Money and Capital market

Money Market : concept and type

Money Market Concept and Type

Money market meets the short term requirements of the economy The money market is expected to discharge following functions 1. Equilibrating mechanism to even out demand and supply of short term funds. 2. A focal point for central banks intervention for influencing liquidity and general level of interest in the economy. 3. Providing reasonable access to user and provider the short term borrowing and investment requirement.

(Y.V.Reddy Monetary and Financial Reforms in India (2000) UBS Publisher and Distributors , New Delhi

Money Market Concept and Type

Indian money market has two parts 1. Unorganized money market 2. Organized Money market . The RBI is the apex institution of the money market

Unorganized money market Unregulated and un-integrated

Unregulated non banking financial institutions (A) Loan companies (B) loan companies ,(C ) Chit funds and Nidhi,(d) Indigenous banker and money lender This sector has very high rate of interest No systematic data on this sector are available. This sector is thriving on the weakness of the organized sector .

Organized money market Concept and issues

The organized money market comprises of RBI, commercial banks , cooperative banks, Discount and Finance House of India Ltd (DFHI), Finance Corporation, Mutual Funds and Foreign Banks. The money market is not coordinated and some critics are of the view that there is no national money market, there is Mumbai Money market , Kolkata Money market and o on but no Indian money market

Organized money market : issues

Lack of rational interest structure Absence of organized commercial bill market Seasonal stringency of funds and fluctuation in interest. Inadequate banking facility 15900 person per bank in India, compared to 1200 person per bank in USA.

Organized Money Market : Principal Constituents

1. Call Money market Borrowing and landing transactions are carried out for one day 1. This market bring together the borrowing and lending banks i.e the banks which has surplus fund and the banks which are in deficit.
2. This market is also called inter bank call money market
The Scheduled Commercial banks, Discount and Finance House of India(DFHI) and Co-operative Banks are main player- the borrowers and lender. The LIC, GIC , IDBI and NABARD also participate but only as lender

Organized Money Market : Principal Constituents

1. Call Money market Call money market is highly sensitive and reflective of the liquidity situation. The deficit and surplus in banks emerges because of fluctuations in CRR and also because of the medium term investment that banks make by borrowing from call money market. Since establishment of DFHI in 1988, on the recommendation of Vaghual Committee has contributed in the development of call money market

Organized Money Market : Principal Constituents 2. The Treasury Bill Market

Treasury bills are issued by governments to meet its temporary deficit. There are no measure holders of treasury bills other than RBI, which is a captive holder of treasury bills i.e. it is obliged to purchase all treasury bills issued by the government and is bound to discount the bills presented to it. RBI auctions treasury bills at regular interval

Organized Money Market : Principal Constituents 2. The Treasury Bill Market

Presently there are following types of treasury bills 91 days treasury bills, weekly auction basis by RBI 182 days treasury bills are auctioned on Wednesday , preceding non reporting Fridays 364 days treasury bills are auctioned on Wednesday , preceding reporting Fridays Available on the multiples of Rs 25000/ Almost risk less , as they are guaranteed by Government of India.

Organized Money Market : Principal Constituents 3.The Repo Market

Under a repo transactions , securities are sold by their holders to an buyer with an agreement to re-purchase them at a predetermined rate and date. Under reverse repo transaction securities are purchase with a simultaneous agreement to sell at a predetermined rate and date

Organized Money Market : Principal Constituents 4.The Repo Market

Initially repo was allowed in the central government treasury bills and dated securities created by converting some of the treasury bills, later this provision has been extended to all government securities and treasury bills of all maturities and now state govt. securities , PSUs bond and securities and private corporate securities have also been allowed in this transactions.

Organized Money Market : Principal Constituents 5 .Commercial Bill market

Commercial bill is drawn by one merchant firm on other.The legitimate purpose of commercial bill is reimburse the seller while the buyer delays payment. The commercial bill market in India is less developed because of popularity of cash transactions and the unwillingness of the larger buyers to bind themselves to payment disciplines.

Organized Money Market : Principal Constituents 5 .Commercial Paper Market. Commercial paper is an unsecured promissory note with fixed maturity issued by a corporation . Unlike commercial bill is not related with underlying self liquidating trade . Usually the borrower and lend adopt the maturity as per their needs. CP was introduced in India in 1990, on the recommendation of Vaghul Committee ( working group on Money market 1987) The CP can be issued by any listed company which has a working capital of Rs 5 crore in the multiple of Rs 25 lakhs subject to a minimum size of Rs 25 lakhs

Organized Money Market : Principal Constituents 5 .Commercial Paper Market.

The issuing company must have the credit rating of A2 by Investment Information and Credit Rating Agency of India Ltd (ICRA ) or P2 of Credit Rating and Information Services of India Ltd(CRISIL).

Organized Money Market : Principal Constituents 6 .The money Marekt Mutual Funds (MMFS)

MMF introduced in 1992 to provide short term avenues for investment to individual investors. Banks, Public Finance Institutions and also private sectors too can setup MMFs. MMFs has been brought under the regulatory authority of SEBI.

Capital market : Concepts

The capital market deals with long term lending and borrowing . There is inter dependence between short term and long term market The suppliers serve in money as well as capital market. The short term and long term rate of interest are interdependent , however it is short term interest rate which changes first and the long term follows after wards

Capital market : Concepts

The capital market can be divided in two categories : (1) The financial institutions like IFCI, EXIM bank , SIDBI, IDFC, SFC, LIC etc provide long term loans. (2) Securities Market it is further divided in two parts the gilt -edged securities and corporate securities

The gilt -Edged securities ( of the Best quality )

Risk free Securities guaranteed by government principal as well as interest. The issue market - RBI does all the issues of central as well as of the state governments . Secondary market : Large stockbrokers deals in old issues and the RBI keeps securities of various maturities and interest rates to meet the demand

The gilt -Edged (Best quality ) securities The dealers in gilt

edged market are mainly institutions who have the statutory requirements to invest their funds in the government securities like LIC, GIC Provident funds . These institutions mobilize savings and invest in these securities. These are called captive market. Discriminatory auctions : The process of auctioning a single unit to the highest bidder and also the multiple units to the highest bidder till the stock exhaust.

The gilt -Edged ( Best quality ) securities The private investors are also entering in this market to attract to the middle income group investors generally averse of taking risk. The investor base of government securities has expanded rapidly since 1991. Primary issuance Rs 12000/ - cr ---- 1991-92 Rs 99,630/ cr -------1999-2000 Gross market borrowing of central and state government in 2006-07 Rs 2,00198 cr

Corporate Security Market

Corporate security market : Primary market and secondary market. Capital can be raised from general public by prospectus, offer sale ( shares are taken in bulk by third and later sold to public ) private placement and by offering right issues ( shareholders have right to have certain number of shares in proportion to present holdings )

Growth of Capital Market

Rapid expansion of government security market, 12,000 crs in 1991-92 to 99630 cr in 1999-2000 and 2,00 198 cr in 2006-07 secondary market of gilt edge securities has also been increased to 5,01808 in 2007-08. In 1990-91 total private issue was 364 and the fund raised was just Rs 4321 cr which increased to 2006-07 31,600 cr

Growth of Capital Market : issues

Popularity of Shares : Prior to 1991 debentures were popular and constituted 70 percent of the fund raised through new issues. which has now been changed qualitatively as in 2007 the contribution of share capital in total fund raised was 87.6 percent. And among shares preference share accounts a nominal fraction of the total capital raised

Resource mobilization through primary market (Rs crs)

Growth of Capital Market : issues

Debt market: The debt market is dominated by government bonds The growth of Mutual funds have been significant resources mobilized in 1987-88 when public sector banks was allowed to have mutual funds was Rs 2310 crs which increased to 93,985 cr in 2006-07. The mutual funds are of four types Unit Trust of India, MF subsidiaries of Public sector banks, MF subsidiaries of investment institutions and private sector MF

Growth of capital market in India

Year No of stock exchange 1975- 85-86 76 8 14 25302 97-98 22 560235 2000-01 23 625553 2005-06 22 3022189 2006-07 21 35,45,041

Market value of 3273 Capital (Rs cr) Capital issues (Rs cr) 98

1745 3.4

34755 9.6

49028 10.0

78813 7.5

115818 8.8

Capital raised 0.7 as percentage of gross domestic saving

Market capitalization in some countries 2007