PRESENTER --- KANCHAN BAWA

What is Financial Markets? What is Money Market? History of Indian Money Market? Condition of Money Market in the pre-reform

period (before 1991) Stages in Money Market. Players of Indian Money Market? Instrument of Money Market till 1986? Recent instruments ? Structure of Indian Money Market? Some problems which leads to market reform in India

Some of the important defects or Drawbacks of Indian money market

Measure for Improvement of the Money Market Recent Innovations Reforms Characteristic features of a developed money Market? Summary

◦ Financial markets perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds.

◦ At any point in time in an economy, there are individuals or organizations with excess amounts of funds, and others with a lack of funds they need for example to consume or to invest.

1) Meaning of Money Market:Money market refers to the market where money and highly liquid

marketable securities are bought and sold having a maturity period of one or less than one year. It is not a place like the stock market but an activity conducted by telephone. The money market constitutes a very important segment of the Indian financial system.

The highly liquid marketable securities are also called as ‘ money market instruments’ like treasury bills, government securities, commercial paper, certificates of deposit, call money, repurchase agreements etc.

According to the Geoffrey, “Money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.”

According to the Reserve Bank of India, “money market is the centre for dealing, mainly of short term character, in money assets; it meets the short term requirements of borrowings and provides liquidity or cash to the lenders. It is the place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers’ agents comprising institutions and individuals and also the government itself.”

It is a market purely for short-terms funds or financial assets called near money.

It deals with financial assets having a maturity period less than one year only.

In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

Transaction have to be conducted without the help of brokers.

Need for short term funds by banks. Outlet for deploying funds on short term basis. Need to keep the SLR as prescribed. Regulate the liquidity and interest rates. Objective of Money Market?• To provide a parking place to employ short term surplus

funds.• To provide room for overcoming short term deficits.• To enable the central bank to influence and regulate liquidity

in the economy through its intervention in this market.• To provide a reasonable access to users of short-term funds

to meet their requirement quickly, adequately at reasonable cost.

Till 1935, when the RBI was set up the Indian money market remained highly disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned economic development that commenced in the year 1951 market an important beginning in the annals of the Indian money market. The nationalization of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the setting up of discount and finance house of India ltd. (1988), the securities trading corporation of India (1994) and the commencement of liberalization and globalization process in 1991 gave a further fillip for the integrated and efficient development of India money market.

Financial system functioned in an environment of constriction, driven primarily by fiscal compulsions. It was geared to provide significant support for Government expenditure.

The monetary and debt management policy was underlined by excessive monetisation of Central Government's fiscal deficit.

Money and Govt. Securities market did not display any vibrancy and had limited significance in the indirect conduct of monetary policy.Money Market instruments were few.

Market had a narrow base and limited to a few participants - commercial banks and six all India Financial Institutions.

Money market instruments consisted of Treasury Bills (91-days T-Bills) and term securities of different maturities issued by the Central and State Governments.

The average maturity of securities remained fairly long, that is above 20-years, reflecting the preference of more the Issuers than those of the Investors.

Government borrowings were done at rates, which were far below the market rates. For example, for 30-year securities the interest rate was low at 6.5 per cent in 1977-78. The Policy led to distortions in the Banking System with high lending rates on certain segments combined with relatively low interest rates on deposits.

Reserve Bank of India Government Discount and Finance House of India Commercial Banks Mutual Funds Primary Dealer Financial Institutions Corporate Firms

The reserve Bank Of India is the most important player in the Indian Money Market.

The Organised money market comes under the direct regulation of the RBI.

The RBI operates in the money market is to ensure that the levels of liquidity and short-term interest rates are maintained at an optimum level so as to facilitate economic growth and price stability.

 RBI also plays the role of a merchant banker to the government. It issues Treasury Bills and other Government Securities to raise funds for the government.

The Government is the most active player and the largest borrower in the money market.

 It raises funds to make up the budget deficit. The funds may be raised through the issue of Treasury Bills

(with a maturity period of 91day/182day/364 days) and government securities.

COMMERCIAL BANKS Commercial Banks play an important role in the money

market. They undertake lending and borrowing of short term funds. The collective operations of the banks on a day to day basis

are very predominant and hence have a major impact and influence on the interest rate structure and the liquidity position.

 Corporate firms operate in the money market to raise short-term funds to meet their working capital requirements.

They issue commercial papers with a maturity period of 7 days to 1 year. These papers are issued at a discount and redeemed at face value on maturity.

These corporate firms use both organised and unorganised sectors of money market

FINANCIAL INSTITUTIONS Financial institutions also deal in the money market. They undertake lending and borrowing of short-term funds. They also lend money to banks by rediscounting Bills of

Exchange. Since, they transact in large volumes, they have a significant

impact on the money market.

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.

They were :-• Treasury bills • Money at call and short notice in the call loan market.• Commercial bills, promissory notes in the bill market.

(T-bills) are the most marketable money market security. They are issued with three-month, six-month and one-year

maturities. T-bills are purchased for a price that is less than their par

(face) value; when they mature, the government pays the holder the full par value.

Auctions of Treasury Bills: While 91-day T-bills are auctioned every week on

Wednesdays, 182 days and 364-day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press

releases prior to every auction.

Funds for working capital required by commerce and industry are mainly provided by banks through cash credits, overdrafts, and purchase/discontinuing of commercial bills.

BILL OF EXCHANGE The financial instrument which is traded in the bill market of

exchange. It is used for financing a transaction in goods that takes some time to complete.

It shows the liquidity to make the payment on a fixed date when goods are bought on credit.

Accordingly to the Indian Negotiable Instruments Act, 1881, it is a written instrument containing as unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Call money market is that part of the national money market where the day to day surplus funds, mostly of banks are traded in.

They are highly liquid, their liquidity being exceed only by cash.

The loans made in this market are of the short term nature. Banks borrow from other banks in order to meet a sudden

demand for funds, large payments, large remittances, and to maintain cash or liquidity with the RBI. Thus, to the extent that call money is used in India for the purpose of adjustment of reserves.

Now, in addition to the above the following new instrument are available:

Commercial papers. Certificate of deposit. Inter-bank participation certificates. Repo instrument Banker's Acceptance Repurchase agreement Money Market mutual fund

A CD is a time deposit with a bank. Like most time deposit, funds can not withdrawn before

maturity without paying a penalty. The maturity period of CDs issued by banks should be not

less than 7 days and not more than one year. CD’s have specific maturity date, interest rate and it can be

issued in any denomination.

Commercial paper (CP) CP is a short term unsecured loan issued by a corporation

typically financing day to day operation. CP is very safe investment because the financial situation

of a company can easily be predicted over a few months. Only company with high credit rating issues CP’s.

A banker’s acceptance (BA) is a short-term credit investment created by a non-financial firm.

BA’s are guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the

secondary market. BA acts as a negotiable time draft for financing imports,

exports or other transactions in goods. This is especially useful when the credit worthiness of a

foreign trade partner is unknown.

ORGANISED MONEY STRUCTURE UNORGANISED MONEY STRUCTURE

ORGANISED MONEY STRUCTURE PARTICIPANTS: Reserve bank of India. DFHI (discount and finance house of India) Commercial banks:- (i)Public sector banks

SBI with 7 subsidiaries Cooperative banks 20 nationalized banks (ii)Private banks Indian Banks Foreign banks

Development bank -- IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

UNORGANISED SECTOR Indigenous Money lenders Unregulated Intermediaries

INDEGENEOUS BANKS

Private firms that receive deposits and give loans and thereby operate as banks

As activities are not regulated properly ,they are unorganized segment

Broadly classified into 4 groups- GUJRATI SHROFFS,MULTANI SHROFFS,CHETTIARS AND MARWARI KAYAS

A) FINANCE COMPANIES- gives loans to the retailers,artisians and other self-employed persons

B) CHIT FUNDS- are saving institutions

C) NIDHIS- operate in unregulated credit market and provide kind of mutual benefit funds

Indian Government appointed a committee under the chairmanship of Sukhamoy Chakravarty in 1984 to review the Indian monetary system. Later, Narayanan Vaghul working group and Narasimham Committee was also set up. As per the recommendations of these study groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market.

Deregulation of the Interest Rate : In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations.

Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds.

Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources.

Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market.

Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.

These are major reforms undertaken in the money market in

India. Apart from these, the stamp duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, at the end we can conclude that the Indian money market is developing at a good speed.

1980s : A committee formed under the chairmanship of Sukhamoy Chakravorty to develop the money market Instruments.

1988 : Discount and Finance House of India (DFHI) was set up as a money market institution jointly by RBI , Public Sector Banks and Financial institutions to provide liquidity to money market instruments.

1989: Introduced money market instruments such as 182 day, treasury bill, certificate of deposit and inter bank paticpation.

1991 : The government set a high level committee in august 1991 to examine all aspects

related to structure, organisation, functions and procedures of financial system.

1994 : The securities Trading Corporation of India was set up to provide an active secondary market in government dated securities and public sector bonds.

1995: Primary dealer system and statelite dealer system set up to inject liquidity in the market.

TREASURY BILLS of varying maturities and RBI repos were introduced.

AUCTIONED TREASURY BILLs were introduced leading to market determined interest rates.

1998: Strategy of combining auctions, private placements, and money market operations are introduced.

2000: Liquidity Adjustment Facility were introduced in April, 2000 (LAF)

2003 : (CBLO) COLLATERAL BPRROWING AND LENDING OBLIGATION was operationalised as money market instrument through the clearing corporations of India Limited. (CCIL)

2004: Real Time Gross Settlement System was implemented after LAF.

2005 : Prudential Limits on exposure of banks to call market are introduced.

Maturity of Certificate of deposit shortened by april 2005. Transformation of call money into pure inter-bank market.

2007: Widening of collateral base by making state government securities eligible for LAF operations.

2010: Repo in corporate bonds allowed. 2012: Operationalisation of a screen based negotiated

system for all dealings in call/notice. The reportings of such transactions made compulsory in Nov, 2012.

2014: The SEC ( Securities and Exchange Commision) issued new rules for the management of money market funds.

NEW RULES : New rules plays tighter restrictions on portfolio holdings while enhancing liquidity and quality requirements.

Retail investors will continue to be able to invest in the full range of taxable & tax-exempt money market funds.

Designation of the Prime Money Market Fund** and six tax-exempt funds** as retail funds that seek to maintain a stable NAV.

Reopening of Federal Money Market Fund†—which also seeks to maintain a stable NAV—to all investors. The fund won't be subject to the liquidity fee or redemption gate requirements.

If you have Vanguard Brokerage Account,your money market settlement fund change as a result of these rules .

The amendments allow retail and institutional funds to put in place of liquidity fees and redemption gates.

Liquidity Fees : If a funds weekly liquid assets fall below 30%, a fee of upto 2% may be put in place on all redemptions if the funds’s board deems that the fee is the best interest of the funds.

Gates : If the funds weekly liquid assets fall below 30% the funds board has the power to temporarily suspend redemptions if the board of director finds that the imposing a gate is in the funds best interest.

Beginning later in 2016, Vanguard Federal Money Market Fund will be the only money market fund you can use to settle brokerage trades.

Vanguard Brokerage selected this fund for retail accounts because it's open to all investors and won't have fees and gates.

Also, after considering factors such as yield, fees, investment objectives, risks, and current market conditions, Vanguard Brokerage believes it's the most appropriate alternative to current money market settlement funds.

Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. The former comprises the legal financial institutions backed by the RBI. The unorganized statement of it includes various institutions such as indigenous bankers, village money lenders, traders, etc. There is lack of proper integration between these two segments.

Multiple rate of interest : In the Indian money market, especially the banks, there exists too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Many rates of interests create confusion among the investors.

Insufficient Funds or Resources : The Indian economy with its seasonal structure faces frequent shortage of financial recourse. Lower income, lower savings, and lack of banking habits among people are some of the reasons for it.

Shortage of Investment Instruments : In the Indian money market, various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate.

Shortage of Commercial Bill : In India, as many banks keep large funds for liquidity purpose, the use of the commercial bills is very limited. Similarly since a large number of transactions are preferred in the cash form the scope for commercial bills are limited.

Lack of Organized Banking System : In India even through we have a big network of commercial banks, still the banking system suffers from major weaknesses such as the NPA, huge losses, poor efficiency. The absence of the organized banking system is major problem for Indian money market.

Less number of Dealers : There are poor number of dealers in the short-term assets who can act as mediators between the government and the banking system. The less number of dealers leads to the slow contact between the end lender and end borrowers.

The activities of the money lender and chit fund should brought under control.

Banking facilities should be extended, especially in the unbanked and neglected areas.

The number of clearing house should be increased Adequate and easy remittance facilities should be provided

to the businessman. Harmony between sub-markets and co-ordination of their

activities must be achieved .

91 days T- bill 182 days T- bill 364 days T- bill 2 years T-bond 5 years T-bond 10 years T-bond 20 years T-bond

The money market specializes in debt securities that mature in less than one year.

Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities.

The easiest way for individuals to gain access to the money market is through a money market mutual fund.

T-bills are short-term government securities that mature in one year or less from their issue date.

MMMFs bridge a gap between small individual investors the money market. MMMFs mobilises savings from small investors and invests them in short-term debt instruments or money market instruments.

A certificate of deposit (CD) is a time deposit with a bank. Annual percentage yield (APY) takes into account compound

interest, annual percentage rate (APR) does not.

Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk .

Banker’s acceptance (BA) are negotiable time draft for financing transactions in goods.

Repurchase agreement (repos) are a form of overnight borrowing backed by government securities.

CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD.

The rate of discount fixed by the central bank of the country for the rediscounting of eligible paper is called the bank rate. It is also the rate charged by the central bank on advances on specified collateral to banks.