Money Market

Dr. Divya

Asst. Prof., USMS, GGSIPU

Money Market
Money market means market where money or its equivalent can be traded. It is a wholesale market of short term debt instrument and is synonym of liquidity. Money Market is part of financial market where instruments with high liquidity and very short term maturities i.e. one or less than one year are traded. RBI defines money market as the centre for dealings, mainly short term character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. Hence, money market is a market where short term obligations such as treasury bills, call/notice money, certificate of deposits, commercial papers and repos are bought and sold.

Purpose of Money market

Key role in the transmission of monetary policy impulses

Banks borrow in the money market to:

Fill the gaps or temporary mismatch of funds To meet the CRR and SLR mandatory requirements as stipulated by the central bank To meet sudden demand for funds arising out of large outflows (like advance tax payments)

Call money market serves the role of equilibrating the short-term liquidity position of the banks

Components of Money Market

Money market

Call Money Market

Treasury bills

Commercial papers

Certificate of Deposits

Money Market instruments

Commercial bills Treasury Bills (TBs) Call and short Notice Money market Certificate of deposits (CDs) Commercial Paper (CP) Repurchase Agreement (REPO)

Characteristics of a Developed Money Market

A developed commercial banking system Presence of a central bank Sub-markets Near Money-assets Availability of ample resources Integrated interest rate structure

Significance/Functions of Money Market

Economic development Profitable Investment Borrowings by the government Importance for central bank Mobilisation of funds Self-sufficiency of commercial banks Savings and investment

Developments in Money Market

Prior to mid-1980s participants depended heavily on the call money market The volatile nature of the call money market led to the activation of the Treasury Bills market to reduce dependence on call money Development of the Liquidity Adjustment Facility. Development of collateralised instruments CBLO and Market Repo Modification in issuance norms and maturity profile of CD and CP Setting up of central counter party Clearing Corporation of India Ltd. (CCIL)

The Players
Reserve Bank of India SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI in 2004) Acceptance Houses - An acceptance house guarantees the payment of bills
used to finance trade deals and goods in shipment. Its profit is the difference between the discounted amount it guarantees to pay and the full amount of the bill that it undertakes to collect from the original creditor.

Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.

Primary Dealers
The system of Primary Dealers (PDs) in the Government Securities Market was introduced by Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities DFHI was set up by RBI in March 1988 to activate the Money Market. It got the status of Primary Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary of State Bank of India (SBI). SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited. Both these companies were merged in 2004 to become the largest Primary Dealer in the country Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI PDs are allowed the following activities as core activities: 1. Dealing and underwriting in Government securities. 2. Dealing in Interest Rate Derivatives. 3. Providing broking services in Government securities. 4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures. 5. Lending in Call/ Notice/ Term/ Repo/ CBLO market. 6. Investment in Commercial Papers. 7. Investment in Certificates of Deposit. 8. Investment in debt mutual funds where entire corpus is invested in debt securities.

Call money market

Day-to day surplus funds mainly of banks are traded Short term in nature Maturity of these loans vary from 1 to 15 days Lent for 1 day: Call money Lent for more than 1 day but less than 15 days: Notice money Money lent for more than 15 days is term money Highly liquid loan repayable on demand The borrowing is exclusively limited to banks, who are temporarily short of funds. The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds The call market helps banks economise their cash and yet improve their liquidity

Call Money Market Participants

Those who can both borrow and lend in the market RBI (through LAF), banks and primary dealers Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lenders side These were phased out and call money market is now a pure inter-bank market (since August 2005)

Call Money Market

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.

Bill Market
It is a market in which short term papers or bills are bought and sold. The important types of short term papers are: Bills of exchange: It is a written unconditional order which is signed by the drawer requiring the drawee to pay on demand or at a fixed future time, a definite sum of money. Treasury bills: are the promissory notes of the government to pay a specified sum after a specified period.

Bill Market
Treasury Bill market- Also called the T-Bill market
These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of India It is an instrument of the government, a promise to pay the stated amount after expiry of the stated period from the date of issue They are issued at discount to the face value and at the end of maturity the face value is paid. 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.

The rate of discount and the corresponding issue price are determined at each auction RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364day T-Bills on a fortnightly basis on behalf of the central government
Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000.
Who can invest in T-Bill Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs can invest in TBills.

Promissory notes
Referred as note payable in accounting It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). The obligation may arise from the repayment of a loan or from another form of debt.

For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Certificates of Deposit
CDs are short-term borrowings in the form of promissory note issued by all scheduled banks and are freely transferable by endorsement and delivery. Introduced in 1989 Maturity of not less than 15 days and maximum up to a year. FIs are allowed to issue CDs for a period between 1 year and up to 3 years Subject to payment of stamp duty under the Indian Stamp Act, 1899 Issued to individuals, corporations, trusts, funds and associations They are issued at a discount rate freely determined by the market/investors 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

Features of CD
(i) CDs can be issued by all scheduled commercial banks except RRBs (ii) selected all india financial institutions, permitted by RBI 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 CRR & SLR are to be maintained CDs are to be stamped CDs may be issued at discount on face value

Commercial Papers
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Short-term borrowings by corporates, financial institutions, primary dealers from the money market Can be issued in the physical form (Usance Promissory Note) or demat form Introduced in 1990 When issued in physical form are negotiable by endorsement and delivery and hence, highly flexible Issued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5 lacs after that Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing company Issued at discount to the face value

Eligibility for issue of CPs

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 sanctioned from the banking system is not less than Rs.4 crore and the borrower account of the company is classified as a Standard Asset by the financing bank/s. All eligible participants should obtain the credit rating for issuance of Commercial Paper The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

Market Repos
Repo (repurchase agreement) instruments enable collateralised short-term borrowing through the selling of debt instruments
It is 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

A security is sold with an agreement to repurchase it at a pre-determined date and rate Reverse repo is a mirror image of repo and reflects the acquisition of a security with a simultaneous commitment to resell

Collateralised Borrowing and Lending Obligation (CBLO)

Operationalised as money market instruments by the CCIL in 2003 Follows an anonymous, order-driven and online trading system On the lenders side main participants are mutual funds, insurance companies. Major borrowers are nationalised banks, PDs and non-financial companies

Collateralized Borrowing and Lending Obligation (CBLO)

It is a money market instrument as approved by RBI, is a product developed by CCIL. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety Days (can be made available 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. - Internet gateway for other entities who do not maintain Current account with RBI. What is CBLO? CBLO is explained as under: An obligation by the borrower to return the money borrowed, at a specified future date; An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received; An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent.

Collateral Loan Market

The market for loans secured by stocks and market is geographically most diversified and most loosely organized. The loans are generally advanced by the commercial banks to private parties in the market. The collateral loans are backed by the securities, stocks and bonds.

Acceptance Market
Very old form of commercial credit. Refers to market for bankers acceptances involved in trade transactions. Deals with bankers acceptances which may be defined as a draft drawn by a business firm upon a bank and accepted by it. A draft drawn by an individual or firm upon a bank and accepted by the bank whereby it is ordered to pay to the order of a designated party or to bearer a certain sum of money at a specified time in future.

MMMFs
Invest primarily in money market instruments of very high quality. RBI and public financial institution can set it either directly or through its existing subsidiaries.

MMMF
Open Ended Close Ended

Thank you