Money Market

Pramod Kumar Patjoshi

Money Market

 Money market is a market for short-

term loans or financial assets.
 It is a market for lending and
borrowing of short term funds.
 It meets the short-term requirements
of borrowers and provides liquidity
or cash to lenders.
Money market-definition

According to Geottery Crowther,

“The money market is the collective
name given to the various firms and
institutions that deal in the various
grades of near money”
 Features of Money Market

 It is a market purely for short term

funds or financial assets called
near money.
 It deals with financial assets
having a maturity period up to one
year only.
 It deals with only those assets
which can be converted into cash
readily.
 Generally transactions takes place
through phone and relevant documents
and written communication can be
exchanged subsequently.
 Transactions have to be conducted
without the help of brokers.
 The components of a money market are
the central bank, commercial bank,
NBFC, discount houses. Commercial
banks generally play a dominant role in
this market.
OBJECTIVES
 To provide a place to employ short-term
surplus funds .
 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
requirements quickly adequately and at
reasonable costs .
Characteristics for
Development of Money Market
 Highly organized banking system
 Presence of central bank
 Availability of proper credit
instruments
 Existence of sub market
 Ample recourses
 Existence of secondary market
 Demand and supply of funds
Important of money market
 Development of trade and
industries
 Development of Capital Market
 Smooth functioning of Commercial
banks
 Effective central bank control
 Formation of suitable monetary
policy
Money Market in India
The money market in India developed from
1935 onwards after formation and
development of
 RBI in 1935,
 Planned economy in 1951,
 The nationalization of banks in 1969,
 The financing house of India in 1988,
 the liberalization and globalization in 1991,
 the security trading corporation of India in
1994,
Composition of Money Market

 Call money market.

 Commercial bills market or Discount
market.
 Treasury bill market.
 Short-Term Loan Market:
Call Money Market

 The call money market refers to the

market for extremely short period
loans; say one day to fourteen days.
 These loans are repayable on
.
demand at the option of either the
lender or the borrower.
 The day to day surplus funds of
commercial banks are traded in the
market. The loans made in call market are
of short-term nature .
 The demand for call money is the highest
in the month of March of every year.
Because it is the time to meet year end
and tax payments and withdrawals of
funds by financial institutions to meet
their statutory obligations.
Participants of Call Money
Market
 Reserve Bank of India
 commercial banks, co-operative
banks.
 Discount and Finance House of India
(DFHI)
 Securities Trading corporation of India
(STCI
 LIC, UTI, GIC, IDBI
Advantages of CMM

 High Liquidity
 High Profitability
 Maintenance: of SLR
 Safe and Cheap
 Assistance to Central Bank
Drawbacks of Call Money
Market

 Uneven Development
 Lack of Integration
 Volatility in Call Market Rates
Commercial Bill Market or
Discount Market
 A commercial bill is one which arises out
of a genuine trade transaction, i.e., credit
transaction.
 As soon as goods are sold on credit, the
seller draws a bill on the buyer for amount
due.
 The buyer accepts it immediately agreeing
to pay the amount mentioned therein after
a certain specified date.
 It is drawn always for a short period
ranging between 3 months and 6 months.
Types of Bills

 Demand and Usance bills

 Clean Bills and Documentary Bills
 Inland and Foreign Bills
 Export Bills and Important Bills
 Indigenous Bills
 Accommodation Bills and Supply
Bills
Advantages of Commercial
Bill Market
 Liquidity
 Self-liquidating and Negotiable Asset
 Certainty of Payment
 Ideal Investment
 Simple Legal Remedy
 High and Quick Yield
Operation in Bill Market

 Discount Market
 Acceptance Market
Treasury Bill Market
Treasury bill market refers to the market
where
 A TBs is nothing but a promissory note
issued by the govt. under discount for a
specified period stated therein.
 The period does not exceed a period of
one year.
 It is purely a finance bill since it doesn’t
arise out of any trade transaction
 TBs are issued only by the RBI on behalf
of govt
Types of TBs

 Ordinary/Regular
 ‘Ad hocs”
Ordinary/Regular

 TBs are issued to the public and

other financial institutions for
meeting the short-term financial
requirements of the Central
Government.
 These bills are freely marketable and
they can be bought and sold at any
time and they have secondary market
also.
Ad hocs

 Ad hocs’ are always issued in favour

of the RBI only.
 They are not sold through tender or
auction.
 They are not marketable in India.
However, the holders of these bills
can always sell them back to the RBI.
TBs may be classified into three. They are:
 91 days TB
 182 days TB
 364 days TB
Participants in the TBM

 RBI & SBI

 Commercial banks
 State Governments
 DFHI
 Financial Institutions like LIC, GIC,
UTI, IDBI, ICICI, etc.
Important or Merits of TBM

 Safety
 Liquidity
 Ideal Short-Term Investment
 Statutory Liquidity Requirement
 Sources of Short-term Funds
Money Market Instruments

 Commercial Papers
 Certificate of Deposit (CD)
 Inter-Bank Participation Certificate
 Repo Instrument
Commercial Papers

 Commercial paper is a new instrument

introduced in India on 27th March, 1989
and used for financing working capital
requirements of corporate enterprises.
 A commercial paper is an unsecured
promissory note issued with a fixed
maturity by a company approved by RBI &
negotiable.
Advantages of Commercial
Paper
 Simplicity
 Flexibility
 Diversification
 High Returns
 Movement of Funds
Features of Commercial
Paper
 Commercial paper is a short-term money
market instrument comprising usance
promissory notes with a fixed maturity.
 It is a certificate evidencing an unsecured
corporate debt of short-term maturity.
 Commercial paper is issued at a discount
to face value basis but it can also be
issued in interest bearing form.
Features of Commercial
Paper
 The issue promises to pay the buyer
some fixed amount on some future period
but pledges no assets, only his liquidity
and established earning power, to
guarantee that promise.
 Commercial paper can be issued directly
by a company to investors or through
banks/merchant bankers.
Advantages of Commercial Paper

 Simplicity
 Flexibility
 Diversification
 High Returns
 Movement of Funds
Certificate of Deposit (CD)

 The banks in the USA in 1960s introduced

CDs
 in June 1989 RBI permitting commercial
banks (excluding RRBs) to issue CDs.
 Meaning: Certificate of Deposits are short
term deposit instruments issued by banks
and financial institutions to raise large
sums of money.
Features of CD

 Document of title to time deposit.

 Freely transferable by endorsement and
delivery.
 Issued at discount to face value.
 Repayable on a fixed date without grace
days.
 Subject to stamp duty like the usance
promissory notes.
Repo Instrument
 A repo/reverse repo/repurchase is a
transaction in which two parties agree to
sell and repurchase the same security.
 The seller sells specified securities, with
an agreement to repurchase the same at a
mutually decided future date and price.
 Like wise, the buyer purchases the
securities, with an agreement to resell the
same to the seller on an agreed date and
at a predetermined price.
Repo Instrument-contd.

 The difference between the price at which

the securities are bought and sold is the
lender’s profit/interest earned for lending
money.
 Repos are usually entered into with a
maturity of 1-14 days. Generally, repo
transactions take place in market lots of
Rs. 5 crores.
 There are two types of repos namely, i)
inter-bank repos, ii) RBI repos.