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http://PersonalFinance201.

The Fundamentals of Money

Market in India

Ashok KatariaSathya MurthyGanesh Naik

Paresh NatekarRanjan Varma

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http://PersonalFinance201.com

Overview of Financial Markets

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The Six Horses: Why, What, Who,Which, How and Where ?

Why: The Need.

What: The Definition. Who: The Players.

Which & How: The Products&

Process. Where: The Resources

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The Need

Need for short term funds by Banks. Outlet for deploying funds on short term

basis

Need to keep the SLR as prescribed Need to keep the CRR as prescribed Optimize the yield on temporary surplus

funds

Regulate the liquidity and interest rates inthe conduct of monetary policy to achievethe broad objective of price stability,efficient allocation of credit and a stable

foreign exchange market

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The Definition

Money Market is "the centre for dealings,mainly short-term character, in moneyassets.

It meets the short-term requirements ofborrower and provides liquidity or cash tothe lenders.

It is the place where short-term surplus

investible funds at the disposal of financialand other institutions and individuals are bidby borrowers, again comprising Institutions,individuals and also the Government itself"

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The Definition (Contd)

Money market refers to the market for shortterm assets that are close substitutes ofmoney, usually with maturities of less than ayear.

A well functioning money market provides arelatively safe and steady income-yieldingavenue.

Allows the investor institutions to optimize

the yield on temporary surplus funds. Instrument of Liquidity adjustment by

Central Bank.

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The Players

Reserve Bank of India

SBI DFHI Ltd (Amalgamation of Discount & FinanceHouse in India and SBI Gilts in 2004)

Commercial Banks, Co-operative Banks and PrimaryDealers are allowed to borrow and lend.

Specified All-India Financial Institutions, MutualFunds, and certain specified entities are allowed to

access to Call/Notice money market only as lenders Individuals, firms, companies, corporate bodies,

trusts and institutions can purchase the treasurybills, CPs and CDs.

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The Products & Process

Certificate of Deposit (CD)

Commercial Paper (C.P)

Inter Bank Participation Certificates Inter Bank term Money

Treasury Bills

Call Money

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Certificate of Deposit

CDs are short-term borrowings in the formof Usance Promissory Notes having amaturity of not less than 15 days up to a

maximum of one year. CD is subject to payment of Stamp Duty

under Indian Stamp Act, 1899 (Central Act)

They are like bank term deposits accounts.Unlike traditional time deposits these arefreely negotiable instruments and are oftenreferred to as Negotiable Certificate of

Deposits

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Features of CD

CDs can be issued by all scheduledcommercial banks except RRBs

Minimum period 15 days

Maximum period 1 year

Minimum Amount Rs 1 lac and in multiplesof Rs. 1 lac

CDs are transferable by endorsement CRR & SLR are to be maintained

CDs are to be stamped

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Commercial Paper

Commercial Paper (CP) is anunsecured money market instrumentissued in the form of a promissorynote.

Who can issue Commercial Paper(CP)Highly rated corporate borrowers,

primary dealers (PDs) and satellitedealers (SDs) and all-India financial

institutions (FIs)

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Eligibility for issue of CP

the tangible net worth of the company, as per the latestaudited balance sheet, is not less than Rs. 4 crore;

(b) the working capital (fund-based) limit of thecompany from the banking system is not less than Rs.4crore

and the borrowal account of the company is classifiedas a Standard Asset by the financing bank/s.

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Rating Requirement

All eligible participants should obtain thecredit rating for issuance of CommercialPaper

Credit Rating Information Services of IndiaLtd. (CRISIL)

Investment Information and Credit RatingAgency of India Ltd. (ICRA)

Credit Analysis and Research Ltd. (CARE)

Duff & Phelps Credit Rating India Pvt. Ltd.(DCR India)

The minimum credit rating shall be P-2 ofCRISIL or such equivalent rating by other

agencies

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Maturity

CP can be issued for maturitiesbetween a minimum of 15 days and amaximum upto one year from the dateof issue.

If the maturity date is a holiday, thecompany would be liable to makepayment on the immediate precedingworking day.

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To whom issued

CP is issued to and held by individuals,banking companies, other corporatebodies registered or incorporated inIndia and unincorporated bodies, Non-Resident Indians (NRIs) and ForeignInstitutional Investors (FIIs).

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Repo

Uses of RepoIt helps banks to invest surplus cashIt helps investor achieve money marketreturns with sovereign risk.

It helps borrower to raise funds at betterratesAn SLR surplus and CRR deficit bank can usethe Repo deals as a convenient way of

adjusting SLR/CRR positions simultaneously.RBI uses Repo and Reverse repo asinstruments for liquidity adjustment in thesystem

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Meaning of Repo

It is a transaction in which two parties agreeto sell and repurchase the same security.Under such an agreement the seller sells

specified securities with an agreement torepurchase the same at a mutually decidedfuture date and a price

The Repo/Reverse Repo transaction can only

be done at Mumbai between partiesapproved by RBI and in securities asapproved by RBI (Treasury Bills,Central/State Govt securities).

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Call Money Market

The call money market is an integral part ofthe Indian Money Market, where the day-to-day surplus funds (mostly of banks) are

traded. The loans are of short-term durationvarying from 1 to 14 days.

The money that is lent for one day in thismarket is known as "Call Money", and if itexceeds one day (but less than 15 days) it isreferred to as "Notice Money".

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Call Money Market

Banks borrow in this market for thefollowing purpose

To fill the gaps or temporarymismatches in funds

To meet the CRR & SLR mandatoryrequirements as stipulated by the

Central bank To meet sudden demand for funds

arising out of large outflows.

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Gilt edged securities

The term government securities encompassall Bonds & T-bills issued by the Central

Government, and state governments. Thesesecurities are normally referred to, as "gilt-edged" as repayments of principal as well asinterest are totally secured by sovereignguarantee.

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Treasury Bills

Treasury bills, commonly referred to as T-Bills are issued by Government of Indiaagainst their short term borrowing

requirements with maturities rangingbetween 14 to 364 days.

All these are issued at a discount-to-facevalue. For example a Treasury bill of Rs.100.00 face value issued for Rs. 91.50 getsredeemed at the end of it's tenure at Rs.100.00.

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Who can invest in T-Bill

Banks, Primary Dealers, State

Governments, Provident Funds,Financial Institutions, InsuranceCompanies, NBFCs, FIIs (as perprescribed norms), NRIs & OCBs caninvest in T-Bills.

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The Resources

RBIs site http://rbi.org.in

SBI DFHIs site http://sbidfhi.com/

Website of R Kannanhttp://www.geocities.com/kstability/lea

Indian Institute of banking & Finance

http://www.iibf.org.in
http://rbi.org.in/http://sbidfhi.com/http://www.geocities.com/kstability/learning/finance/toc.htmlhttp://www.iibf.org.in/http://www.iibf.org.in/http://www.geocities.com/kstability/learning/finance/toc.htmlhttp://sbidfhi.com/http://rbi.org.in/

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