47 47 money market

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MONEY MARKET


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Money Market

1. Need for money market

1. Short term liquidity mismatch for corporates andfinancial institutions

2. Short term surplus funds

2. Money market players Role

Central Bank Intermediary Government Borrower/ Issuer

Banks Borrower/ Lender

Financial Institutions Borrower/ Lender

Corporates Issuers

MFs Lender/ Investor

FIIs etc. Lender/ Investor

Discount & Acceptance houses Market Makers

Dealers Intermediaries


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Primary Dealers

Introduced in Government securities market in

1995

Currently 19 PDs in GSM

Objectives

To strengthen the infrastructure

Develop underwriting and market making

capabilities forGS outside the RBI

To improve secondary trading system


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Money Market Instruments

Government and Quasi Government Securities

Treasury Bills Government dated Securities

Banking Sector Securities

Call & Notice money market

Term money market Certificate of deposits

Private sector securities

Commercial paper

Commercial bill

Inter-corporate deposits/ investment

Money market mutual funds

Repurchase Agreement


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Indian Money Market

History

Organised and unorganised money market

Interest rates

Institutions

Instruments

Steps taken in 80s and 90s to develop MM

in India


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Call Money Market

1. Maturity period vary from 1 to 14 days.

2. Overnight money, Notice money,Term moneyand Inter bank money

3. Participants

4. Purpose Short term mismatches

To meet CRR requirements

Discounting commercial bills

5. Call rates- call rates have varied in a day 6 to50%, in a month from 4 to 86% and in a yearfrom 0 to 108%

6. Operational mechanism


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7. Location

8. Development of call money market


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Current situation

Annual policy statement of April 2001, highlighted the

intention to move towards Pure Inter-bankCall/Noticemoney market in four stages by gradually phasing out

non-bank participation.

In stage I, non-bank participants were allowed to lend up

to 85% of their average daily lending during 00-01. In annual policy Statement of April 2002, it was stated

that RBI would announce the date of effectiveness of

stage II, wherein non-bank participants would allowed to

lend, up to 75% of their average daily, depending on the

date when NDS/CCIL becomes fully operational

Limit on the lending of non bank participants in the call

money market reduced to 45% effective June 26, 2004.


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COMMERCIAL PAPERS

Introduction ofCP is result of suggestion of

Working Group on Money Market in 1987

Commercial Papers are short term unsecured

promissory notes with fixed maturity issued mostly

by the leading, nationally reputed , credit-worthy

and highly rated large corporations and are

generally sold on discount

Also issued by PDs, SDs and DFIs

They are also called as :- Industrial Papers

Finance Papers

Corporate Papers


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Investor

Individuals

Banks

Corporates

Non bank Financial Institutions

NRIs

FIIs

Maturity

7 days(since 2005) 365 days

Types : Commercial paper is either directly placed with

investors or sold through dealers.

Size: 5 lakhs and multiple thereof


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CDsCD

s are marketable receipts in bearer orregistered form of funds deposited in banks for aspecified period at a specified rate of interest.

Features:

Transferable

Negotiable

Short-term

Fixed-interest bearing

Highly liquid Risk less

Issued at discount to face value


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Minimum denomination 1 lacs.

No ceiling in maximum amount Maturity period-same

CDs transferable. No lock-in period

All scheduled banks except RRBs andeven term lending financial institutions can

issue with maturity of 1-3 yrs.

CDs issued in demat form wef June02 andin Oct02 all existing CDs are converted

into demat form


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Treasury Bills

TBs constitute a major portion of short termborrowings by the government of India.

Short term funds to bridge seasonal or temporarygaps between its receipts and expenditure.

TBs are issued in the form of promissory notes orfinance bills by government to tide over shortterm liquidity short falls.

They have distinct features like highly liquid,zero default risk, assured yields, low transactioncost, negligible capital depreciation, do notrequire any grading or further endorsement,eligible in inclusion in SLR, easy availability etc.


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Issuer

Investors Purpose

Form

Size Maturity

14 days

28 days

91 days

182 days

364 days


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Yield

Ad hoc treasury bills : Issued to serve twopurpose

To replenish cash balances of the centralgovernment

To provide medium of inv,. to SG, semi govt.departments, foreign central banks.

Union budget 1994-95 stated the monitisationof budget deficit.

Agreement signed in March 1997, bringing intoexistence the new system of Ways and MeansAdvances

On Tap treasury bills


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Auctioned treasury bills

April 1992, weekly auctionConducted by RBI on every Friday for notified

amount

Bids are tendered and accepted at the auction

Unsubscribe portion

Only two maturities, 91 and 364 days


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Issuing procedure

Development of the market

55, 91 days adhoc introduced

Both SG and CG issued until 50s

Till 65, biweekly tenders or auction

65, auction replaced by on tap

74, rate fixed at 4.6%

86, 182 TBs introduced and discontinued in 92

97, 14 days introduced to facilitate SG and foreign

CBs

182 again reintroduced and in 01 both 14 and 182

discontinued


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15. Auction procedure

S No. Bidders Name Price Amount

1 B 98.95 502 A 98.90 40

3 A 98.80 60

4 C 98.80 80

5 B 98.75 50

6 C 98.65 120

7 C 98.50 200

8 A 98.50 100

9 B 98.50 100

10 A 98.45 200

11 B 98.40 120

12 C 98.35 280

13 D 98.45 70

14 D 98.35 120


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Fully accepted bids are

. Bidders Name Price Amount

A 98.90 40A 98.80 60

B 98.95 50

B 98.75 50

C 98.65 120C 98.80 80

Total = 400

RBI allots three bidders proportionately in following way

A 98.50 100

B 98.50 100

C 98.50 200

Total = 500

47 47 money market

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