A Brief on Money Market

8/8/2019 A Brief on Money Market

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A Brief On Money Market

Money Market refers to the market for short-term funds, i.e., up to one-year maturity.

Money Market is the place where lending and

borrowing is done through instruments having anoriginal maturity of up to one year.

It provides a mechanism to balance the demandfor and supply of short-term funds.

Is the opportunity for players to invest theirshort-term surplus funds and to borrow short-term funds in case of deficit.



1. Treasury Bills

T-bills are short-term securities that mature inone year or less from their issue date.

Issued by RBI on behalf of the govt.

T-bills are purchased for a price that is less thantheir par (face) value; when they mature, thegovernment pays the holder the full par value.

Interest is the difference between the purchaseprice of the security and what you get at maturity

TDS not applicable



Features

Negotiable securities

Highly liquid

No default risk

Used for SLR purpose Purchases and sales are effected through SGL ac.

91-day, 182-day and 364-day bill

Minimum- 25000

Are the most marketable money market security.Their popularity is mainly due to their simplicity.

Transparency



Participants

RBI, &

All entities registered in India like banks,financial institutions, Primary Dealers, firms,companies, corporate bodies, partnershipfirms, institutions, mutual funds, ForeignInstitutional Investors, State Governments,

ProvidentF

unds, trusts, researchorganizations, and even individuals are eligibleto bid and purchase Treasury bills.



Types On tap bills: could be bought at any time; definite interest

yield of 4.66%; Not in use.

Ad hoc bills: introduced in 1955; decided between RBI andgovt. of India; just an accounting measure in Reserve Banksbook

Auctioned bills: introduced in 1992; RBI receives bids inauction; cut off limits are determined

SALE OF T-BILLS

Competitive auction

Non-competitive auction

Multiple price auction

Uniform price auction



2.Call/Notice Money Market

It is the market for borrowing and lending for

short-term periods (usually up to 14 days)

The deals are mostly done by commercial banks.

Commercial banks often face temporary

shortages of funds (e.g., to meet CRR and SLR

requirements, or sudden outgo of funds) or

temporary surpluses. When a bank is in shortage of funds, it borrows

from another bank which is in surplus.



types

Call Money

If borrowing (or lending) is made for one day(overnight), it is known as Call Money. This segment isalso called overnight money market.

N otice Money If the maturity of borrowing (or lending) is more than 1

day but up to 14 days, then it is known as Notice Money.

T erm Money

Term Money refers to money borrowed (or lent) formore than 14 days but less than one year. In Indian moneymarket, most of the transactions are of call money andnotice money.



Players in Call Market

Commercial banks and primary dealers canboth borrow and lend

RBI, as regulator, routinely participates in themarket to inject liquidity (lend) or to mop upliquidity (borrow).

LIC, UTI, GIC, IDBI, NABARD, ICICI ,Mutual

Fund managers, etc can lend money in thismarket (but theyre not allowed to borrowfrom this market)



3.Collateralized Borrowing & Lending

Obligation (CBLO)

Introduced by Clearing Corporation of India Ltd (CCIL)in 2003

CBLO is a money market instrument of borrowingagainst securities held in custody by the CCIL.

The tenure is generally one day, but can go upto 364days.

For CBLO, borrower should deposit Treasury bill orGovt. Securities with CCIL.



Participants: Banks, Financial Institutions,

Mutual Funds, Primary Dealers, Cooperative

Banks, Corporate and who are the member of

NDS (Negotiated Dealing System).

Borrowing Limit and Margin amount.

Settlement



4.Certificate of deposit

A certificate of deposit (CD) is a time deposit with a bank. CDs aregenerally issued by commercial banks but they can be boughtthrough brokerages. They bear a specific maturity date (from threemonths to five years), a specified interest rate, and can be issued inany denomination, much like bonds. Like all time deposits, the

funds may not be withdrawn on demand like those in a checkingaccount.

The returns are higher than T-bills as the risk is higher. Returns arebased on an annual percentage yield (APY) or annual percentagerate (APR). In APY, interest is gained by compounded interestcalculation, whereas in APR simple interest calculation is done to

calculate the return. The amount of interest you earn depends on anumber of other factors such as the current interest rateenvironment, how much money you invest, the length of timeand the particular bank you choose.



Certificate of deposit in India

This scheme was introduced in July 1989, to enable the bankingsystem to mobilise bulk deposits from the market, which they canhave at competitive rates of interest.

The major features are:

Who can issue Scheduled commercial banks (except RRBs) and AllIndia Financial Institutions within their `Umbrella limit.

CRR/SLR applicable on the issue price in case of banksInvestors Individuals (other than minors), corporations,companies, trusts, funds, associations etc

Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years).

Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac



Interest rate Market related.

Fixed or floating Loan Against collateral of CD not permitted

Pre-mature cancellation Not allowed

Transfer Endorsement & delivery any time

Nature Usance Promissory note. Can be issued in Dematerialisationform only wef June 30, 2002

Other conditions If payment day is holiday, to be paid on next preceding businessday

Issued at a discount to face value Duplicate can be issued after giving a public notice & obtainingindemnity



5. Commercial Paper

Commercial Paper (CP) is a short-term

unsecured promissory note issued by well

established corporates with the requisite

credit ratings.

CP has been in existence in the US for more

than 100 years

In India, CP made its appearance from January

1990



Eligibility for issue of CP

The tangible net worth-not less than Rs.4 crores; The working capital (fund-based) limit-not less than Rs.4 crores;

Borrower: joint stock companies whose share listed on arecognized stock exchange.

Lenders: other joint stock companies, public sector companies orcorporations, banks, Insurance Companies and Term-Lending etc.

Denomination of CPs: The minimum denomination for a singleinvestor is Rs. 25 lakhs. Thereafter, it should be in multiples of Rs 5 lakhs

Tenure: CPs are issued for periods ranging between 15 days to 365

days. Commercial paper is sold at a discount from its face value



6. Commercial Bills

Arising out of trade

Most of them are documentary bills

Acceptance function has not become popular

Only discounting

Secondary market is not developed

Mainly SBI-DFHI



7. Repurchase agreement (Repos)

A participant acquires immediate funds by selling securities andsimultaneously agrees to the repurchase of the same or similarsecurities after a specified time at a specified price.

It is the annual interest rate for the funds transferred by the lenderto the borrower.

Present repo rate is 4.75% as on 29.01.2010

It is lower than that offered on unsecured inter-bank rate.

No limit on tenure of repo(usually 1-14 days), though at present itsonly overnight.

Factors affecting repo rate:

Creditworthiness of the borrower, Liquidity of the collateral,

Other money market rates.



Reverse repo

Exactly opposite of repo

A party buys a security from another party with acommitment to sell it back to the latter at a specified

time and price. Undertaken to earn additional income on idle cash.

Present reverse repo rate is 3.25% as on 29.01.2010

TYPES OF REPO Inter Bank Repo

RBI Repo



Inter Bank Repo

Repo transaction among banks and with DFHI & STCI.

Misused and banned in1992. Started again inJune1995.

All government securities and treasury bills eligible forrepo.

Banks & primary dealers allowed to deal only inMumbai, provided they are routed through SGLaccounts.

Permitted to develop a secondary market in publicsector bonds & private debt securities & transactionsdone through stock exchanges only.

Non-bank entities holding SGL a/c can lend money.



RBI Repo

In order to inject liquidity into the system, RBI conducts fixed rateauctions of repo.

Absorption of short-term liquidity, RBI carries out overnight (oneday) repo auction at a fixed rate.

The reverse repo rate is linked to the repo rate.

Currently, fixed-rate repo and reverse repo auctions are conductedby the RBI on a daily basis (excluding Saturdays, Sundays and otherpublic holidays) for 1 day (overnight) tenure.

This rate is fixed in the sense that it does not change on a daily basisdepending upon the supply-demand condition of short-term

liquidity Changes in the fixed repo rate are usually made in the Annual

Monetary and Credit Policy or in the Mid-Term Review of theMonetary and Credit Policy.



The players in Repo / Reverse Repo

RBI, Scheduled banks & Primary dealers can borrow andlend

Non-Bank participants (Financial institutions) & companieslisted in stock market can only lend , they cannot borrow.

IMPORTANCE:

Safer than non-collateralized market as repos are backed bysecurities and are fully collateralized.

Used by central bank as an indirect instrument of monetarycontrol for absorbing or injecting short term liquidity.

Used in maintaining equilibrium between demand & supplyof short-term funds.

A Brief on Money Market

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