UNDERSTANDING – MONEY MARKET

8/8/2019 UNDERSTANDING – MONEY MARKET

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Financial Market An Over view³A Mechanism that allows people to easily buy & sell :-

F inancial Securities,Commodities,

Other fungible items

at low transactional cost and at prices that reflect the efficientmarket hypothesis.´



Financial Market Structure



Mo ney Market An Over view

Mo ney Market is part of f inanc ial m arket where instru m entswith h igh liqu idity an d very short term matur it ies ie one or lessthan one year are tra ded.



Mo ney Market An Over view

M oney markets are markets for f inanc ing the short term fun dre qu irements of Go vernment, Banks, Corporate an d otherFinanc ial Inst itut ions . The instruments in the market are to agreat extent governe d b y Central Bank s pol icies re gar ding

supply of money in the economy an d the rates of interest .



Mo ney Market An Illustrati on

IDBI Bank needs to pay SBI Rs.10 Crores balancing figure at the end of theday. This transaction happens by requesting RBI to increase the account

balance of SBI by 10 Crores and corresponding decrease in the account balance of IDBI.

Now, with this the balances or total money with IDBI reduces. But it might be requiring that money for transactions with its other customers. This meansa IDBI wants to borrow money now. There might be another institution thatmight be having surplus money that it does not require in the near future.Say,

ICICI Bank having surplus money for15 days (the same duration that

IDBI wants it for). So we have ICICI loaning IDBI Rs.10 Crores for 15 daysat an agreed rate. This was a MONEY MARKET transaction.



Mo ney Market s Objecti ves

To pro vide a park ing place to employ short termsurplus fun ds.

To pro vide room for o vercom ing short term def icits .

To ena b le the central bank to influence an d re gulateliqu idity in the economy throu gh its inter vent ion in th ismarket .

To pro vide a reasona b le access to users of short-termfun ds to meet the ir re quirement qu ickly, a dequately atreasona b le cost .



Mo ney Market s Features

N ear M oney .

M atur ity Per iod less then One Year .

N o Formal Exchan ge for Such M arket .

N o Broker .

Compr ises of se veral su bmarket .



Mo ney Market V/S Capital Market

Money market Capital market1 . It is a market for short-term loan able funds for

a period of not exceeding one year.

It is a market for long-term funds exceeding a period

one year.

2. This market supplies funds for financing current

business operations, working capital

requirements of industries and short period

requirements of the Government

This market supplies funds for financing the fixed

capital requirements of trade and commerce as well as

the long-term requirements of the Government

3. The instruments that are dealt in a money

market are bills of exchange, treasury bills,

commercial papers, certificate of deposit etc.

This market deals in instruments like shares,

debentures, Government bonds etc.



Mo ney Market V/S Capital Market

4 . Each single money market instrument is

of large amount. A TB is of minimum

for one lakh. Each CD or CP is for

minimum of Rs. 25 lakhs.

Each single capital market instrument is of

small amount. Each share value is Rs.10.

each debenture value is Rs. 100.

5. The central bank and commercial banks

are the major institutions in the moneymarket.

Development banks and insurance companies

play a dominant role in the capital market.

6. Money market instruments secondary

markets.

Capital market instruments generally have

secondary markets.



Com positi on of Mo ney Market

M oney M arket cons ists of a num ber of su b -markets wh ich collect ively const itute the moneymarket . They are,

Call M oney M arketCommerc ial bi lls market or discount market

Acceptance market

Treasury bi ll market



Constituents of Mo ney Market

The call money market is an inte gral part of the In dianM oney M arket, where the day-today surplus fun ds

(mostly of banks) are tra ded. The loans are of short-term durat ion vary ing from 1 to 14 days .

The money that is lent for one day in th is market isknown as " Call Money ", an d if it excee ds one day (butless than 15 days) it is referre d to as " Notice Money ".

Call Market




Banks borrow in th is market for the follow ingpurpose :

To f ill the gaps or temporary m ismatches in fun dsTo meet the CRR & SLR man datory re qu irements as

st ipulate d b y the Central bankTo meet su dd en deman d for fun ds ar ising out of lar ge

outflows .

Call Market



Operati ons

Borrowers an d Lenders in Call M arket .N egot iat ion route d throu gh Spec ialized M oney

market Inst itut ion .Inst itut ion is informe d about fun d re qu irement &Surplus at spec if ic interest rate .

Deal Settlement A dvice is Generate d.Call Loan can be renewe d up to 14 days at back of depos it rece ipt by the borrower

Call Market




A bi ll is a one wh ich ar ises out of a genu ine tra detrasact ion, i.e cre di t transact ion . (BOE)

Thus, a bi ll of exchan ge conta ins a wr itten or derfrom the cre di tor to the deb tor, to pay a certa insum, to certa in person .

M any types of B ills are c irculate d in th is market:-Inlan d & Fore ign, Export & Import B ills etc .

Bill Market



Operati ons

From po int of view of operat ion bi ll market cons ist of two:-

Discount M arket .Acceptance M arket .

M arket where short term genu ine tra de bi ll arediscounte d b y f inanc ial interme diar ies l ike commerc ial

banks is known as Discount M arket .M arket where short term genu ine tra de bi lls are

accepte d b y f inanc ial interme diar ies .

Bill Market




Treasury B ills market represents such bi lltransact ions were government borrow ing takes

place for short term . It s a very popular an d liqu idsince they are issue d b y government .Treasury B ills are issue d b y central bank of country

on behalf of the government, these bi lls are w ithbas ic per iod of 91 days, 182 days or 364 days but italso depen d on country to country .

Treasury Market



Operati ons

They are issue d on tap bas is throu ghout the week,howe ver more 300 days bi ll are sol d throu gh

auct ion only, Inst itut ional investors, Commerc ialBanks, State Go vernment, are the major players inth is market an d they ma inta in a spec if ic accountwith the central bank E .G. Subsidiary General

Ledg er Account w ith RBI.

Treasury Market



Indian Mo ney Market

It s a M onetary System .

The In dian money market is class if ied into: the or gan ise d sector an d theunor gan ise d sector .

The unor gan ise d sector an dm icrocre di t are st ill preferre d overtra di t ional banks in rural an d su b -ur ban areas, espec ially for non-pro duct ive purposes, l ike ceremon iesan d short durat ion loans .



P layers of Indian Mo ney Market

The Reserve Bank of India(RBI)SBI DFHI Ltd (Amalgamation of Discount &Finance House in India and SBI Gilts in 200 4 )

Commercial Banks,Co-operative Banks and Primary Dealers areallowed to borrow and lend

All-India Financial Institutions



Structure of Indian Mo ney Market

Indian M oney M arket

Unor gan ized Sector

IndigenousBankers

M oneyLenders

ChitFun ds

Organ ized Sector

RBIPub licSectorBanks

Pr ivateSectorBanks

DevelopmentBanks

Co-operat ive Sector



Instru m ents in Indian Mo ney Market

Treasury bills

Certificate of Deposits(CD)Commercial Papers(CP)Reverse Agreement(REPO)Banker¶s AcceptanceCollateral ized Borrow ing an d Lending Ob ligat ion(CBLO)



Treasury B ills

(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.T-Bills are so popular among money market instruments because of affordability to the individual investors.

It is an important instrument of short-term borrowing by government.Treasury bills are the promissory notes or a kind of finance bill issued bythe govt. under discount for a fixed period, not exceeding beyond oneyear, with a promise to pay the amount stated there in to the bearer of theinstrument. It is used for bridging temporary gap between the receipts andexpenditure.



Treasury B ills

R BI holds 91, 182 days T-Bill as well as 364 days. 91 Tbs are issued at

the fixed rate by R BI. The current rate as of today is :-91 day T-bills : 5.9841%*182 day T-bills : 6.3519%*364 day T-bills : 6.2985%*

Institutional Investors like commercial Banks, DFHI, maintains the accountwith R BI, If the account is not maintain directly by the investor DFHIcomes in the picture at such transactions. In India, this market is in thehands of the Banking Sector, it accounts 90% of TB¶s Sale annually.



Certi f icate of Dep osits

A CD is a time deposit with a bank.

Like most time deposit, funds can not withdrawn beforematurity without paying a penalty.

CD¶s have specific maturity date, interest rate and it can be

issued in any denomination.

The main advantage of CD is their safety. A nyone can earn more than a saving account interest.



Comm ercial P apers

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.

CP can be issued directly by the company to investor or through banks..



Comm ercial P apers

To Whom Issued

CP is issued to and held by individuals, bankingcompanies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-R esident Indians (N R Is) and Foreign InstitutionalInvestors (FIIs).

A ll eligible participants should fulfill the rating requirementsby C R ISIL, IC RA , C ARE , DC R India³CP can be issued for maturities between a minimum of 15days and a maximum up to one year from the date of issue.´

.



REP O Instru m ent

R epo Stands for repurchase. Under R epo transaction, the

borrower part with the securities to the lender with anagreement to repurchase them at the end of the fixed periodat the specified price.

The difference between the original and specified price is the

cost for the borrower. This costing is called µ R epo R ate¶.R epo transactions are conducted in the market to manipulateshort term interest rate and manage liquidity levels. In IndiaR epo are conducted for 3 day period. These are usually

government notes, treasury bills and public bonds.R epo R ate by R BI current is 5.75%.



REP O Instru m ent

The R epo/ R everse R epo transaction can only be done at

Mumbai between parties approved by R BI and in securitiesas approved by R BI (Treasury Bills, Central/State Govtsecurities).

It helps banks to invest surplus cash

It helps investor achieve money market returns withsovereign risk.

It helps borrower to raise funds at better rates R BI uses R epo

and R everse repo as instruments for liquidity adjustment inthe system



REP O Instru m ent



B ankers Acceptance

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

B A¶s are guaranteed by a bank to makepayment.

A cceptances are traded at discountsfrom face value in the secondary market.

B A acts as a negotiable time draft for financing imports, exports or other transactions in goods.

This is especially useful when the creditworthiness of a foreign trade partner isunknown.



Collateralized B orr owing and Lending Ob ligati on (CB LO)

It is a money market instrument as approved by R BI, is a productdeveloped by CCIL. CBLO is a discounted instrument available in

electronic book entry form for the maturity period ranging from one day toninety Days (can be made available up to one year as per R BI guidelines).In order to enable the market participants to borrow and lend funds, CCILprovides the Dealing System through:

- Indian Financial Network (INFINET) , a closed user group to theMembers of the Negotiated Dealing System (NDS) who maintain Currentaccount with R BI.

- Internet gateway for other entities who do not maintain Current accountwith R BI.



Collateralized B orr owing and Lending Ob ligati on (CB LO)

What is CBLO?

CBLO is explained as under: A n obligation by the borrower to return the money borrowed, at a

specified future date; A n 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 valuereceived;

A n underlying charge on securities held in custody (with CCIL) for theamount borrowed/lent.



Can an Indi vidual invest in Mo ney Market??



Can an Indi vidual invest in Mo ney Market??

One of the ma in differences between the money market an d thestock market is that most money market secur it ies tra de in veryh igh denom inat ions an d so individ ual investors ha ve l im ite d accessto them .

The eas iest way for individ ual investors to ga in access to the moneymarket is w ith a money market mutual fun d , or somet imes a moneymarket bank account .

These accounts an d fun ds pool to gether the assets of thousan ds of investors an d buy the money market secur it ies on the ir behalf .

Althou gh, some money market instruments l ike treasury bi lls maybe purchase d directly or throu gh other lar ge f inanc ial inst itut ionswith direct access to these markets .



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UNDERSTANDING – MONEY MARKET

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