Submitted ByAiswarya V V4th sem McomDCMS

Seminar presentation on Money market

CONTENTS

What is Money Market?

Features of Money Markets.

Constituents of Money Markets.

Role of RBI

What is Money Market?

FINANCIAL MARKETS

MONEY MARKET

CAPITAL MARKET

Money Market

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

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

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

Continued…..

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

It includes all individual, institution and intermediaries.

Features of Money Market It is a market purely for short term funds/financial

assets. It deals with financial assets having a maturity period

up to 1 year only. Transactions have to be conducted without the help of

brokers. It is not a single homogeneous market, it comprises of

several submarket like call money market, acceptance & bill market.

It deals only high liquid financial assets. In Money Market transaction can not take place

formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

Composition of Money Market

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

Call Money Market Commercial bills market or discount market Acceptance market Treasury bill market

1. Call Money Market Call money market refers to the market for extremely short

period loans, say one day to 14 days. The loans are repayable on demand.

Advantages:•High liquidity•High profitability•Maintenance of SLR•Safe & cheap•Assistance to Central bank operations

Disadvantages:•Uneven development•Lack of integration•Volatility in Call Money rates

2.Commercial Bill Market/ Discount Market

A commercial bill is one which arises out of a credit

transactions.

A bill of exchange is a ‘self liquidating ’ paper &

negotiable.

It is drawn always for short period ranging between 3

months and 6 months.

Sec 5 of the Negotiable instruments Act defines a bill

of exchange as follows:

“An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.”

Discount Market: Discount markets refers to the market where short term genuine trade bills are discounted by financial intermediaries like commercial banks.

3.Acceptance MarketAcceptance market refers to the market where short

term genuine trade bills are accepted by financial intermediaries.

Advantages:•Liquidity•Self liquidating and negotiable assets•Ideal investment•Simple legal remedy•High and quick yield•Easy Central bank control

Disadvantages•Absence of bill culture•Absence of rediscounting among bank•Stamp duty•Absence of secondary market•Difficulty in ascertaining genuine trade bills.•Limited foreign trade•Absence of acceptance services.

Treasury Bill Market

Treasury bills represent short term borrowings of

the Government.

It refers to the market where treasury bills are

bought & sold.

It is a promissory note issued by the Gov’t under

discount for a specified period stated therein.

The period does not exceed a period of 1 year.

It is issued by RBI on behalf of the Gov’t.

Advantages:

Safety

Liquidity

Ideal short term investment

Ideal fund management

Statutory liquidity requirement

Source of short term funds

Non inflationary monetary tool

Hedging facility

Disadvantages:

Poor yield

Absence of competitive bids

Absence of active trading

Role of RBI

References

Gordon & Natarajan “Financial Markets and Services”, Himalaya Publishing House, Pg no:29-48.