!

 Scheme Senior Citizens –Old Age
Dependency
 Increase in Longevity and Low Mortality
 Rising Cost of Good Health Care
 No proper Social Security Systems
 Regular Income flow + Pensions (?)
 Biggest Savings / Asset / Wealth
 Increase in residential house prices

 Senior Citizen of India – above 60 years age
 Married Couples as joint borrowers
 Should be owner of a self-acquired, self
occupied residential property (house or flat)
located in India, with clear title of ownership
 Property should be free from burden
 Residual life of property be at least 20 years
 Borrowers should use the property as
permanent primary residence

 Depends of Market value of residential property
& prevailing rate of interest
AGE
Loan Proportion of Assessed
value of property
60- 65 40%
66 – 70 50%
71 – 75 60%
Above 75 70%

 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)

 Purchasing power of your money goes
down, in case of up in inflation.
 Absence of integration.
 Absence of Bill market.
 No contact with foreign Money markets.
 Limited instruments.
 Limited secondary market.
 Limited participants.

 The money market specializes in debt securities
that mature in less than one year.
 Money market securities are very liquid, and are
considered very safe. As a result, they offer a
lower return than other securities.
 The easiest way for individuals to gain access to
the money market is through a money market
mutual fund.
 T-bills are short-term government securities that
mature in one year or less from their issue date.
 T-bills are considered to be one of the safest
investments.

 A certificate of deposit (CD) is a time deposit with a
bank.
 Annual percentage yield (APY) takes into account
compound interest, annual percentage rate (APR)
does not.
 CDs are safe, but the returns aren't great, and your
money is tied up for the length of the CD.
 Commercial paper is an unsecured, short-term loan
issued by a corporation. Returns are higher than T-
bills because of the higher default risk.
 Banker’s acceptance (BA) are negotiable time draft
for financing transactions in goods.
 Repurchase agreement (repos) are a form of
overnight borrowing backed by government
securities.

Money market

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Money market