Money Market %28exam%29

8/13/2019 Money Market %28exam%29

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MONEYMARKET

Money market does not imply to any specific market place. Rather it

refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of

supply for such funds to borrowers.

Most of the money market transactions are taken place on

telephone, fax or Internet. The Indian money market consists of

Reserve Bank of India, Commercial banks, Co-operative banks, and

other specialized financial institutions. The Reserve Bank of India is

the leader of the money market in India.

Some Non-Banking Financial Companies (NBFCs) and financial

institutions like LIC, GIC, UTI, etc. also operate in the Indian money

market.


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MONEYMARKET

4. Purpose of Loan - The money market meets the short-term credit

needs of business; it provides working capital to the industrialists.

5. Risk - The degree of risk is small in the money market. The

maturity of one year or less gives little time for a default to occur, so

the risk is minimised.

6. Basic Role - The basic role of money market is that of liquidity

adjustment.

7. Relation with Central Bank - The money market is closely and

directly linked with central bank of the country.


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MONEYMARKETININDIA

MoneyMarket

Organized

RBIPrivateBanks

PublicBanks

NBFCs andother FIs

Unorganized

MoneyLenders

IndigenousBankers

Chit Funds


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MONEYMARKETINSTRUMENTS

1. Commercial Paper (CPs)

2. Certificate of Deposits (CDs)

3. Treasury Bills (T Bills)

4. Government Securities (G Secs)

5. Money Market at Call and Short Notice6. Call Money / Short term deposit

7. Money Market Mutual Funds (MMFs)

8. Commercial Bills

9. Inter Bank Participation Certificates (IBPCs)10. Gilt Edged Govt. Securities

11. BankersAcceptance

12. REPOS

13. Inter Corporate Deposits (ICDs)


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CERTIFICATEOFDEPOSITS(CDS)

Certificate of Deposit (CD) is a negotiable money market

instrument and issued in dematerialised form or as a

Usance Promissory Note against funds deposited at a

bank or other eligible financial institution for a specified

time period.

A promissory note is a negotiable instrument, wherein

one party (the makeror issuer) makes an unconditional

promise in writing to pay a determinate sum of money to

the other (the payee), either at a fixed or determinable

future time or on demand of the payee, under specific

terms.


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CDs can be issued by (i) scheduled commercial banks

{excluding Regional Rural Banks and Local Area Banks}; and(ii) select All-India Financial Institutions (FIs) that have been

permitted by RBI to raise short-term resources within the

umbrella limit fixed by RBI.

Banks have the freedom to issue CDs depending on their

funding requirements. No prescribed cap.

Minimum amount of a CD should be Rs.1 lakh, i.e., the

minimum deposit that could be accepted from a single

subscriber should not be less than Rs.1 lakh, and in multiples

of Rs. 1 lakh thereafter


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CDs can be issued to individuals, corporations, companies,

trusts, funds, associations, etc.

Non-Resident Indians (NRIs) may also subscribe to CDs, but

only on non-repatriable basis, which should be clearly stated

on the Certificate. Such CDs cannot be endorsed to another

NRI in the secondary market.

The maturity period of CDs issued by banks should not be less

than 7 days and not more than one year, from the date of

issue.

The FIs can issue CDs for a period not less than 1 year and

not exceeding 3 years from the date of issue.


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CDs may be issued at a discount on face value. Banks / FIs

are also allowed to issue CDs on floating rate basis provided

the methodology of compiling the floating rate is objective,

transparent and market-based. The issuing bank / FI is free to

determine the discount / coupon rate. The interest rate onfloating rate CDs would have to be reset periodically in

accordance with a pre-determined formula that indicates the

spread over a transparent benchmark. The investor should be

clearly informed of the same.


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Banks have to maintain appropriate reserve requirements, i.e.,

cash reserve ratio (CRR) and statutory liquidity ratio (SLR), onthe issue price of the CDs.

CDs in physical form are freely transferable by endorsement

and delivery. CDs in demat form can be transferred as per the

procedure applicable to other demat securities.

There is no lock-in period for the CDs.

All OTC trades in CDs shall be reported within 15 minutes of

the trade on the FIMMDA reporting platform.


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Banks / FIs cannot grant loans against CDs. Furthermore, they

cannot buy-back their own CDs before maturity. However, the

RBI may relax these restrictions for temporary periods through

a separate notification.

There will be no grace period for repayment of CDs. If the

maturity date happens to be a holiday, the issuing bank/FIshould make payment on the immediate preceding working

day. Banks / FIs, therefore, should fix the period of deposit in

such a manner that the maturity date does not coincide with a

holiday to avoid loss of discount / interest rate.


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CERTIFICATEOFDEPOSITS(CDS) Since CDs are transferable, the physical certificates may be

presented for payment by the last holder. Issuer make payment onlyby a crossed cheque.

The holders of demat CDs will approach their respective depositoryparticipants (DPs) and give transfer / delivery instructions to transferthe security represented by the specific International Securities

Identification Number (ISIN) to the 'CD Redemption Account'maintained by the issuer. The holders should also communicate tothe issuer by a letter / fax enclosing the copy of the deliveryinstruction they had given to their respective DP and intimate theplace at which the payment is requested to facilitate promptpayment. Upon

receipt of the demat credit of CDs in the "CD Redemption Account",the issuer, on maturity date, would arrange to repay to holders /transferors by way of Banker's cheque / high value cheque, etc.


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In case of loss of physical certificates, duplicate certificates can be

issued after compliance with the following:

a. A notice is required to be given in at least one local newspaper;

b. Lapse of a reasonable period (say 15 days) from the date of the

notice in the newspaper; and

c. Execution of an indemnity bond by the investor to the satisfaction

of the issuer of CDs

The duplicate certificate should be issued only in physical form. No

fresh stamping is required as a duplicate certificate is issued againstthe original lost CD. The duplicate CD should clearly state that the

CD is a Duplicate one stating the original value date, due date, and

the date of issue (as "Duplicate issued on ________").


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TREASURYBILLS(T BILLS)

Treasury Bills are money market instruments to finance the short

term requirements of the Government of India.

These are discounted securities and thus are issued at a discount to

face value. The return to the investor is the difference between the

maturity value and issue price.

In India, at present, the Treasury Bills are issued for the following

tenors 91-days, 182-days and 364-days Treasury bills

T Bills are issued only by Central Government.

The treasury bills are issued in the form of promissory note in

physical form or by credit to Subsidiary General Ledger (SGL)

account or Gilt account in dematerialised form.


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TREASURYBILLS(T BILLS) Bids for treasury bills are to be made for a minimum amount of Rs

25000/- only and in multiples thereof.

All entities registered in India like banks, financial institutions,

Primary Dealers, firms, companies, corporate bodies, partnership

firms, institutions, mutual funds, Foreign Institutional Investors, State

Governments, Provident Funds, trusts, research organisations,

Nepal Rashtra bank and even individuals are eligible to bid andpurchase Treasury bills.

The treasury bills are repaid at par on the expiry of their tenor at the

office of the Reserve Bank of India, Mumbai.

All the treasury Bills are highly liquid instruments available both in

the primary and secondary market.


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Yield Calculation

The yield of a Treasury Bill is calculated as per the followingformula:

(100-P)*365*100

Y =

------------------

P*D

Wherein Y = discounted yield

P= Price D= Days to maturity


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A commercial bank wishes to buy 91 Days Treasury Bill

Maturing on Dec. 6, 2012 on Oct. 12, 2012. The rate quoted

by seller is Rs. 99.1489 per Rs. 100 face value. The YTM can

be calculated as following:

The days to maturity of Treasury bill are 55 (October 20

days, November 30 days and December 5 days)

YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70%

Similarly if the YTM is quoted by the seller price can be

calculated by inputting the price in above formula.


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TREASURYBILLS(T BILLS) T Bills in Primary market

Issued through Bid auction by RBI -

Type of T

Bills

Day of Auction Day of Payment

91 days Wednesday Following Friday

182 days Wednesday of non-reporting week Following Friday

364 days Wednesday of reporting week Following Friday


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The Auction Technique

The auction of treasury bills is done only at Reserve Bank of India,

Mumbai.

Bids are submitted in terms of price per Rs 100. For example, a bidfor 91-day Treasury bill auction could be for Rs 97.50.

Auction committee of Reserve Bank of India decides the cut-off price

and results are announced on the same day.

Bids above the cut-off price receive full allotment; bids at cut-off price

may receive full or partial allotment and bids below the cut-off price

are rejected.


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Types Of Auctions

There are two types of auction for treasury bills:

Multiple Price Based or French Auction: Under this method, all

bids equal to or above the cut-off price are accepted. However, the

bidder has to obtain the treasury bills at the price quoted by him.

Uniform Price Based or Dutch auction:Under this system, all the

bids equal to or above the cut-off price are accepted at the cut- off

level. However, unlike the Multiple Price based method, the bidderobtains the treasury bills at the cut-off price and not the price quoted

by him.


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Benefits Of Investment In Treasury Bills

1. No tax deducted at source

2. Zero default risk being sovereign paper

3. Highly liquid money market instrument

4. Better returns especially in the short term

5. Transparency

6. Simplified settlement

7. High degree of tradeability and active secondary

market facilitates meeting unplanned fund

requirements.


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COMMERCIALBILLS

Bills of exchange are negotiable instruments drawn by the seller

(drawer) on the buyer (drawee) or the value of the goods delivered to

him. Such bills are called trade bills. When trade bills are accepted

by commercial banks, they are called commercial bills.

The bank discount this bill by keeping a certain margin and credits

the proceeds. Banks can also get such bills rediscounted by financialinstitutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity

period of the bills varies from 30 days, 60 days or 90 days,

depending on the credit extended in the industry.

Commercial bill is an important tool finance credit sales. It may be ademand bill or a usance bill; clean bills or documentary bills.; inland

bills or foreign bills

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