Money market

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  • 1. The Fundamentals of MoneyMarket in India

2. Overview of Financial Markets 3. 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 4. The Definition Money Market is "the centre for dealings,mainly short-term character, in moneyassets. It meets the short-term requirements ofborrower and provides liquidity or cash tothe lenders. It is the place where short-term surplusinvestible funds at the disposal of financialand other institutions and individuals are bidby borrowers, again comprising Institutions,individuals and also the Government itself" 5. The Definition (Contd) Money market refers to the market for shortterm assets that are close substitutes ofmoney, usually with maturities of less than ayear. A well functioning money market provides arelatively safe and steady income-yieldingavenue. Allows the investor institutions to optimizethe yield on temporary surplus funds. Instrument of Liquidity adjustment byCentral Bank. 6. The Players Reserve Bank of India SBI DFHI Ltd (Amalgamation of Discount & FinanceHouse in India and SBI Gilts in 2004) Commercial Banks, Co-operative Banks and PrimaryDealers are allowed to borrow and lend. Specified All-India Financial Institutions, MutualFunds, and certain specified entities are allowed toaccess to Call/Notice money market only as lenders Individuals, firms, companies, corporate bodies,trusts and institutions can purchase the treasurybills, CPs and CDs. 7. The Products & Process Certificate of Deposit (CD) Commercial Paper (C.P) Inter Bank Participation Certificates Inter Bank term Money Treasury Bills Call Money 8. Certificate of Deposit CDs are short-term borrowings in the formof Usance Promissory Notes having amaturity of not less than 15 days up to amaximum of one year. CD is subject to payment of Stamp Dutyunder Indian Stamp Act, 1899 (Central Act) They are like bank term deposits accounts.Unlike traditional time deposits these arefreely negotiable instruments and are oftenreferred to as Negotiable Certificate ofDeposits 9. Features of CD CDs can be issued by all scheduledcommercial banks except RRBs Minimum period 15 days Maximum period 1 year Minimum Amount Rs 1 lac and inmultiples of Rs. 1 lac CDs are transferable by endorsement 10. Commercial Paper Commercial Paper (CP) is anunsecured money market instrumentissued in the form of a promissorynote. Who can issue Commercial Paper(CP) Highly rated corporate borrowers,primary dealers (PDs) and satellitedealers (SDs) and all-India financialinstitutions (FIs) 11. Eligibility for issue of CPa) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;b) (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crorec) and the borrowal account of the company is classified as a Standard Asset by the financing bank/s. 12. Rating Requirement All eligible participants should obtain thecredit rating for issuance of CommercialPaper Credit Rating Information Services of IndiaLtd. (CRISIL) Investment Information and Credit RatingAgency 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 ofCRISIL or such equivalent rating by otheragencies 13. Maturity CP can be issued for maturitiesbetween a minimum of 15 days and amaximum upto one year from the dateof issue. If the maturity date is a holiday, thecompany would be liable to makepayment on the immediate precedingworking day. 14. To whom issuedCP 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). 15. Call Money MarketThe call money market is an integral part ofthe Indian Money Market, where the day-to-day surplus funds (mostly of banks) aretraded. The loans are of short-term durationvarying from 1 to 14 days. The money that is lent for one day in thismarket is known as "Call Money", and if itexceeds one day (but less than 15 days) it isreferred to as "Notice Money". 16. Call Money MarketBanks borrow in this market for thefollowing purpose To fill the gaps or temporarymismatches in funds To meet the CRR & SLR mandatoryrequirements as stipulated by theCentral bank To meet sudden demand for fundsarising out of large outflows. 17. 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. 18. Treasury BillsTreasury bills, commonly referred to as T- Bills are issued by Government of India againsttheir short term borrowing requirements withmaturities ranging between 14 to 364 days.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 its tenure at Rs. 100.00. 19. Who can invest in T-Bill Banks, PrimaryDealers, State Governments,Provident Funds, Financial Institutions,Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.