Post on 29-May-2018
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MONEY MARKET
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Money Market
1. Need for money market
1. Short term liquidity mismatch for corporates andfinancial institutions
2. Short term surplus funds
2. Money market players Role
Central Bank Intermediary Government Borrower/ Issuer
Banks Borrower/ Lender
Financial Institutions Borrower/ Lender
Corporates Issuers
MFs Lender/ Investor
FIIs etc. Lender/ Investor
Discount & Acceptance houses Market Makers
Dealers Intermediaries
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Primary Dealers
Introduced in Government securities market in
1995
Currently 19 PDs in GSM
Objectives
To strengthen the infrastructure
Develop underwriting and market making
capabilities forGS outside the RBI
To improve secondary trading system
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Money Market Instruments
Government and Quasi Government Securities
Treasury Bills Government dated Securities
Banking Sector Securities
Call & Notice money market
Term money market Certificate of deposits
Private sector securities
Commercial paper
Commercial bill
Inter-corporate deposits/ investment
Money market mutual funds
Repurchase Agreement
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Indian Money Market
History
Organised and unorganised money market
Interest rates
Institutions
Instruments
Steps taken in 80s and 90s to develop MM
in India
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Call Money Market
1. Maturity period vary from 1 to 14 days.
2. Overnight money, Notice money,Term moneyand Inter bank money
3. Participants
4. Purpose Short term mismatches
To meet CRR requirements
Discounting commercial bills
5. Call rates- call rates have varied in a day 6 to50%, in a month from 4 to 86% and in a yearfrom 0 to 108%
6. Operational mechanism
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7. Location
8. Development of call money market
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Current situation
Annual policy statement of April 2001, highlighted the
intention to move towards Pure Inter-bankCall/Noticemoney market in four stages by gradually phasing out
non-bank participation.
In stage I, non-bank participants were allowed to lend up
to 85% of their average daily lending during 00-01. In annual policy Statement of April 2002, it was stated
that RBI would announce the date of effectiveness of
stage II, wherein non-bank participants would allowed to
lend, up to 75% of their average daily, depending on the
date when NDS/CCIL becomes fully operational
Limit on the lending of non bank participants in the call
money market reduced to 45% effective June 26, 2004.
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COMMERCIAL PAPERS
Introduction ofCP is result of suggestion of
Working Group on Money Market in 1987
Commercial Papers are short term unsecured
promissory notes with fixed maturity issued mostly
by the leading, nationally reputed , credit-worthy
and highly rated large corporations and are
generally sold on discount
Also issued by PDs, SDs and DFIs
They are also called as :- Industrial Papers
Finance Papers
Corporate Papers
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Investor
Individuals
Banks
Corporates
Non bank Financial Institutions
NRIs
FIIs
Maturity
7 days(since 2005) 365 days
Types : Commercial paper is either directly placed with
investors or sold through dealers.
Size: 5 lakhs and multiple thereof
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CDsCD
s are marketable receipts in bearer orregistered form of funds deposited in banks for aspecified period at a specified rate of interest.
Features:
Transferable
Negotiable
Short-term
Fixed-interest bearing
Highly liquid Risk less
Issued at discount to face value
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Minimum denomination 1 lacs.
No ceiling in maximum amount Maturity period-same
CDs transferable. No lock-in period
All scheduled banks except RRBs andeven term lending financial institutions can
issue with maturity of 1-3 yrs.
CDs issued in demat form wef June02 andin Oct02 all existing CDs are converted
into demat form
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Treasury Bills
TBs constitute a major portion of short termborrowings by the government of India.
Short term funds to bridge seasonal or temporarygaps between its receipts and expenditure.
TBs are issued in the form of promissory notes orfinance bills by government to tide over shortterm liquidity short falls.
They have distinct features like highly liquid,zero default risk, assured yields, low transactioncost, negligible capital depreciation, do notrequire any grading or further endorsement,eligible in inclusion in SLR, easy availability etc.
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Issuer
Investors Purpose
Form
Size Maturity
14 days
28 days
91 days
182 days
364 days
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Yield
Ad hoc treasury bills : Issued to serve twopurpose
To replenish cash balances of the centralgovernment
To provide medium of inv,. to SG, semi govt.departments, foreign central banks.
Union budget 1994-95 stated the monitisationof budget deficit.
Agreement signed in March 1997, bringing intoexistence the new system of Ways and MeansAdvances
On Tap treasury bills
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Auctioned treasury bills
April 1992, weekly auctionConducted by RBI on every Friday for notified
amount
Bids are tendered and accepted at the auction
Unsubscribe portion
Only two maturities, 91 and 364 days
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Issuing procedure
Development of the market
55, 91 days adhoc introduced
Both SG and CG issued until 50s
Till 65, biweekly tenders or auction
65, auction replaced by on tap
74, rate fixed at 4.6%
86, 182 TBs introduced and discontinued in 92
97, 14 days introduced to facilitate SG and foreign
CBs
182 again reintroduced and in 01 both 14 and 182
discontinued
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15. Auction procedure
S No. Bidders Name Price Amount
1 B 98.95 502 A 98.90 40
3 A 98.80 60
4 C 98.80 80
5 B 98.75 50
6 C 98.65 120
7 C 98.50 200
8 A 98.50 100
9 B 98.50 100
10 A 98.45 200
11 B 98.40 120
12 C 98.35 280
13 D 98.45 70
14 D 98.35 120
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Fully accepted bids are
. Bidders Name Price Amount
A 98.90 40A 98.80 60
B 98.95 50
B 98.75 50
C 98.65 120C 98.80 80
Total = 400
RBI allots three bidders proportionately in following way
A 98.50 100
B 98.50 100
C 98.50 200
Total = 500