Money Market1

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INTRODUCTION

Money market is the centre for dealing mainly in short term money assets

It is a market for the lending and borrowing of short

term funds

As the name implies, it does not actually deals withnear substitutes for money or near money like trade

bills, promissory notes and government papers drawnfor a short period not exceeding one year.

It meets the short-term requirements of borrowers andprovides liquidity or cash to lenders.


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Objectives of Money Market

To provide a parking place to employ short-termsurplus funds.

To provide room for overcoming short-term

deficits. To enable the Central Bank to influence and

regulate liquidity in the economy through itsintervention in this market.

To provide a reasonable access to users of Short-term funds to meet their requirements quickly,adequately and at reasonable costs


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ADVANTAGES

Safety

Liquidity

Ideal Short-Term Investment

Ideal Fund Management

Statutory Liquidity Requirement

Source of Short-Term Funds

Non-Inflationary Monetary Tool


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DRAWBACKS

Poor Yield

Absence Of Competitive Bids

Absence of Active Trading


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Components of a Money Market


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Central Bank

It is naturally to be the leader of all banks. It is

the bank, which is entrusted with the task of

controlling the issue of money and funds to

the market and regulates credit facilities

provided by various other institutions.


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Commercial Banks

They play a vital role in the money market.

They make advances, discount bills and lend

against the promissory notes and the like.

They also take help of the market in solving

their liquidity problems.


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Non Banking Financial Companies

A Non Banking Financial Company(NBFC) is a company

registered under the Companies Act, 1956 of India, engaged

in the business of loans and advances, acquisition of shares,

stock, insurance business, or chit business: but does not

include any institution whose principal business is that

includes agriculture or industrial activity; purchase or

construction of immovable property.


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Discount Houses

Discount houses are special institutions for

rediscounting the bills of exchange. They

usually deal in three kinds of bills.

(a) The domestic bills

(b) The foreign bills and

(c) The government treasury bills


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Continued.

The discount houses borrow huge funds for

short periods from the commercial banks and

RBI and Sinvest them in discounting bills. But

before discounting a trade bill of exchange,

the Discount House insists that it should be

accepted by an Acceptance House.


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Acceptance Houses

Acceptance Houses are institutions which

specialize in accepting bills of exchange.

Generally they are merchant bankers. They act

as second signatories on the bills of exchange.

That is they guarantee the bills of a trader

whose financial standing is not known, for

making the bill negotiable.


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Continued

They maintain correspondents in important

towns of various places within and outside the

country to collect information about the

creditworthiness and financial position of thecustomers, who seek the assistance of the

Acceptance Houses. For their service, they

charge a small amount of commission but en-sure great security for the bills discounted by

the Discount Houses.


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INSTRUMENTS


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Certificate of Deposits

A Certificate of Deposit is a promissory note

issued by a bank. It is a time deposit that

restricts holders from withdrawing funds on

demand. Although it is still possible towithdraw the money, this action will often

incur a penalty.


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Commercial Papers

An unsecured, short-term debt instrument

issued by a corporation, typically

for the financing of accounts

receivable, inventories and meeting short-term liabilities. Maturities on commercial

paper rarely range any longer than 270

days. The debt is usually issued at a discount,reflecting prevailing market interest rates.


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Repurchase Agreements

A form of short-term borrowing for dealers in

government securities. The dealer sells the

government securities to investors, usually on an

overnight basis, and buys them back the following day.


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Bankers Acceptance

An instrument issued by a firm that is guaranteed by a

commercial bank. Banker's acceptances are issued by

firms as part of a commercial transaction. These

instruments are similar to T-Bills and are frequentlyused in money market funds. Banker's acceptances are

traded at a discount from face value on the secondary

market, which can be an advantage because the

banker's acceptance does not need to be held untilmaturity.


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Treasury Bills

A particular kind of finance note put out by the

government of the country. Treasury bills are highly

liquid because there cannot be a better guarantee of

repayment than the one given by the government.They are claims against the government.

That means when you buy a Treasury, we are actually

loaning money to the government and the government

in turn is paying you interest on the borrowed money.


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Qualities of T-Bills

High liquidity.

Absence of risk of default.

Readily available Assured yield

Low transaction cost


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Types of T-Bills

Ordinary T-bills:-

Ordinary T-bills are issued to the public and the

RBI for enabling the government to meet the needs of

supplementary short term finance. Adhoc T-bills:-

The practice of issuing adhoc TBs has been

discounted through the singing of two agreement

between the government and the RBI.


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T-Bills Rate

Treasury bills rate is the rate of interest at

which treasury bills are sold by RBI.

The effective return on treasury bills is the

discount at which they are sold and their

redemption value.


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Present Status

At present the government of India issues

four types of treasury bills trough auctions

namely 14 day ,91 day , 182 day and 364 day .

There are no treasury bills issued by state

Government.


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Auction

T-bills are auctioned every alternative week of

Wednesday.

The RBI issues quarterly calendar of T-bills

auction which is available at the banks

website.

All T-bills are now sold through an auction

process according to a fixed auction calendar,

announced by RBI.


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91 day T-bills Auction

Published on Saturday Nov. 11,2010 at 13:50 1 updated

at Saturday Nov.11 2010 at 14:27

The RBI has announced the auction of 91 days

Government of India Treasury Bills for notified amountof Rs 2000cr.

The auction will be conducted on Nov 15 2010.

The sale will be subject to the terms and conditions

specified in


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CONTINUED

he General Notification No. F.Z.(12)-W and M/97 dated

31st March 1998 issued by Government of India and as

amended from time

Tender should be submitted in the prescribed form onWednesday November 15,2010 by 12:30 P..M.

Results will be announced on the same evening.

Payments by success full bidders will be on Friday,

November 17,2010.

Any person in India including individuals, firms,

companies, corporate bodies.

Trusts and Institutes can purchase T-bills.


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FORM

The T-bills are issued in the form of Promising

note in Physical Form or by credit Subsidary

General Ledger (SGL) account or Gill account

in dematerialised form.


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REPAYMENTS

The T-Bills are repaid as par on the expiry of

their tenor at the office of RBI, Mumbai.


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YIELD CALCULATION

The yield of a T-Bill is calculated as per the

following formulla:-

Y=(100-P)*365*100/P*D

Y:-Discounted Yield

P:-Price

D:-Days of maturity


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Salient Features of the Auction

Technique

The auction of T-Bills is done only at RBI

Mumbai.

Bids are submitted in terms of price per Rs100.

e.g a bid for 91-day . T-Bill auction could be for

Rs97.50. Auction Committee of RBI decides

the cut-off price and results are announced on

the same day.


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Call Money Market

The Call Money Market refers to the market

for extremely short period loans; say one day

to fourteen days. These loans are repayable

on demand at the option of either the lenderor the borrower.


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INTRODUCTION

A short-term money market, which allows for

large financial institutions, such as banks,

mutual funds and corporations to borrow and

lend money at interbank rates. The loans inthe call money market are very short, usually

lasting no longer than a week and are often

used to help banks meet reserverequirements.


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ADVANTAGES

High Liquidity

High Profitability

Maintenance Of SLR

Safe And Cheap

Assistance To Central Bank Operations


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High Liquidity

Money lent in a call market can be called back

at any time when needed. So, it is highly

liquid. It enables commercial banks to meet

large sudden payments and remittances bymaking a call on the market


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High Profitability

Banks can earn high profiles by lending their

surplus funds to the call market when call

rates are high volatile. It offers a profitable

parking place for employing the surplus fundsof banks temporarily


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Maintenance Of SLR

Call market enables commercial bank to

minimum their statutory reserve

requirements. Generally banks borrow on a

large scale every reporting Friday to meettheir SLR requirements. In absence of call

market, banks have to maintain idle cash to

meet5 their reserve requirements. It will tellupon their profitability


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Safe And Cheap

Though call loans are not secured, they are

safe since the participants have a strong

financial standing. It is cheap in the sense

brokers have been prohibited form operatingin the call market. Hence, banks need not pay

brokers on call money transitions


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Assistance To Central Bank

Operations

Call money market is the most sensitive part

of any financial system. Changes in demand

and supply of funds are quickly reflected in

call money rates and give an indication to thecentral bank to adopt an appropriate

monetary policy. Moreover, the existence of

an efficient call market helps the central bankto carry out its open market operations

effectively and successfully.


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Drawbacks

Uneven Development

Lack Of Integration

Volatility In Call Money Rates


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Uneven Development

The call market in India is confined to only big

industrial and commercial centers like

Mumbai, Kolkata, Chennai, Delhi, Bangalore

and Ahmadabad. Generally call markets areassociated with stock exchanges. Hence the

market is not evenly development.


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Lack Of Integration

The call markets in different centers are not

fully integrated. Besides, a large number of

local call markets exist without an\y

integration.


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Volatility In Call Money Rates

Another drawback is the volatile nature of the

call money rates. Call rates very to greater

extant indifferent centers indifferent seasons

on different days within a fortnight. The ratesvery between 12% and 85%. One can not

believe 85% being charged on call loans.


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THANK YOU

Money Market1

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