Money Market IB

7/28/2019 Money Market IB

1/50

Jaswinder Singh

Money Market Instruments In India


2/50

Overview Of Financial Markets

FINANCIAL

MARKET

Money Mkt. Debt Mkt. FOREX Mkt. Capital Mkt.


3/50

Money Market includes

Call/ Notice

Treasury Bills

Term Money

Certificate OfDeposit

Repo

Commercial Bill

Inter corporatedeposits

Commercial Papers


4/50

Debt Market

It includes Government Securities and Bonds.

Government Security includes Central Govt. Securities

State Govt. Securities

Bonds includes

Foreign Investment Bonds

PSU Bonds

Corporate Securities


5/50

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

Where

Why : The Need

What : The Definition

Who : The Players

Which & How : The Products and Process

Where : The Resources


6/50

The Need

Need for short term funds by banks Outlet for deploying funds on short term basis

Need to keep the SLR & CRR as prescribed

Optimize the yield on temporary surplus funds

Regulate the liquidity & interest rates


7/50

The Definition

Money Market is the centre for dealings, mainly shortterm character, in money assets.

It meets the short term requirements of the borrowers& provides liquidity or cash to the lenders.

Money Market refers to the market for short termassets that are close substitutes of money, usually withmaturities of less than a year.


8/50

The Players

RBI SBI DFHI Ltd. (Amalgamation of Discount & Finance House in

India & SBI Gilts in 2004)

Commercial Banks, Cooperative Banks & Primary Dealers are

allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds and

certain specified entities are allowed to access to Call/Noticemoney market only as lenders.

Individuals, Firms, Companies, corporate bodies, trusts &institutions can purchase the treasury bills, commercial papersand certificate of deposits.


9/50

The Products & Process

Certificate of Deposit (CD) Commercial Paper (C.P)

Inter Bank Participation Certificates

Inter Bank Term Money Treasury Bills

Call Money

Bankers Acceptance

REPO


10/50

Certificate Of Deposit (June,1989)

Short term borrowings in the form of UsancePromissory Notes having a maturity of not less than15 days upto a maximum of 1 year.

Subject to payment of Stamp Duty under IndianStamp Act, 1899 (Central Act)

They are like bank term deposit accounts, freelynegotiable instruments often referred to asNegotiable CD.


11/50

Features Of CD

Can be issued by all scheduled commercial banks exceptRRBs

Minimum period 15 days, Maximum period 1 year

NRIs can subscribe to CDs on non-repatriable basis.

Minimum amount Rs.1 lac & in multiples of Rs.1 lac

Transferable by endorsement & delivery.

CRR & SLR are to be maintained.

CDs are to be stamped.


12/50

Advantages

Enable high return on short term surpluses.

Enhances liquidity & allows resale.

For raising resources in times of need. To improve lending capacity of the bank.


13/50

Commercial Paper

CP is an unsecured money market instrument

(short-term) issued in the form of a promissory

note.

Who Can Issue CP?

Highly rated corporate borrowers, primary

dealers (PDs) & satellite dealers (SDs) & all-

India financial institutions (FIs)


14/50

Features

Cheaper source of funds than limits set by banks.

Optimal combination of liquidity return.

Highly liquid instrument.

Transferable by endorsement & delivery.

Backed by liquidity & earnings of issuer.

Issued for a minimum period of 30 days and a maximum upto one year

Issued at a discount to face value

Issued in demat form. (Compulsory demat from July '01).


15/50

Types of CP

Direct Papers :-

Issued directly by company to investors without any

intermediary.

Dealer Papers :-

Issued by a dealer or merchant banker on behalf of a

client.


16/50

Eligibility for issue of CP

The tangible net worth-not less than Rs.4 crore;

the working capital (fund-based) limit-not less than

Rs.4 crore

& borrowal account- classified as a Standard Asset bythe financing banks.


17/50

Rating RequirementAll eligible participants should obtain the credit rating for issuance of

CP through the following--

Credit Rating Information Services Of India Ltd. (CRISIL)

Investment Information & Credit Rating Agency of India Ltd. (ICRA)

Credit Analysis & Research Ltd. (CARE)

DCR India

The minimum credit rating shall be P-2 of CRISIL or such equivalentrating by other agencies.


18/50

Maturity

Issued for maturities between a minimum of 30 days anda maximum upto one year from the date of issue.

If the maturity date is a holiday, the company would beliable to make payment on the immediate preceding

working day.


19/50

To whom Issued

CP is issued to and held by

individuals,

banking companies,

other corporate bodies registered or incorporated inIndia, and

unincorporated bodies,

Non-Resident Indians (NRIs) and

Foreign Institutional Investors (FIIs).


20/50

Banker's Acceptance

It is a short-term credit investment. It is guaranteed by abank to make payments. The Banker's Acceptance is

traded in the Secondary market.


21/50

RepoMeaning of Repo

Transaction in which 2 parties agree to sell & repurchase the

same security. Under such an agreement, the seller sells

specified securities with an agreement to repurchase the

same at a mutually decided future date and a price.

The Repo/Reverse repo transaction can only be done at

Mumbai between parties approved by RBI & in securities as

approved by RBI (Treasury Bills, Central/State Govt.

Securities).


22/50

Repo

Uses of Repo Helps banks to invest surplus cash

Helps investors achieve money market

returns with sovereign risks. Raising funds by borrowers

Adjusting SLR/CRR positions simultaneously.

For liquidity adjustmentin the system.


23/50


24/50

Recent changes

All Govt. Securities are eligible for repos.

Primary dealers & non-bank participants allowed to

undertake such transactions.

Minimum 3 days period, for inter-bank transactions hasbeen removed.


25/50

Call Money Market

Integral part of Indian Money Mkt., where the day-to-day surplus funds (mostly of banks) are traded. The loansare of short term duration varying from 1 to 14 days.

The money that is lent for 1 day in this mkt. is known asCall Money, & if it exceeds 1 day (but less than 15 days),it is referred to as Notice Money.


26/50

Call Money MarketFeatures

Deals in loans at call and short notices.

Deals with extreme form of short term loans; 24

hours, 7-15 days maturity.

Recalled on demand or shortest possible notice. Normally, collaterals are not insisted upon.

In India, CMM provides facilities for inter-bank

tending.

Surplus suppliers of funds: UTI, SBI, LIC


27/50

Call Money Market

Banks borrow in this market for the following

purpose:

To fill the gaps in funds.

To meet CRR & SLR mandatory

requirements.

To meet sudden demand for funds


28/50

Gilt Edged Securities

The term Government securities encompass all

bonds & treasury bills issued by the Central and

the State govt. These securities are normally

referred to, as gilt-edged as repayments of

principal as well as interest are totally secured by

sovereign guarantee.


29/50

Features

These securities have a fixed coupon that is paid onspecific dates on half-yearly basis.

Maturity dates, from short dated (less than one year)to long dated (upto twenty years).

Available in primary and secondary market.

High liquidity-securities can be sold in the secondarymarket at prevailing rates.


30/50

Available in physical form or in demat -maintainedin Constituents Subsidiary General Ledger (CSGL) a/cwith any bank.

Securities held in CSGL a/c will have the convenienceof automatic credit of half yearly interest and theredemption proceeds on due date.

Reasonably good returns


31/50

Recent Changes

During last few years, Government of India has issuednew instruments such as Zero Coupon Bonds, Floating

Rates Bonds, Partly-paid Stocks, Capital Index Bonds,

etc.


32/50

Treasury Bills

T-Bills are issued by Govt. of India against theirshort term borrowing requirements with maturitiesranging between 14 to 364 days.

All these are issued at a discount-to-face value. Foreg: a T-Bill of Rs.100 face value issued for Rs.91.50gets redeemed at the end of its tenure at Rs.100.


33/50

Features

Issued at a discount to face value. Sovereign zero risk instruments.

Available in primary and secondary market.

No Tax Deduction at Source (TDS)

Highly liquid & attractive returns Eligible securities for SLR purposes.

The 14/91/182/364-days bills are issued for a minimum value ofRs.25,000 and multiples thereof.

Generally issued in the form of SGL (Subsidiary General Ledger)

entries in the books of RBI & not as securities.


34/50

Who can invest in T-Bill?

Banks, Primary dealers, State Governments,Provident Funds, Financial Institutions, Insurance

Companies, NBFIs, FIIs (as per prescribed norms),

NRIs can invest in T-Bills.


35/50

Credit Card

Instrument that enables the cardholder to obtain

goods & services without actual payment at the

time of purchasea Pay Later card provided to acustomer.
http://www.infomerchant.net/creditcardprocessing/accept_credit_cards.html


36/50

Features

Can be availed for a period of 30-45 days. Card carries a pre-determined limit upto which the

holder can spend.

2-3% interest p.m. charged on outstanding balance.

Discounts on purchases on gaining additional points onregular use of card.


37/50

Types of Cards

Master card

VISA Card

Affinity Card

Standard Card Classic Card

Gold/Executive Card

Platinum Card

Titanium Card

Secured Card

Smart Card

Charge Card

Rebate Card Co-branded Card

Cash Card

Travel Card

Debit Card


38/50

Recent Changes

Personal Accident Insurance Cash withdrawal facility

Increase in credit

Add-on facility Leveraged investment facility


39/50

Internationalization of Financial Markets

With the ongoing financial liberalization, eachcountry now have a wider source of funds.

The traditional instruments in the internationalbond market are known as Foreign bonds.

Foreign bonds are sold in the foreign countries andare denominated in that countrys currency.


40/50

Internationalization of Financial Markets

Foreign bonds:

German auto maker sales a foreign

bond in US denominated in US dollar.

Euro Bond:

Bonds denominated in a currency other

than that of the country in which it

is sold.

Euro bond:

A bond denominated in US dollar and sold in

London.

I i li i f Fi i l


41/50

Internationalization of Financial

Markets

However, A bond denominated in euro is calledEuro Bond if it is sold outside the countries thatadopted Euro as their currencies.

Euro Currencies:

A variant of euro bond is eurocurrencies. Foreign currenciesdeposited in banks outside the home

country. US dollar deposited in Banks outside US.


42/50

Money market mutual funds

Introduced in June,1996

Pooled short maturity, high quality investments which buy money

market securities on behalf of retail or institutional investors


43/50

Municipal notes - (in the U.S.)

Short-term notes issued by municipalities in

anticipation of tax receipts or other revenues.

Federal funds - (in the U.S.)

Interest-bearing deposits held by banks and other

depository institutions at the Federal Reserve; these

are immediately available funds that institutions

borrow or lend, usually on an overnight basis. They

are lent for the federal funds rate.

I t t P i i l B
http://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Federal_fundshttp://en.wikipedia.org/wiki/Federal_fundshttp://en.wikipedia.org/wiki/Municipal_bond


44/50

Instrument Principal Borrowers

Federal Funds Banks

Discount Window Banks

Negotiable Certificates of Deposit (CDs) Banks

Eurodollar Time Deposits and CDs Banks

Repurchase Agreements Securities dealers, banks, non financial

corporations, governments

(principal participants)

Treasury Bills government

Municipal Notes State and local governments

Commercial Paper Non financial and financial businesses

Bankers Acceptances Nonfinancial and financial businesses

Government-Sponsored Enterprise

Securities

Farm Credit System, Federal Home Loan

Bank System, Federal National Mortgage

Association

Shares in Money Market Instruments Money market funds, local government

investment pools, short-term investment

funds

Futures Contracts Dealers, banks (principal users)

Futures Options Dealers, banks (principal users)

Swaps Banks (principal dealers)


45/50

Money market and the financial world The money available to consumers, investors, etc. to spend or invest in products

is known as the money supply of the market.

High money supply high increased demand for products in the products

market

inflation (rising prices).

To enable the monetary authorities to guard against this kind of inflation, a few

options are available where use is made of the money market, two of which are ----

Selling money market instruments & Increasing interest rates by offering less

money


46/50

Current Reports

Special repo for 140.3 bn rupees to enable banks to meetliquidity needs of mutual funds: RBI. The repo rate is

now 7.25%.


47/50

Summary

1. Efficient financial markets are required to channel fundsfrom surplus-spending units (savers) to deficit-spendingunits. Typically, such securities entitle the holder to astream of periodic future cash payments.

2. Financial intermediaries allow economies of scale to berealized when matching surplus-spending units withdeficit-spending units. Greater opportunities forportfolio diversification and money management can be

gained.


48/50

Major findings

Various segments of the financial market in India have achieved market efficiency

The 91-day Treasury bill rate is the appropriate 'reference rate' of the financial sector in

India

The financial markets in India are largely integrated at the short-end of the market, and

The long-end of the market is integrated with the short-end of the market.

The above findings suggest that monetary policy should rely more on interest rate and

asset price channels to control inflation.


49/50

Conclusion

The money market is a vibrant market, affecting our everydaylives. As the short-term market for money, money changes hands

in a short time frame and the players in the market have to be alert

to changes, up to date with news and innovative with strategies

and products


50/50

.

In brief, various policy initiatives by the Reserve Bank

have facilitated development of a wider range of

instruments such as market repo, interest rate swaps,

CDs and CPs. This approach has avoided market

segmentation while meeting demand for various

products. These developments in money markets have

enabled better liquidity management by the Reserve

Bank.

Money Market IB

Documents

Transcript of Money Market IB