Discount Markets & DFHI

BYDHEERAJ.P

According to Crowther, "The money market is a name given to the various firms and institutions that deal in the various grades of near money."

Discount Market

Discount market refers to the market where short-term genuine trade bills are discounted by financial intermediaries like commercial banks. When credit sales are effected, the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment.

Objectives of Discount Market• Smoothening Liquidity

• Integration

• Market Maker

• Promoting Market

• Investment Avenue

DFHIDiscount and Finance House of India Ltd. (DFHI), a unique institution of its kind, was set up in April 1988. The share capital of DFHI is Rs 200 crores, which has been subscribed by Reserve Bank of India (10.5%), Public sector banks (62%) and Financial Institutions (26.6%). The discount has been established to deal in money market instruments in order to provide liquidity in the money market. Thus the task assigned to DFHI is to develop a secondary market in the existing money market instruments.The establishment of a discount House was recommended by a Working Group on Money market. The main objective of DFHI is to facilitate the smoothening of the short term liquidity imbalances by developing an active money market and integrating the various segments of the money market

At preset DFHI’s activities are restricted to:

1. dealing in 91 days and 364 days Treasury Bills2. re-discounting short term commercial bills.3. participating in the inert bank call money, notice money and term deposits 4. Dealing in Commercial Paper and Certificate of deposits.5. Government dated Securities

Importance of DFHI•Minimizing Liquidity balances.•Authorized institutions for

government securities.• REPO Facility.• Expansion of money market.•Developing Primary and Secondary

market in financial instruments.

Challenges of DFHI• Mounting Competition.

• Uncertainties of interest rates.

• Abundance of liquidity in the system.

• Falling yields for government securities.

• Rapid changes in market conditions and regulatory framework.

Role of DFHI

–Functions as market maker in Certificate of Deposits market

–Offers bid and offer rate for Certificate of Deposits

–Acts as an ideal conduct for disinvestments of Certificate of Deposits holdings

–Engages in buying Certificate of Deposits from the bank at bid discount rate