MONEY MARKET INSTRUMENTS

MONEY MARKET Money market means market where money or its equivalent can be traded,

Synonym of liquidity

It is a wholesale market of short term debt instrument ,Short term maturities i.e. one or less than one year are traded

It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market

The component of Money Market are the commercial banks, acceptance houses & NBFC.

Hence, money market is a market where short term obligations such as Treasury bills, Call/notice money, Certificate of Deposits, Commercial papers and Repos are bought and sold

MONEY MARKET

FINANCIAL MARKETS

MONEY MARKET CAPITAL MARKET

CHARACTERISTICS OF MONEY MARKET INSTRUMENTS

Short-term borrowing and lending

Low credit risk

High liquidity

High volume of lending and borrowing

Players in Money Market

Reserve Bank of India

SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI in 2004)

Acceptance Houses

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

Specified All-India Financial Institutions, Mutual Funds

Individuals, firms, companies, corporate bodies, trusts and institutions

COMPOSITION OF MONEY MARKET

Call

Money

Commercial

Bills

Acceptance Market

Treasury

Bill

STRUCTURE OF INDIAN MONEY MARKET

ORGANISED STRUCTURE

RBIDFHI(Discount and Finance

house of India

Commercial banks

Development bank

Public Sector banks

SBI with 7 subsidiaries

Co-Operat

ive banks

20 nationalized banks

Private banks

Indian banks

Foreign banks

CONTINUED…..UNORGANISED SECTOR

Indigenous banks

Money lenders

Nidhis Chits

CO-OPERATIVE SECTOR

State cooperative

Central cooperative

banks

Primary Agri credit societi

es

Primary

urban banks

State Land development banks

Central land

development banks

Primary land

development banks

Money market Instruments

Treasury Bills Repurchase Agreements

Repo Reverse Repo

Commercial Papers Certificate of Deposits Banker’s Acceptance

TREASURY BILLS T-Bills are issued by GOI against their short term borrowing requirements with

maturities ranging between 14 to 364 days. 3 types of T-Bills issued through auctions

91-day (Auctioned every week on Wednesdays) 182-day and 364-day (Auctioned alternate Wednesdays)

No treasury bills issued by State Governments T-bills are purchased for a price that is less than their par value; when they

mature, the government pays the holder the full par value Types of Bills: on tap bills, ad hoc bills, auctioned T- bills Available both in primary market as well as secondary market Treasury bills are available for a minimum amount of Rs.25,000 and in multiples

of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par T-bills are considered to be the safest investments They are exempt from state and local taxes

REPURCHASE AGREEMENTS

REPO - the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price

REVERSE REPO - when viewed from the perspective of the buyer of the securities

The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities)

Repos are safe collateral for loans It is a transaction in which two parties agree to sell and

repurchase the same security Used for overnight borrowing and used by those who deal in

government securities

COMMERCIAL PAPERS

It is a short term unsecured loan issued by a corporation typically financing day to day operation; In the form of a promissory note

Usually issued with fixed maturity between 1 to 270 days Very safe investment and Yield higher returns as

compared to T-Bills Issued by corporates to impart flexibility in raising working

capital resources at market determined rates Only company with high credit rating issues CPs Commercial Papers are actively traded in the secondary

marketWho can issue Commercial Paper (CP)

Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs)

Certificate of Deposit

CD is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest

Time deposit with a bank Also referred to as Negotiable Certificate of Deposits Funds can not withdrawn before maturity without paying a penalty CDs have specific maturity date, interest rate and it can be issued in any

denomination Ranges from three months to five years and restricts the holders to

withdraw funds on demand Main advantage of CD is their safety The returns on certificate of deposits are higher than T-Bills because it

assumes higher level of risk

Call Money Market

The call money market is an integral part of the Indian Money Market

Day-to-day surplus funds (mostly of banks) are traded

The loans are of short-term duration varying from 1 to 14 days

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

Collateralized Borrowing and Lending Obligation (CBLO)

It is a money market instrument as approved by RBI, is a product developed by CCIL. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety Days (can be made available up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through:

- Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI.

- Internet gateway for other entities who do not maintain Current account with RBI.

What is CBLO?

CBLO is explained as under: • An obligation by the borrower to return the money borrowed, at a specified future date; • An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received; • An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent.

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