MONEY MONEY MARKETMARKET

CONTENTSCONTENTS

What is Money Market?What is Money Market? Features of Money Market?Features of Money Market? Objective of Money Market?Objective of Money Market? Importance of Money Market?Importance of Money Market? Composition of Money Market?Composition of Money Market? Instrument of Money Market?Instrument of Money Market? Structure of Indian Money Market? Structure of Indian Money Market? Disadvantage of Money Market?Disadvantage of Money Market?

Continued…….Continued…….

Characteristic features of a Characteristic features of a developed money Market?developed money Market?

Recent development in Money Recent development in Money Market?Market?

SummarySummary

1! What is Money Market?1! What is Money Market?

As per RBI definitions “ A market for short As per RBI definitions “ A market for short terms financial assets that are close terms financial assets that are close substitute for money, facilitates the substitute for money, facilitates the exchange of money in primary and exchange of money in primary and secondary market”.secondary market”.

The money market is a mechanism that The money market is a mechanism that deals with the lending and borrowing of deals with the lending and borrowing of short term funds (less than one year). short term funds (less than one year).

A segment of the financial market in which A segment of the financial market in which financial instruments with high liquidity and financial instruments with high liquidity and very short maturities are traded.very short maturities are traded.

Continued…….Continued…….

It doesn’t actually deal in cash or It doesn’t actually deal in cash or money but deals with substitute of money but deals with substitute of cash like trade bills, promissory cash like trade bills, promissory notes & govt papers which can notes & govt papers which can converted into cash without any loss converted into cash without any loss at low transaction cost.at low transaction cost.

It includes all individual, institution It includes all individual, institution and intermediaries.and intermediaries.

2 ! Features of Money Market?2 ! Features of Money Market?

It is a market purely for short-terms funds It is a market purely for short-terms funds or financial assets called near money.or financial assets called near money.

It deals with financial assets having a It deals with financial assets having a maturity period less than one year only.maturity period less than one year only.

In Money Market transaction can not take In Money Market transaction can not take place formal like stock exchange, only place formal like stock exchange, only through oral communication, relevant through oral communication, relevant document and written communication document and written communication transaction can be done. transaction can be done.

Continued……..Continued……..

Transaction have to be conducted without Transaction have to be conducted without the help of brokers.the help of brokers.

It is not a single homogeneous market, it It is not a single homogeneous market, it comprises of several submarket like call comprises of several submarket like call money market, acceptance & bill market.money market, acceptance & bill market.

The component of Money Market are the The component of Money Market are the commercial banks, acceptance houses & commercial banks, acceptance houses & NBFC (Non-banking financial companies). NBFC (Non-banking financial companies).

3 ! Objective of Money Market?3 ! Objective of Money Market?

To provide a parking place to employ short To provide a parking place to employ short term surplus funds. term surplus funds.

To provide room for overcoming short term To provide room for overcoming short term deficits.deficits.

To enable the central bank to influence and To enable the central bank to influence and regulate liquidity in the economy through regulate liquidity in the economy through its intervention in this market.its intervention in this market.

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

4 ! Importance of Money Market?4 ! Importance of Money Market?

o Development of trade & industry.Development of trade & industry.o Development of capital market.Development of capital market.o Smooth functioning of commercial Smooth functioning of commercial

banks.banks.o Effective central bank control.Effective central bank control.o Formulation of suitable monetary Formulation of suitable monetary

policy.policy.o Non inflationary source of finance to Non inflationary source of finance to

government.government.

5 ! Composition of Money Market?5 ! Composition of Money Market?

Money Market consists of a number of Money Market consists of a number of sub-markets which collectively sub-markets which collectively constitute the money market. They constitute the money market. They are,are,

Call Money MarketCall Money Market Commercial bills market or discount Commercial bills market or discount

marketmarket Acceptance market Acceptance market Treasury bill marketTreasury bill market

6 ! Instrument of Money Market?6 ! Instrument of Money Market?

A variety of instrument are available in a A variety of instrument are available in a developed money market. In India till 1986, developed money market. In India till 1986, only a few instrument were available.only a few instrument were available.

They wereThey were• Treasury bills Treasury bills • Money at call and short notice in the call Money at call and short notice in the call

loan market.loan market.• Commercial bills, promissory notes in the Commercial bills, promissory notes in the

bill market.bill market.

New instrumentNew instrument

Now, in addition to the above the following Now, in addition to the above the following new instrument are available:new instrument are available:

Commercial papers.Commercial papers. Certificate of deposit.Certificate of deposit. Inter-bank participation certificates.Inter-bank participation certificates. Repo instrumentRepo instrument Banker's AcceptanceBanker's Acceptance Repurchase agreementRepurchase agreement Money Market mutual fundMoney Market mutual fund

Treasury Bills (T-Bills)Treasury Bills (T-Bills)

(T-bills) are the most marketable money (T-bills) are the most marketable money market security. market security.

They are issued with three-month, six-They are issued with three-month, six-month and one-year maturities. month and one-year maturities.

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

T-Bills are so popular among money T-Bills are so popular among money market instruments because of market instruments because of affordability to the individual investors. affordability to the individual investors.

Certificate of deposit (CD)Certificate of deposit (CD)

A CD is a time deposit with a bank.A CD is a time deposit with a bank. Like most time deposit, funds can not Like most time deposit, funds can not

withdrawn before maturity without withdrawn before maturity without paying a penalty.paying a penalty.

CD’s have specific maturity date, CD’s have specific maturity date, interest rate and it can be issued in any interest rate and it can be issued in any denomination.denomination.

The main advantage of CD is their The main advantage of CD is their safety.safety.

Anyone can earn more than a saving Anyone can earn more than a saving account interest.account interest.

Commercial paper (CP)Commercial paper (CP)

CP is a short term unsecured loan issued CP is a short term unsecured loan issued by a corporation typically financing day to by a corporation typically financing day to day operation.day operation.

CP is very safe investment because the CP is very safe investment because the financial situation of a company can easily financial situation of a company can easily be predicted over a few months.be predicted over a few months.

Only company with high credit rating Only company with high credit rating issues CP’s.issues CP’s.

Repurchase agreement (Repos)Repurchase agreement (Repos)

Repo is a form of overnight borrowing and Repo is a form of overnight borrowing and is used by those who deal in government is used by those who deal in government securities.securities.

They are usually very short term They are usually very short term repurchases agreement, from overnight to repurchases agreement, from overnight to 30 days of more.30 days of more.

The short term maturity and government The short term maturity and government backing usually mean that Repos provide backing usually mean that Repos provide lenders with extreamly low risk.lenders with extreamly low risk.

Repos are safe collateral for loans.Repos are safe collateral for loans.

Banker's AcceptanceBanker's Acceptance

A banker’s acceptance (BA) is a short-term A banker’s acceptance (BA) is a short-term credit investment created by a non-financial credit investment created by a non-financial firm.firm.

BA’s are guaranteed by a bank to make BA’s are guaranteed by a bank to make payment.payment.

Acceptances are traded at discounts from Acceptances are traded at discounts from face value in the secondary market.face value in the secondary market.

BA acts as a negotiable time draft for BA acts as a negotiable time draft for financing imports, exports or other financing imports, exports or other transactions in goods.transactions in goods.

This is especially useful when the credit This is especially useful when the credit worthiness of a foreign trade partner is worthiness of a foreign trade partner is unknown. unknown.

7 ! Structure of Indian Money 7 ! Structure of Indian Money Market? Market?

I :- ORGANISED STRUCTUREI :- ORGANISED STRUCTURE 1. Reserve bank of India.1. Reserve bank of India. 2. DFHI (discount and finance house of India).2. DFHI (discount and finance house of India).

3. Commercial banks3. Commercial banks i. Public sector banks i. Public sector banks SBI with 7 subsidiaries SBI with 7 subsidiaries Cooperative banks Cooperative banks 20 nationalised banks 20 nationalised banks ii. Private banks ii. Private banks Indian Banks Indian Banks Foreign banks Foreign banks4. Development bank4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc. IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

Continued…..Continued…..

II. UNORGANISED SECTORII. UNORGANISED SECTOR 1. Indigenous banks 1. Indigenous banks 2 Money lenders 2 Money lenders 3. Chits 3. Chits 4. Nidhis 4. Nidhis

III. CO-OPERATIVE SECTORIII. CO-OPERATIVE SECTOR 1. State cooperative 1. State cooperative i. central cooperative banks i. central cooperative banks Primary Agri credit societies Primary Agri credit societies Primary urban banks Primary urban banks 2. State Land development banks 2. State Land development banks central land development banks central land development banks Primary land development banks Primary land development banks

8 ! Disadvantage of Money Market8 ! Disadvantage of Money Market

Purchasing power of your money Purchasing power of your money goes down, in case of up in inflation.goes down, in case of up in inflation.

Absence of integration.Absence of integration. Absence of Bill market.Absence of Bill market. No contact with foreign Money No contact with foreign Money

markets.markets. Limited instruments.Limited instruments. Limited secondary market.Limited secondary market. Limited participants.Limited participants.

9 ! Characteristic features of a 9 ! Characteristic features of a developed money Market?developed money Market?

Highly organaised banking systemHighly organaised banking system Presence of central bankPresence of central bank Availability of proper credit Availability of proper credit

instrumentinstrument Existence of sub-marketExistence of sub-market Ample resourcesAmple resources Existence of secondary marketExistence of secondary market Demand and supply of fundDemand and supply of fund

10 ! Recent development in 10 ! Recent development in Money MarketMoney Market

Integration of unorganised sector with the Integration of unorganised sector with the organised sectororganised sector

Widening of call Money marketWidening of call Money market Introduction of innovative instrumentIntroduction of innovative instrument Offering of Market rates of interest Offering of Market rates of interest Promotion of bill culturePromotion of bill culture Entry of Money market mutual fundsEntry of Money market mutual funds Setting up of credit rating agenciesSetting up of credit rating agencies Adoption of suitable monetary policyAdoption of suitable monetary policy Establishment of DFHIEstablishment of DFHI Setting up of security trading corporation of Setting up of security trading corporation of

India ltd. (STCI)India ltd. (STCI)

11 ! 11 ! SummarySummary The money market specializes in debt The money market specializes in debt

securities that mature in less than one year. securities that mature in less than one year. Money market securities are very liquid, Money market securities are very liquid,

and are considered very safe. As a result, and are considered very safe. As a result, they offer a lower return than other they offer a lower return than other securities. securities.

The easiest way for individuals to gain The easiest way for individuals to gain access to the money market is through a access to the money market is through a money market mutual fund. money market mutual fund.

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

T-bills are considered to be one of the T-bills are considered to be one of the safest investments. safest investments.

Continued…….Continued……. A certificate of deposit (CD) is a time deposit A certificate of deposit (CD) is a time deposit

with a bank. with a bank. Annual percentage yield (APY) takes into Annual percentage yield (APY) takes into

account compound interest, annual percentage account compound interest, annual percentage rate (APR) does not. rate (APR) does not.

CDs are safe, but the returns aren't great, and CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD. your money is tied up for the length of the CD.

Commercial paper is an unsecured, short-term Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher loan issued by a corporation. Returns are higher than T-bills because of the higher default risk. than T-bills because of the higher default risk.

Banker’s acceptance (BA) are negotiable time Banker’s acceptance (BA) are negotiable time draft for financing transactions in goods. draft for financing transactions in goods.

Repurchase agreement (repos) are a form of Repurchase agreement (repos) are a form of overnight borrowing backed by government overnight borrowing backed by government securities. securities.

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