Money Market

Characteristics of Money Market Wholesale market of short term debt instruments

Principal feature is honour

Need-based market

Interest rates are market determined

Main players are: RBI, Mutual funds, banks, DFHI, corporates, NBFCs, STCI, state governments, PFs, PSUs, primary dealers and NRIs

Money Market Instruments

Treasury bills (T-bills)

Call/Notice money market- Call(overnight) and short notice (up to 14 days)

Certificates of deposit

Commercial bills

Commercial paper

Treasury bills Short-term instruments issued by RBI on behalf of the governmentRepaid at par on maturity, issued at a discount Negotiable and highly liquid securities Absence of default risk Assured yield, low transaction cost Security for SLR purposesParticipant in T-bill market- RBI, banks, mutual funds, FIs, corporate, foreign banks, FIIs

An unsecured, negotiable and tradable short-term promissory note issued at a discount Issuers creditworthy corporatesAll India financial institutions

Discount is freely determined by market forcesMaturity period 7 days to upto one year.Can be issued to individuals, banks, companies etc.An attractive source of working capital funds for corporate as the rates are less.Rating requirement min. P2 of CRISIL.Minimum 5 lakhs and multiples.

Commercial Paper

A short-term, negotiable and self liquidating instrument with low risk.

Bills of exchange are negotiable instruments drawn by the seller on the buyer for the value of the goods delivered to him. Such bills are called trade bills.

When trade bills are accepted by commercial banks, they are called commercial bills.

Bank discounts this bill by keeping a certain margin and credit the proceeds. Banks can rediscount the bills in the money market.

Maturity period of bill varies from 30 days, 60 days or 90 days.Commercial Bills

An unsecured, negotiable, short- term time deposit issued by commercial banks and development financial institutions. Issued at a discount to face value. Minimum amount Rs 1 lakh and in multiples thereof Maturity period 15 days to one year for banks1 to 3 years for FIs Transferable by endorsement Banks to maintain appropriate reserve requirement (SLR and CRR) on issue of CDs. Issued in demat form Investors individuals, corporations, Mutual FundsCDs are subject to requirements.Certificates of Deposit

Banks borrow/lend money for a period ranging between 1 and 14 days.

Purely Interbank market

When borrowed or lent- for 1 day- overnight/call moneyfor 2 to 14 day- notice money No collateral security required

Highly liquid, risky, and volatile market

Banks trade money to adhere to CRR requirement

Call rate is freely determined by market forces

RBI indirectly intervenes in call money market through repo transactions

Link between call rates and short term money market instruments

Call/Notice Money Market

To provide

a balancing mechanism for demand & supply

the focal point for central bank for influencing liquidity and interest rates

reasonable access to short-term funds

serves as a benchmark for long term interest rates Functions of Money Market

Monetary policy affects the real economy through money market.

Objectives of the monetary policy Price stability GrowthInstruments of Monetary Policy Reserve requirements: CRR (4%)- The cash that banks have to maintain with RBI as a percentage of their demand and time liabilities SLR(22%)- mandatory investment in government securities Interest rates: Bank rate :9%Repo rate: 8%Reverse repo rate: 7% Open Market Operations (OMO)

Link Between Money Market and Monetary Policy in India