WHAT IS MONEY MARKET?

The Money Market is a market for overnight to short-term funds, and for short-term money and financial assets that are close substitutes of money.

MONEY MARKET IN NATIONAL

ECONOMY:

The money market is an integral part of the economy and it plays a vital role in the development of the economy. This is endorsed by the fact that in the less developed countries, money market too is undeveloped. Consequently, in the absence of well-developed money market in these countries great difficulty is experienced in pooling funds large enough to finance private enterprise..

MONEY MARKET INSTRUMENTS:

Call/Notice Money Treasury Bills Inter Bank term Money Certificate of Deposit (CD) Commercial Paper (C.P) Commercial Bills

Call/Notice Money

DEFINATION:

When money is borrowed/lent for a day, it is known as call money.

When money is borrowed/lent for more than a day and up to 14 days, it is known as notice money.

The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and

Primary Dealers are allowed to borrow and lend in this market.

Interest rates in this market are highly sensitive to the demand - supply factors.

Banks borrow in this market To meet the CRR & SLR mandatory requirements as stipulated by the Central bank

TREASURY BILLS:

Treasury Bills are an instrument for short term borrowing for the Government of India.

They are issued at a discount to face value.Any person in India including individuals,

firms, companies, corporate bodies, trusts and institutions can purchase the bills.

The bills are eligible securities for SLR purposes.

CERTIFICATE OF DEPOSITS (CDs):

Certificate of Deposit are negotiable term deposit certificates, issued by a commercial banks/Financial Institutions at discount to face value at market rates, with maturity ranging from 15 days to one year.

CDs can be issued by (i) commercial banks (excluding the Local area Banks ) and (ii) select all-India FIs permitted by the RBI.

CDs are the liabilities of commercial banks/financial institutions and they make sound investments.

The market for these instruments is not very deep, but quite often CDs are available in the secondary market.

COMMERCIAL PAPERS (CPS):

The CP is a short-term unsecured negotiable instrument consisting of usance primary notes with a fixed maturity.

CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue.

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).

Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) can issue the Commercial Papers.

Eligibility for issue of CP

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

b) The working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore

c) The borrowers account of the company is classified as a Standard Asset by the financing banks.

REPOS

A Repo or Reverse Repo is 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 price.. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price.

Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction.

RBI has prescribed that following factors have to be considered while performing repo:

purchase and sale price should be in alignment with the ongoing market rates.

No sale of securities should be affected unless the securities are actually held by the seller in his own investment portfolio.

Immediately on sale, the corresponding amount should be reduced from the investment account of the seller.

The securities under repo should be market to market on the balance sheet date.

Repos/Reverse Repos are used :

to meet shortfall in cash position, augment returns on funds held, to borrow securities to meet regulatory

requirement An SLR surplus bank and a CRR deficit bank can

use the Repo deals as a convenient way of adjusting CRR/SLR positions simultaneously.

RBI uses Repo and Reverse Repo deals as a convenient way of adjusting liquidity in the system.

trade on the yield curve. The securities eligible for trading are: GOI & State Govt. Securities Treasury Bills PSU bonds, FI bonds & Corporate bonds held in

Dematerialized form

COMMERCIAL BILLS

Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills.

Bill rediscounting is an important segment of the money market and the bill as an instrument, provides short-term liquidity to the banks in need of funds.

Primary Dealers & Satellite Dealers

Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securities market. Satellite Dealers work in tandem with the Primary Dealers forming the second tier of the market to cater to the retail requirements of the market.

These were formed during the year 1994-96 to strengthen the market infrastructure

What role do Primary Dealers play?

The role of Primary Dealers is to;

(i) commit participation as Principals in Government of India issues through bidding in auctions (ii) provide underwriting services (iii) offer firm buy - sell / bid ask quotes for T-Bills & dated securities (v) Development of Secondary Debt Market

Effect of Inflation Rate on CRR & CR

Inflation Rate controlling and Money Flow monitoring in the Indian Economy is the main objectives of RBI.

Now a days Inflation Rate is highly fluctuated from about last 1 fiscal year so, the RBI has changed the (increase) the CRR rate.

And all banks are forced to maintain the CRR rate as per RBI norms’ so, they are using the Call Money instruments so the Call Rate is fluctuating with respect to time.

INFLATION CONDITION IN INDIA

WPI INFLATION(%)

0123456789

DATE

RATE

CRR

CASH RESERVE RATIO

6.26.36.46.56.66.76.86.9

77.1

5/4

/20

07

5/1

8/2

00

7

6/1

/20

07

6/1

5/2

00

7

6/2

9/2

00

7

7/1

3/2

00

7

7/2

7/2

00

7

8/1

0/2

00

7

8/2

4/2

00

7

9/7

/20

07

9/2

1/2

00

7

10

/5/2

00

7

10

/19

/20

07

DATE

RATE

CALL MONEY RATE

CALL MONEY RATE

0

10

20

30

40

50

605/

4/20

07

5/18

/200

7

6/1/

2007

6/15

/200

7

6/29

/200

7

7/13

/200

7

7/27

/200

7

8/10

/200

7

8/24

/200

7

9/7/

2007

9/21

/200

7

10/5

/200

7

10/1

9/20

07

DATE

RATE

FOREIGN INSTITUTIONAL INVESTMENT

FII means an entity established or incorporated outside India which proposes to make investment in India.

The FIIs have been a major driver in Indian equities' upward journey in the recent past and resumption of positive momentum is unlikely before FIIs start purchasing again. One who propose to invest their proprietary funds or on behalf of foreign corporate and individuals and belong to any of the under given categories can be registered for FII.

o Pension Funds o Mutual Funds o Investment Trust o Insurance or reinsurance companies o Endowment Funds o University Funds o Foundations or Charitable Trusts or Charitable Societies

who propose to invest on their own behalf, and o Asset Management Companies o Nominee Companies o Institutional Portfolio Managers o Trustees o Power of Attorney Holders o Bank

THE PARAMETERS ON WHICH SEBI DESIDES ALIGIBILITY OF A FII APPLICANT:

Applicant’s track record, professional competence, financial soundness, experience, general reputation of fairness and integrity. (The applicant should have been in operation for at least one year)

whether the applicant is registered with and regulated by an appropriate Foreign Regulatory Authority in the same capacity in which the application is filed with SEBI

Whether the applicant is a fit & proper person.

CURRENT SCENARIO OF FII:

in 2007, the FIIs have made a net purchase worth over Rs 70,000 crore (more than 17 billion dollars) -- the highest annual inflow so far.

India funds have seen a net outflow of 792 million dollar so far in 2007, against an inflow of 1,751 million dollar in the same period last year.

Reporting Date

Debt/Equity

Gross Purchases(Rs Crores)

Gross Sales(Rs Crores)

Net Investment (Rs Crores)

Net Investment US($) million at month exchange rate

03-DEC-2007

Equity 7639.40 6159.00 1480.40 367.00

Debt 39.30 0.00 39.30 9.70

04-DEC-2007

Equity 5566.00 5451.60 114.40 28.40

Debt 9.40 539.90 (530.50) (131.50)

05-DEC-2007

Equity 3974.10 3954.60 19.50 4.80

Debt 369.50 107.60 262.00 64.90

06-DEC-2007

Equity 5515.50 4434.20 1081.30 268.10

Debt 533.70 45.10 488.60 121.10

07-DEC-2007

Equity 4943.20 4120.80 822.40 203.90

Debt 1187.60 59.60 1127.90 279.60

10-DEC-2007

Equity 4752.30 4747.10 5.20 1.30

Debt 987.50 497.50 490.00 121.50

11-DEC-2007

Equity 3128.60 2827.90 300.60 74.50

Debt 122.80 130.10 (7.20)