Money Market

Prof Ravichandran
 Money Market

• As money became a commodity, the money

market became 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.
• Trading in the money markets is done over the
counter, is wholesale.
 Money Market
• Market for short-term money and financial
assets that are near substitutes for money.
• Short-Term means generally period upto
one year and near substitutes to money is
used to denote any financial asset which can
be quickly converted into money with
minimum transaction cost
• Its not a physical location (like the stock
market), but an activity that is conducted
over the phone.
 Money Market

• It is a place for Large Institutions and

government to manage their short-term
cash needs
• It is a subsection of the Fixed Income
Market
• It specializes in very short-term debt
securities
• They are also called as Cash Investments
 Characteristics of the Money Market
A Money Market is expected to perform three
broad functions :
1. Provide a balancing mechanism to even the
demand for and supply for short term funds
2. Provide a focal point for central bank
intervention for influencing liquidity and
general level of interest rates in the economy.
3. Provide reasonable access to suppliers and
users of short term funds to fulfil their
borrowings and investment requirements at an
efficient market clearing price.
 Defects of Money Market

Lack of Integration

Lack of Rational Interest Rates structure

Absence of an organized bill market

Shortage of funds in the Money Market

Seasonal Stringency of funds and fluctuations in Interest rates

Inadequate banking facilities

 Money Market Instruments
• Some of the important money market
instruments are briefly discussed below;
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
• 6. Repos /Reverse Repos
• 7. CBLOs
 1. Call / Notice Money Market

• By far the most visible market as day-to-day surplus funds, mostly of

banks are traded.
• Maturity Period : 1 day – Fortnight
• 1 day – call (overnight) money
• More than a day – notice money
• No collateral security to cover transactions
• Call money is a highly liquid
• Call money is required mostly by banks. Commercial banks borrow
money with out collateral from other banks to maintain a minimum
cash balance known as cash reserve requirement (CRR)
• CRR refers to that cash that banks have to maintain with the RBI as
a certain percentage of their demand and time liabilities
• Bank can recall the loan at its maturity
 Call money market
• Call money market is a market for
uncollateralized lending and borrowing of
funds.
• This market is predominantly overnight and is
open for participation only to scheduled
commercial banks and the primary dealers.
 2. Term Money

• Term Money market for deposits of maturity

beyond 14 days is referred to as the term
money market.
• The entry restrictions are the same as those
for Call/Notice Money except that, as per
existing regulations, the specified entities are
not allowed to lend beyond 14 days.
 3. Treasury Bills (T-Bills)

• Treasury bills (Government Paper Securities) are

short-term instruments issued by RBI on behalf of
govt to tide over short-term liquidity shortfalls.
• T-Bills are paid on maturity.
• Sale of T-Bills are conducted thro action
• Duration of 91 days(discontinued), 14-day T-Bills
• Promissory note of the government to pay a
specified sum after a specified period
 Features of T Bills
• Negotiable securities
• Absence of default risk
• Assured yield , low transaction cost and
eligible for inclusion in SLR purposes
• Currently 91-day,182-day a d 364-day T-Bills in
Vogue. Refer RBI site for update.
• T-Bills are available for min of Rs 25,000 and
multiples
 4. Certificate of Deposits

• Certificates of Deposit (CDs) is a negotiable

money market instrument and issued in
dematerialized form or as a Usance Promissory
Note, for funds deposited at a bank or other
eligible financial institution for a specified time
period.
• Guidelines for issue of CDs are presently
governed by various directives issued by the
Reserve Bank of India, as amended from time to
time.
• CDs are unsecured, short-term, negotiable
instruments in bearer form issued by commercial
banks, development financial institutions.
 4. Certificate of Deposits contd.

Reserve Bank of India, as amended from time to time.

CDs can be issued by
(i) Scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and
(ii) Select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within
the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on
their requirements.
An FI may issue CDs within the overall umbrella limit fixed
by RBI, i.e., issue of CD together with other
instruments viz., term money, term deposits,
commercial papers and interoperate deposits should
not exceed 100 per cent of its net owned funds, as per
the latest audited balance sheet.
 Some additional info on CDs
• Min Size : Rs 1 lakh and multiples of 1 lakh
• Maturity :
• Banks :Not less than 7 days but not more than
1 year
• Fis : Not less than 1 year but not more than 3
years
• CDs may be issued at a discount on face value
 5. Commercial Paper (CP)
• Commercial Paper (CP) is an unsecured money
market instrument issued in the form of a
promissory note.
• Corporates, primary dealers (PDs) and the all-
India financial institutions (FIs) that have been
permitted to raise short-term resources under the
umbrella limit fixed by the Reserve Bank of India
are eligible to issue CP.
• CP can be issued for maturities between a
minimum of 7 days and a maximum up to one
year from the date of issue.
 Commercial Paper

• CP is an unsecured money market instrument

(short-term) issued in the form of a
promissory note.
• Who Can Issue CP?
• Highly rated corporate borrowers, primary
dealers (PDs) & satellite dealers (SDs) & all-
India financial institutions (FIs)
Buyers :
A CM can be issued to individuals, banks,
companies and other registered Indian
Corporate bodies and unincorporated bodies.
 5. Commercial Paper Contd.
• CP is a note in evidence of the debt obligation
of the issuer.
• On issuing commercial paper the debt
obligation is transformed into an instrument.
• CP is thus an unsecured promissory note
privately placed with investors at a discount
rate to face value determined by market
forces.
• CP is freely negotiable by endorsement and
delivery.
 5. Commercial Paper Contd.
A company shall be eligible to issue CP provided
(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
(c) the borrowal account of the company is classified
as a Standard Asset by the financing bank/s.
The minimum maturity period of CP is 7 days.
 6/ Repo
Meaning of Repo

• Transaction in which 2 parties agree to sell &

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 & in
securities as approved by RBI (Treasury Bills,
Central/State Govt. Securities).
 6/Repo
• Uses of Repo
• Helps banks to invest surplus cash
• Helps investors achieve money market
returns
with sovereign risks.
• Raising funds by borrowers
• Adjusting SLR/CRR positions simultaneously.
• For liquidity adjustment in the system.
 7/ Collateralised Borrowing and
Lending Obligation (CBLO)
• CBLO is another money market instrument
operated by the Clearing Corporation of India
Ltd. (CCIL), for the benefit of the entities who
have either no access to the inter bank call
money market or have restricted access in
terms of ceiling on call borrowing and lending
transactions.
Collateralised Borrowing and Lending
Obligation (CBLO)
• CBLO a new product launched by CCIL- to provide liquidity
to Non-bank entities hit by restrictions on access to the call
money market.
• CBLO is a discounted instrument available in electronic book
entry form for the maturity period ranging from one day to
ninety days (up to one year as per RBI guidelines).
• In order to enable the market participants to borrow and
lend funds, CCIL provides the Dealing System through
Indian Financial Network (INFINET), a closed user group to
the Members of the Negotiated Dealing System (NDS) who
maintain Current account with RBI and through Internet for
other entities who do not maintain Current account with
RBI.
Collateralised Borrowing and Lending
Obligation (CBLO)
• By participating in the CBLO market, CCIL
members can borrow or lend funds against
the collateral of eligible securities.
• Eligible securities are Central Government
securities including Treasury Bills, and such
other securities as specified by CCIL from time
to time.
Collateralised Borrowing and Lending
Obligation (CBLO)
• Borrowers in CBLO have to deposit the required
amount of eligible securities with the CCIL based
on which CCIL fixes the borrowing limits. CCIL
matches the borrowing and lending orders
submitted by the members and notifies them.
• While the securities held as collateral are in
custody of the CCIL, the beneficial interest of the
lender on the securities is recognized through
proper documentation.