MONEY MARKETMONEY MARKET

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

Main players are: RBI, DFHI, Mutual Main players are: RBI, DFHI, Mutual Funds, Banks, Corporate Investors, Funds, Banks, Corporate Investors, Non-Banking finance companies, Non-Banking finance companies, State government, Primary Dealers, State government, Primary Dealers, Public Sector Undertakings, NRI’s Public Sector Undertakings, NRI’s and Overseas corporate bodies. and Overseas corporate bodies.

Functions of Money Functions of Money MarketMarket

A balancing mechanism to even out the A balancing mechanism to even out the demand for and supply of short-term demand for and supply of short-term funds.funds.

A focal point for central bank A focal point for central bank intervention for influencing liquidity and intervention for influencing liquidity and general level of interest rates in the general level of interest rates in the economy.economy.

Reasonable access to suppliers and users Reasonable access to suppliers and users of short-term funds to fulfill their of short-term funds to fulfill their borrowings & investment requirements.borrowings & investment requirements.

Money Market Money Market InstrumentsInstruments

Treasury Bills (T-bills)Treasury Bills (T-bills) Call/Notice money marketCall/Notice money market Certificates of Deposit (CD)Certificates of Deposit (CD) Commercial PaperCommercial Paper Commercial Bills (CB)Commercial Bills (CB)

KEY TERMINOLOGIESKEY TERMINOLOGIES

MONEY MARKET MUTUAL FUNDS MONEY MARKET MUTUAL FUNDS (MMMFs) : It mobilises savings from (MMMFs) : It mobilises savings from small investors and invest them in a small investors and invest them in a short-term debt instruments or short-term debt instruments or money market instruments.money market instruments.

Discount & Finance House of India Discount & Finance House of India ( DFHI): ( DFHI):

KEY TERMINOLOGIESKEY TERMINOLOGIES

Cash Reserve Ratio (CRR): Cash Reserve Ratio (CRR): a portion a portion of deposits (as cash) which banks of deposits (as cash) which banks have to keep/maintain with the RBI. have to keep/maintain with the RBI.

Statutory Liquidity Ratio (SLR): Statutory Liquidity Ratio (SLR): banks are required to invest a banks are required to invest a portion of their deposits in portion of their deposits in government securities as a part of government securities as a part of their statutory liquidity ratio (SLR) their statutory liquidity ratio (SLR) requirements. requirements.

KEY TERMINOLOGIESKEY TERMINOLOGIES Repo (Repurchase) Rate: ItRepo (Repurchase) Rate: It is the rate at which is the rate at which

banks borrow funds from the RBI to meet the banks borrow funds from the RBI to meet the gap between the demand they are facing for gap between the demand they are facing for money (loans) and how much they have on money (loans) and how much they have on hand to lend. hand to lend.

Reverse Rapo Rate : The rate at which RBI Reverse Rapo Rate : The rate at which RBI borrows money from the banks (or banks lend borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo money to the RBI) is termed the reverse repo rate.rate.

Bank Rate: Bank Rate: This is the rate at which RBI lends This is the rate at which RBI lends money to other banks (or financial money to other banks (or financial institutions).The bank rate signals the central institutions).The bank rate signals the central bank’s long-term outlook on interest rates. If thbank’s long-term outlook on interest rates. If th

Prime Lending Rate: It is the Prime Lending Rate: It is the minimum lending rate charged by minimum lending rate charged by the bank from its best corporate the bank from its best corporate customers or prime borrowers.customers or prime borrowers.

Treasury BillsTreasury Bills

A short term promissory notes issued A short term promissory notes issued by the Central Government to tide by the Central Government to tide over short-term liquidity shortfalls.over short-term liquidity shortfalls.

A negotiable security, highly liquid, A negotiable security, highly liquid, absence of default risk, assured yield absence of default risk, assured yield and are eligible for inclusion in the and are eligible for inclusion in the securities for SLR purpose. securities for SLR purpose.

Issued for maturities of 91, 182 & 360 Issued for maturities of 91, 182 & 360 days.days.

Types of Auctions in T-Types of Auctions in T-BillsBills

Multiple – Price

Auction

Uniform- Price

Auction

Commercial PapersCommercial Papers

Unsecured promissory note issued Unsecured promissory note issued by highly rated companies.by highly rated companies.

Issuing company should get itself Issuing company should get itself rated by approved rating agencies.rated by approved rating agencies.

Minimum period 7 days & maximum Minimum period 7 days & maximum 1 year.1 year.

Issued at a discount & the discount Issued at a discount & the discount is determined by market forces.is determined by market forces.

Certificates of DepositsCertificates of Deposits

Unsecured, negotiable, short-term Unsecured, negotiable, short-term instruments in bearer form.instruments in bearer form.

Issued by Commercial Banks and Issued by Commercial Banks and development financial institutions.development financial institutions.

Time deposit of specific maturity.Time deposit of specific maturity. Issued by banks during the period of Issued by banks during the period of

tight liquidity, at relatively high tight liquidity, at relatively high interest rateinterest rate

Commercial BillsCommercial Bills

It is a short-term, negotiable and It is a short-term, negotiable and self-liquidating instrument with low self-liquidating instrument with low risk.risk.

Transferable by endorsement and Transferable by endorsement and delivery.delivery.

Call/Notice Money Call/Notice Money MarketMarket

It is a market for very short-term It is a market for very short-term funds repayable on demand and with funds repayable on demand and with a maturity period varying between a maturity period varying between one day to fortnight.one day to fortnight.

Money is borrowed to maintain Money is borrowed to maintain minimum level of CRR.minimum level of CRR.

Call rate is determined by market Call rate is determined by market forces of demand & supply.forces of demand & supply.