MONEY MARKETS

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MONEY MARKETS
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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 doesnt 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.

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The Definition

• Money Market is "the centre for dealings, mainly
  short-term character, in money assets.
• It meets the short-term requirements of borrower
  and provides liquidity or cash to the lenders.
• It is the place where short-term surplus
  investible funds at the disposal of financial and
  other institutions and individuals are bid by
  borrowers, again comprising Institutions,
  individuals and also the Government itself"
• Money market refers to the market for short term
  assets that are close substitutes of money,
  usually with maturities of less than a year.
• A well functioning money market provides a
  relatively safe and steady income-yielding
  avenue.
• Allows the investor institutions to optimize the
  yield on temporary surplus funds.
• Instrument of Liquidity adjustment by Central
  Bank.

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FORM OF FINANCIAL MARKETS
TIME PERIOD
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OVERVIEW OF FINANCIAL MARKETS
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Features of Money Market

• 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).
• 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.

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Objective of Money Market

• To provide a reasonable access to users of
  short-term funds to meet their requirement
  quickly, adequately at reasonable cost.
• To provide a parking place to employ short term
  surplus funds.

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importance of Money Market

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

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the Players

• Reserve Bank of India
• SBI DFHI Ltd (Amalgamation of Discount Finance
  House in India and SBI Gilts in 2004)
• 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.

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Composition of Money Market

• 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

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The Products Process

• Certificate of Deposit (CD)
• Commercial Paper (CP)
• Inter Bank Participation Certificates
• Inter Bank term Money (Repo rates)
• Treasury Bills
• Call Money

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Instrument of Money 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.

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NEW INSTRUMENTS

• 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
• Money Market mutual fund

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Certificate of Deposit

• CDs are short-term borrowings in the form of
  Usance 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
• A CD is a time deposit with a bank.
• Like most time deposit, funds can not withdrawn
  before maturity without paying a penalty.
• CDs have specific maturity date, interest rate
  and it can be issued in any denomination.
• The main advantage of CD is their safety.
• Anyone can earn more than a saving account
  interest.

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Features of CD

• CDs can be issued by all scheduled commercial
  banks except RRBs
• 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

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Commercial Paper

• 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
  CPs.
• Who can issue Commercial Paper (CP) Highly
  rated corporate borrowers, primary dealers (PDs)
  and satellite dealers (SDs) and all-India
  financial institutions (FIs)

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Eligibility for issue of CP

1. The tangible net worth of the company, as per the
   latest audited balance sheet, is not less than
   Rs. 4 crore
2. 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.

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Rating Requirement

• All eligible participants should obtain the
  credit rating for issuance of Commercial Paper
• Credit Rating Information Services of India Ltd.
  (CRISIL)
• Investment Information and Credit Rating Agency
  of India Ltd. (ICRA)
• Credit Analysis and Research Ltd. (CARE)
• Duff Phelps Credit Rating India Pvt. Ltd. (DCR
  India)
• The minimum credit rating shall be P-2 of CRISIL
  or such equivalent rating by other agencies

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Maturity

• 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).

To whom issued
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Repo Rates and Reverse Repo Rates

• 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.

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Meaning of Repo

• 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
• The Repo/Reverse Repo transaction can only be
  done at Mumbai between parties approved by RBI
  and in securities as approved by RBI (Treasury
  Bills, Central/State Govt securities).

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Repurchase agreement (Repos)

• Repo is a form of overnight borrowing and is used
  by those who deal in government securities.
• They are usually very short term repurchases
  agreement, from overnight to 30 days of more.
• The short term maturity and government backing
  usually mean that Repos provide lenders with
  extreamly low risk.
• Repos are safe collateral for loans.

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Call Money Market

• 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 varying from 1 to 14 days.
• 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".

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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.

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Banker's Acceptance

• A bankers acceptance (BA) is a short-term credit
  investment created by a non-financial firm.
• BAs are guaranteed by a bank to make payment.
• Acceptances are traded at discounts from face
  value in the secondary market.
• BA acts as a negotiable time draft for financing
  imports, exports or other transactions in goods.
• This is especially useful when the credit
  worthiness of a foreign trade partner is unknown

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Treasury Bills

• Treasury bills, commonly referred to as T-Bills
  are issued by Government of India against their
  short term borrowing requirements with maturities
  ranging between 14 to 364 days.
• (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.

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Who can invest in T-Bill

• Banks, Primary Dealers, State Governments,
  Provident Funds, Financial Institutions,
  Insurance Companies, NBFCs, FIIs (as per
  prescribed norms), NRIs OCBs can invest in
  T-Bills.
• All these are issued at a discount-to-face value.
  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.

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Gilt edged securities

• The term government securities encompass all
  Bonds T-bills issued by the Central Government,
  and state governments. These securities are
  normally referred to, as "gilt-edged" as
  repayments of principal as well as interest are
  totally secured by sovereign guarantee.

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Structure of Indian Money Market

• 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 nationalized banks
  ii. Private banks
  Indian Banks Foreign
  banks4. Development bank IDBI, IFCI,
  ICICI, NABARD, LIC, GIC, UTI etc.

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Structure of Indian Money Market

• 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

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! Disadvantage of Money Market

• Purchasing power of your money goes down, in case
  of up in inflation.
• Dichotomized and loosely integrated
• Irrational structure of interest rates
• Highly volatile market
• Seasonal stringency of loan able funds
• Lack of funds in the money market
• Inadequate banking facilities

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Characteristic features of a developed money
Market

• Highly organized banking system
• Presence of central bank
• Availability of proper credit instrument
• Existence of sub-market
• Ample resources
• Existence of secondary market
• Demand and supply of fund

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Recent development in Money Market

• 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)

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The Need

• Need for short term funds by Banks.
• Outlet for deploying funds on short term basis
• Need to keep the SLR as prescribed
• Need to keep the CRR as prescribed
• Optimize the yield on temporary surplus funds
• Regulate the liquidity and interest rates in the
  conduct of monetary policy to achieve the broad
  objective of price stability, efficient
  allocation of credit and a stable foreign
  exchange market

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