By

Jasdeep singh

Enu sambyal

Yogita

Sarita

MONEY MARKET

Money Market

Money market refers to that segment of the financial system that enables the raising of short term funds for meeting the temporary shortages of cash and obligations,& the temporary deployment of excess funds for earning returns.

In other words money market is a market for short-term financial assets which are near-substitutes for money. Short-term genearlly means a period of one year or less than one year.

CHARACTERISTICS OF MONEY MARKET

It is not a single market but a collection of markets for several instruments.

It is a need-based market wherein the demand & supply of money shape the market.

Money market is basically over-the-phone market. Dealing in money market may be conductive with or

without the help of brokers. It is a market for short-term financial assets that are close

substitutes for money. Financial assets which can be converted into money with

ease, speed, without loss & with minimum transaction cost are regarded as close substitutes for money.

PREREQUISITES FOR AN EFFICIENT MONEY MARKET Money market should be wide & deep. There should be

large number of participants. There should be well diversified mix of money market

instruments, suited to different requirement of borrowers and lenders.

A strong central bank for regulation, direction and facilitation is essential for a well organised and developed money market.

A well organised commercial banking system. There should be a number of inter-related and integrated

sub-markets. Money market should have adequate amount of liquidity. Money market should have large demand and supply of

funds.

FunctionsEconomic developmentProfitable investmentBorrowings to governmentImportance for central bankMobilisation of fundsSavings and investment

reforms In the 1980s : sukhamoy chakravorty committee, underlines the need to

develop the money market instruments.Later on, a working group was formed and the RESEREVE BANK

OF INDIA initiated a number of measures like:-1. The discount and finance house of India was set up as a

money market institution jointly by the reserve bank, PSUs, and financial institutions in April 1988

2. Money market instruments such as the 182-day treasury bill, certificate of deposit were introduced in 1988-89. commercial paper was introduced in January 1990.

3. A ceiling of 10 percent on call money rates imposed by the Indian banks association was withdrawn in 1989.

In the 1990s The securities trading corporation of India

was setup in June 1994 to provide an active secondary market in government dated securities and public sector bonds.

Barriers to entry were gradually eased by 1. Relaxing issuance restrictions and

subscriptions norms 2. Enabling market evaluation of associated

risks by withdrawing regulatory restrictions3. Increasing the number of participants.

Several financial innovations in instruments and methods were introduced. T-bills of various maturities and RBI repos were introduced.

Ad hoc and on-tap 91 –day t-bills were discontinued. Indirect monetary control instruments such as the bank rate-

reactivated in April 1997, strategy of private placement and open market operations in 1998-99 and the LAF in June 2000

The minimum lock in period for instruments was brought down to 15 days

With a view to adopting sound risk management procedures and eliminating counter-party risks, the clearing corporation of India was set up on February 15,2002.

Structure of Money market

Money Market

Components Institutions Instruments

Components Call Money Market ; Collateral Loan Market; Acceptance market; Bill Market;

InstitutionsCommercial banksCentral bankAcceptance houseNon banking financial intermediaries Bill brokers

MONEY MARKET INSTRUMENTSTreasury billsCall money marketCommercial papers Certificates of depositsCommercial bills

TREASURY BILLS

It is an important instrument of short-term borrowing by government. Treasury bills are the promissory notes or a kind of finance bill issued by the govt. under discount for a fixed period, not exceeding beyond one year, with a promise to pay the amount stated there in to the bearer of the instrument. It is used for bridging temporary gap between the receipts and expenditure.

TYPES OF TREASURY BILLS

TYPESONTAP: Through the help of this funds can

available at any time.It can be bought fro RBI at anytime.

AD HOC: These tbs issued in favor of RBI only and it serves two purposes which are :-

1]They replenish cash balances of the central govt. 2]They provide an investment outlet to state govt.,

semi-govt. departments and foreign central bank for parking their temporary surplus and income.

AUCTIONED: RBI receives bids in an auction and issued with certain cut off limits.It includes 91 days tbs, 182 days tbs and 364 days tbs.

QUALITIES OF TREASURY BILLSHigh liquidityZero default riskReady availabilityLow transaction costAssured yield

CALL/NOTICE MONEY MARKETCall money market is an important segment of

the money market. Borrowing & lendings in call money market are for short duration ranging from overnight to a fortnight. Call money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day is known as Call money market.

When money is borrowed or lent for more than a day and up to 14 days, it is known as Notice Money Market.

Call money is required mostly by banks.

BENEFITS OF CALL MONEY MARKET

Commercial banks, primary dealers and other financial institutions are allowed to borrow and lend in call market for adjusting their CR requirement.

Bank & other institutions can even out their day to day deficits & surpluses.

Specified FFIs, mutual funds &other specified entities are allowed to operate.

It is a inter-bank market.Participants are required to have current

account with RBI.

COMMERCIAL PAPERS A Commercial paper is an unsecured short term promissory note, negotiable and transferable with a fixed maturity period.

It is issued at a discount by creditworthy corporates, primary dealers and all India financial institutions.

Conti…..Commercial papers are debt instruments issued by

corporates for raising short term resources from money market. These are unsecured debt of corporates. They are issue in the form of promissory notes, redeemable at par to the holder at the maturity period. Only corporates who get an investment grade rating can issue CPs, as per RBI rules. A commercial paper is an unsecured short term promissory note issued at a discount by creditworthy corporates, primary dealers and all India financial institutions

CERTIFICATE OF DEPOSITCertificates of deposit are unsecured, negotiable,

short term instruments in bearer form, issued by commercial banks & development financial institutions. CDs were introduced in June 1989. Only scheduled banks excluding RRBs &local area banks were allowed to issue them initially.

COMMERCIAL BILLSA commercial bill is a short term & self

liquidity instrument with low risk .These are also called as trade bills.

According to Indian Negotiable Instruments Act,1881,bill of exchange is a written instrument containing an unconditional order, signed by the maker, directing to pay a certain amount of money only to a particular person or to the bearer of the instrument.

Conti……In other words these are negotiable

instruments drawn by seller on the buyer demand which are in turn, accepted & discounted by commercial banks. These are varies fro 30 days, 60days, 90days depending on the credit extended in the industry.

MONEY MARKET INTERMEDIARIES

1. Reserve Bank of India2. DFHI3.MMMFsCommercial banks

Reserve Bank of IndiaRBI is the most important constituent of

the money market.The aims of the Reserve Bank is to ensure liquidity,to ensure an adequate flow of credit to the productive sectors of the economy.

Discount and Finance House of IndiaThe Discount and Finance House of India The DFHI was set in April 1988 by the

Reserve Bank with the objective of deepening & activating the money market. It commenced its operations from July 28,1988.

It is a Joint Stock Company in form & is jointly owned by the Reserve bank, public sector banks and all India financial institutions which have contributed to its paid up capital of Rs.200crore in the proportion of 5:3:2.

The role of DFHI is to function as a specialised money market intermediary for stimulating activity in money market instruments.

DFHI mobilises fund/resources from commercial/co-operative banks, financial institutions & corporate entities having resources which are pooled & lent in the money market.

DFHI is also authorized institution to undertake repo transactions in a treasury bills & all dated government securities to impart greater liquidity to these instruments.

The major part of the turnover was in the call money followed by the government dated securities & treasury bills. Its business in CDs & CPs was negligible & business in commercial bills declined sharply in the 1990s.

The DFHI has been concentrating on the call money market rather than activating other money market instruments like CPs, CDs,CBs.These instruments need to be developed further for activating & deepening the money market.

MONEY MARKET MUTAL FUNDS

Money Market Mutual Funds were introduced in April,1991 to provide an additional short term avenue for investment & bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments.

MMMFs bridge the gap between small individual investors the money market. MMMFs mobilizes the savings from small investors & invests them in short term debt instruments or money market instruments.

Tools for managing liquidity in money market

Reserve requirementsInterest rates - Prime lending rate - Bank rate Refinance from the reserve bank Liquidity adjustment facility Repos

Can individual investors invest in Money markets?

One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations and so individual investors have limited access to them. The easiest way for individual investors to gain access to the money market is with a money market mutual fund, or sometimes a money market bank account. These accounts and funds pool together the assets of thousands of investors and buy the money market securities on their behalf. Although, some money market instruments like treasury bills may be purchased directly or through other large financial institutions with direct access to these markets.

Current scenario