MONEY MARKET

DR. DEERGHA SHARMA

MONEY MARKET
Features
•It channelize savings into short term productive
investments .

•It
deals with the financial assets having maturity period
up-to- one year.

•Generally the transactions take place through phone.

Relevant documents and written communication can be
exchanged subsequently.

•There is no formal place like stock exchange as in case of

capital market.

•Transactions have to be conducted without the help of

brokers.
CONTINUED

 It is not a single homogeneous market. It comprises of

several submarkets, each specializing in a particular
type of financing like Call money market, Acceptance
market, Bill market and so on.
 The components of money market are central bank,
Commercial banks, Non-banking financial companies,
discount houses and acceptance houses. Commercial
banks play a dominant role in the market.
FUNCTIONS OF MONEY MARKET

 Development of trade and industry

 Development of capital market

 Smooth functioning of commercial banks

 Effective central bank control

 Formulation of suitable monetary policy

 ORGANISATION OF MONEY MARKET
1) Call Money Market

•Part of the national money market

•Day-to day surplus funds mainly of banks are traded

•Short term in nature

•Maturity of these loans vary from 1 to 15 days

•Lent for 1 day: Call money

•Lent for more than 1 day but less than 15 days: Notice money

•Convenient interest rate

•Highly liquid loan repayable on demand

CONTINUED

• The participants in the market can be classified into

two categories:
1) Those permitted to act as both lenders and borrowers
of call loans
2) Those permitted to act only as lenders in the market.
The first category includes all commercial banks,
cooperative banks, DFHI. In the second category
LIC, UTI, GIC, IDBI, NABARD and specialised
mutual funds are included. They can only lend and
they cannot borrow in the call market.
2)COMMERCIAL BILL MARKET OR
DISCOUNT MARKET
 It refers to the market where short-term genuine
trade bills are discounted by financial
intermediaries like commercial banks.
 The seller can ensure payment immediately by
discounting the bill with some financial
intermediary by paying a small amount of money
called discount rate.
3) ACCEPTANCE MARKET
 The acceptance market refers to the market where
short-term genuine trade bills are accepted by
financial intermediaries.
 All the trade bills cannot be discounted easily
because the parties to the bills may not be
financially sound. In such case bills are accepted
by financial intermediaries like banks, the bills
earn a good name and reputation and such bills
can be easily discounted anywhere.
 In India the acceptance market is not developed.
4) TREASURY BILL MARKET
 T-Bills is nothing but a promissory note issued by
the government under discount for a specified
stated therein.

 The government promises to pay the specified

amount mentioned therein to the bearer of the
instrument on the due date.

 The period does not exceed a period of one year.

 T- bills are issued only by the RBI on behalf of

the government.
CONTINUED
 T-Bills are issued for meeting temporary
Government Deficits.
 The T-Bills rate or rate of discount is fixed by the
RBI from time to time.
 It is the lowest one in the entire structure of
interest rates in the country because of short
term maturity and high degree of liquidity and
security.
TYPES OF T-BILLS
 1) Ordinary
 These bills are issued to the public and other
financial institutions for meeting the short term
financial requirement of Central Government.
 These bills are freely marketable and they can
be bought and sold at any time and they have
secondary market also.
2) AD HOCS

 These are always issued in favour of the RBI.

 They can’s be sold through auctioning.

 They are purchased by the RBI and RBI is

authorised to issue currency notes against them.

 Thay are not marketable in India.

CONTINUED

Ad hocs serve the government in following ways:

They replenish the cash balances of the central

Government. Just like State Governments get
advances from the RBI, the Central Government
can raise finance through these ad hocs.
 They also provide an investment medium for
investing the temporary surpluses of the state
governments and foreign central banks.
CONTINUED
On the basis of periodicity, treasury bills may be
classified into three:

1) 91 days T-Bills
2) 182 days T-Bills
3) 364 days T- Bills

The bills can be rediscounted with the RBI.

PARTICIPANTS OF T-BILLS MARKET
 RBI and SBI
 Commercial banks

 State Governments

 DFHI

 STCI

 Financial Institutions like LIC, GIC, UTI, IDBI,

ICICI,NABARD etc.
 Public

Among all the participants banking sector accounts

for nearly 90 percent of the annual sales of T-
Bills.
INSTRUMENTS OF MONEY MARKET
1) Commercial paper
 It is an unsecured promissory note issued with
fixed maturity by a company approved by RBI,
negotiated by endorsement and delivery, issued
at such discount on the face value as may be
determined by the issuing company.

 Participants
i) Issuers
All private sector company, public sector units,
NBFC’s
II) INVESTORS

 Individuals, banks, corporate and also NRIs.

Usually banks, large corporate bodies and public
sector units with investible funds participate in
CP market.
 COMMERCIAL PAPERS

Unsecured Promissory note.

Issued by well known companies with strong and high credit
rating.
Solddirectly by the issuers to investors or through agents like
merchant banks and security houses.
Flexible Maturity
Low interest rates with compared to banks.
Imparts a degree of financial stability to the system.
RBI GUIDELINES ON COMMERCIAL PAPER
ISSUE

1) A company can issue commercial paper only if it

has:
 A tangible net worth of not less than Rs.10 crore
as per latest balance sheet.
 Minimum current ratio of 1.33:1.

 A debt servicing ratio closer to 2.

 The company is listed on stock exchange

2) Commercial paper shall be issued in multiples of

Rs. 25 lakh but the minimum mount to be
invested by a single investor shall be Rs.1 crore.
CONTINUED
3) The commercial paper shall be issued for a
minimum maturity period of 7 days and the
maximum period of 6 months from the date of
issue. There will be no grace period on maturity.

4) Investment in commercial papers can be made

by any person or banks or corporate bodies
registered or incorporated in India and
unincorporated bodies too.
PROMISSORY NOTE
Referred as note payable in accounting

It is a contract detailing the terms of a promise

by one party (the maker) to pay a sum of money
to the other (the payee).

The obligation may arise from the repayment

of a loan or from another form of debt.

Forexample, in the sale of a business, the

purchase price might be a combination of an
immediate cash payment and one or more
promissory notes for the balance.
2) CERTIFICATE OF DEPOSITS
 These are short term deposit instruments issued
by banks and financial institutions to raise large
sum of money.
 They are in marketable form bearing specific face
value and maturity
 They are issued at discount to face value.

 They are repayable on fixed date without grace

days
 They are freely transferable by endorsement and
delivery.
 There is minimum lock in period of 45 days.
 CERTIFICATES OF DEPOSITS
Defined as short term deposit by way of
usance promissory notes.

Greaterflexibility to investors in the

deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto

1 year.

Transferable in nature

Free negotiability and limited flexibility

ISSUERS

 Commercial banks and financial institutions etc.

Subscribers
Individuals, corporations, trusts, associations and
NRI’s
RBI GUIDELINES
 The denomination of CDs could be in multiples of
Rs. 5 lakh subject to a minimum size of an issue
to a single investor being 25 lakh.
 They are issued in terms of usance promissory
note payable on fixed date without days of grace.
 Banks have to maintain CRR and SLR on the
issue price of CD’s and report them as deposits to
the RBI.
 MONEY MARKET MUTUAL FUNDS

Investprimarily in money market

instruments of very high quality.

RBI and public financial institution can set

it either directly or through its existing
subsidiaries.

MMMF
Open Ended
Close Ended
REPO INSTRUMENTS
 Repo stands for repurchase.
 Under Repo transaction, the borrower parts with
securities to the lender with an agreement to
repurchase them at the end of fixed period at a
specified price.
 At the end of the period, the borrower will
repurchase the securities at the predetermined
price.
 The difference between the purchase price and
the original price is the cost for the borrower.
 This cost of borrowing is called repo rate which is
little cheaper than pure borrowing.
CONTINUED
 A transaction is called Repo when viewed from
the perspective of the seller of the securities and
Reverse Repo when described from the point of
view of the supplier of the funds.
 Whether a given agreement is termed a Repo or
Reverse Repo depends largely on which party
initiated the transaction.
 Repo transactions are conducted in the money
market to manipulate short term interest rate
and manage liquidity levels.
 In India, Repos are normally conducted for a
period of three days.
 The eligible securities for the purpose are decided

by the RBI.
CONTINUED
 These securities are usually government
promissory notes, T-Bills and public sector bonds.
 When RBI conducts Repos the short term
interest rate in the money market may not go
below the RBI repo rate.
 Thus repo transactions ensure stability in short
term interest rates in the money market.
DEFICIENCIES OF MONEY MARKET

 Existence of unorganised sector

 Absence of Integration

 Diversity in money rates of interest

 Limited instruments

 Limited Secondary market.

 Limited participants

 Absence of bill culture

RECENT DEVELOPMENTS
 Introduction of Innovative instruments
 Entry of money market mutual funds

 Setting up of credit rating agencies

 Establishment of DFHI

 Establishment of STCI

 Offering of market rate of interest

CAPITAL MARKETS
Provided resources needed by medium and large
scale industries.

Purpose for these resources

Expansion
Capacity Expansion
Investments
Mergers and Acquisitions

Deals in long term instruments and sources of

funds
Main Activity

Functioning as an institutional mechanism to channelize

funds from those who save to those who needed for
productive purpose.

Provides opportunities to various class of individuals and

entities.
 STRUCTURE OF CAPITAL MARKETS
Primary Markets Secondary Markets
When companies need financial resources The place where such securities are traded
for its expansion, they borrow money from by these investors is known as the secondary
investors through issue of securities. market.

Securities issued Securities like Preference Shares and

a) Preference Shares Debentures cannot be traded in the
b) Equity Shares secondary market.
c) Debentures
Equity shares is issued by the under writers Equity shares are tradable through a private
and merchant bankers on behalf of the broker or a brokerage house.
company.
People who apply for these securities are: Securities that are traded are traded by the
a) High networth individual retail investors.
b) Retail investors
c) Employees
d) Financial Institutions
e) Mutual Fund Houses
f) Banks

One time activity by the company. Helps in mobilising the funds for the
investors in the short run.
NEW ISSUE MARKET
 The industrial security market in India consist of
new issue market and stock exchanges.
 The new issue market deals with the new
securities which were not previously available to
the investing public.
 The market, therefore, makes available a new
block of securities for public subscription.
 The new issue market encompasses all
institutions dealing in fresh in fresh claim in
form of equity shares, preference shares,
debentures, right issues, deposits, etc.
FUNCTIONS
 Avenue for investment
 Mobilisation of savings

 Channelising savings for productive use

 Sources of large supply of funds

 Rapid industrial growth

 Source of expansions and technological

upgradation
THANK-YOU