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8/13/2019 moneymarketitsinstruments-120411145313-phpapp01 (1)

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As per RBI definitions A market for shortterms financial assets that are closesubstitute for money, facilitates theexchange of money in primary and secondary

market.

The money market is a mechanism that dealswith the lending and borrowing of short term

funds (less than one year).

A segment of the financial market in whichfinancial instruments with high liquidity andvery short maturities are traded.


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It doesntactually deal in cash or money butdeals with substitute of cash like trade bills,promissory notes & govt papers which canconverted into cash without any loss at low

transaction cost.

It includes all individual, institution and

intermediaries.


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It is a market purely for short-terms fundsor financial assets called near money.

It deals with financial assets having amaturity period less than one year only.

In Money Market transaction can not take

place formal like stock exchange, onlythrough oral communication, relevantdocument and written communicationtransaction can be done.


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Transaction have to be conducted withoutthe help of brokers.

It is not a single homogeneous market, itcomprises of several submarket like callmoney market, acceptance & bill market.

The component of Money Market are thecommercial banks, acceptance houses &NBFC (Non-banking financial companies).


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To provide a parking place to employ shortterm surplus funds.

To enable the central bank to influence and

regulate liquidity in the economy through itsintervention in this market.

To provide a reasonable access to users ofshort-term funds to meet their requirementquickly, adequately at reasonable cost.


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o Development of trade & industry.o Development of capital market.

o Smooth functioning of commercial

banks.o Effective central bank control.

o Formulation of suitable monetary

policy.o Non inflationary source of finance togovernment.


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Money Market consists of a number of sub-markets which collectively constitute themoney market. They are,

Call Money Market

Commercial bills market or discount market

Acceptance market

Treasury bill market


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A variety of instrument are available in adeveloped money market. In India till 1986,only a few instrument were available.

They were

Treasury bills

Money at call and short notice in the call loanmarket.

Commercial bills, promissory notes in the billmarket.


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Now, in addition to the above the followingnew instrument are available:

Commercial papers.Certificate of deposit.Banker's AcceptanceRepurchase agreementMoney Market mutual fund


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Call money market is that part of the nationalmoney market where the day to day surplusfunds, mostly of banks are traded in.

They are highly liquid, their liquidity beingexceed only by cash.

The loans made in this market are of theshort term nature.


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Continued..

Banks borrow from other banks in order tomeet a sudden demand for funds, largepayments, large remittances, and to maintaincash or liquidity with the RBI. Thus, to the

extent that call money is used in India for thepurpose of adjustment of reserves.


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Treasury bills (TBs), offer short-terminvestment opportunities, generally up to oneyear.

They are thus useful in managing short-termliquidity.

Types of treasury bills through auctions

91- Day, 182- day, 364- day, and 14- day

TBs


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Continued..

It is important to note that no specific

amount of funds was sought to be raisedthrough the auctions of these bills.

The amount raised in each auction suspendedupon the funds available with the market

participants, and the funds they desired toinvest in these bills. Thus, the new bill hadbecome a handy instrument for banks,financial institution.


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Treasury bills are available for a minimumamount of Rs.25,000 and in multiples of Rs.25,000. Treasury bills are issued at adiscount and are redeemed at par. Treasury

bills are also issued under the MarketStabilization Scheme (MSS).

91-day T-bills are auctioned every week onWednesdays.

182-day and 364-day T-bills are auctionedevery alternate week on Wednesdays.


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Funds for working capital required bycommerce and industry are mainly providedby banks through cash credits, overdrafts,and purchase/discontinuing of commercial

bills. BILL OF EXCHANGE The financial instrument which is traded in

the bill market of exchange. It is used forfinancing a transaction in goods that takessome time to complete.


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It shows the liquidity to make the payment ona fixed date when goods are bought on

credit. Accordingly to the Indian Negotiable

Instruments Act, 1881, it is a writteninstrument containing as unconditional order,

signed by the maker, directing a certainperson to pay a certain sum of money only to,or to the order of, a certain person, or to thebearer of the instrument.


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Commercial bills may be used for financingthe movement and storage of goods betweencountries, before export (pre-export credit),and also within the country.

In India the use of bill of exchange appears tobe in vogue for financing agriculturaloperations, cottage and small scaleindustries, and other commercial and tradetransactions.


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Apart from the genuine bill of exchange, i.e.bills which evidence sale and /or dispatch ofgoods, there are other bills which are knownto the money market. They areaccommodation bills and supply bills.

As accommodationbill is defined as one inwhich a person, called as accommodationparty, puts his name (accept it) to

accommodate another person withoutreceiving and consideration. Such bill issometimes called, a kite or wind bill.


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A banker's acceptance is a short-terminvestment plan created by a company or firmwith a guarantee from a bank.

It is a guarantee from the bank that a buyerwill pay the seller at a future date. A goodcredit rating is required by the company orfirm drawing the bill.

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


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The terms for these instruments are usually90 days, but this period can vary between 30and 180 days. Companies use the acceptance

as a time draft for financing imports, exportsand trade.

In India, there are neither specialisedacceptance agencies for providing this service

on a commission basis nor is it provided toany significant extent by commercial banks.

Under the bill market schemes introduced byRBI in 1952, banks are required to select the

borrowers after careful examination of theirmeans, respectability, and dealings forconversion of their advances in to bills.


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Banks maintain opinion registers on differentdrawers of bills and they get reports from

time to time on these drawers of bills. BA acts as a negotiable time draft for

financing imports, exports or othertransactions in goods.

Acceptances are traded at discounts fromface value in the secondary market.

BAs are guaranteed by a bank to makepayment.


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DISCOUNTING SERVICE The central banks help banks in their liquidity

management by providing them discountingand refinancing facilities.

The RBI are in abundance liquidity (funds) tobanks on occasions when liquidity shortagesthreaten economic stability.

The central bank performs his functionthrough its discount window or discountingmechanism.


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Bank borrow funds temporarily at thediscount window of the central bank.

They are permitted to borrow or are given theprivilege of doing so from the central bankagainst certain types of eligible paper, suchas the commercial bill or treasury bill, whichthe central bank stands ready to discount forthe purpose of financial accommodation tobanks.


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The question of setting up of discount housein India was considered by the bankingcommission in the early 1970s.

DISCOUNT HOUSE FUNCTION It should be the sole depository of the

surplus liquid funds of the banking system aswell as the non-banking financial institutions.


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It should use surplus funds to even out theimbalance in liquidity in the banking systemsubject to the RBI guidelines.

It should create ready market for commercialbills, treasury bills, and governmentguaranteed securities by being ready topurchase from and sell to the banking systemsuch securities.


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Commercial Paper CP) is an unsecuredmoney market instrument issued in the formof a promissory note.

It was introduced in India in 1990 with a viewto enabling highly rated corporate borrowers/to diversify their sources of short-termborrowings and to provide an additionalinstrument to investors.


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Only company with high credit rating issuesCPs

Subsequently, primary dealers and satellitedealers were also permitted to issue CP toenable them to meet their short-term fundingrequirements for their operations.

Primary dealers (PDs) and the All-IndiaFinancial Institutions (FIs) are eligible to issueCP.

CP is very safe investment because the

financial situation of a company can easily bepredicted over a few months.


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CP can be issued for maturities between aminimum of 15 days and a maximum up toone year from the date of issue.

The aggregate amount of CP from an issuershall be within the limit as approved by itsBoard of Directors or the quantum indicatedby the Credit Rating Agency for the specified

rating, whichever is lower. As regards FIs, they can issue CP within the

overall umbrella limit fixed by the RBI i.e.,issue of CP together with other instrumentsviz., term money borrowings, term deposits,certificates of deposit and inter-corporatedeposits should not exceed 100 per cent ofits net owned funds, as per the latest auditedbalance sheet.


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Only a scheduled bank can act as an IPA forissuance of CP.

Individuals, banking companies, othercorporate bodies registered or incorporatedin India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign

Institutional Investors (FIIs) etc. can invest inCPs.

Amount invested by single investor shouldnot be less than Rs.5 lakh (face value).

However, investment by FIIs would be withinthe limits set for their investments bySecurities and Exchange Board of India


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CP will be issued at a discount to face valueas may be determined by the issuer.

The investor in CP is required to pay only thediscounted value of the CP by means of a

crossed account payee cheque to the accountof the issuer through IPA.


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With a view to further widening the range ofmoney market instruments and give investorsgreater flexibility in deployment of their short-term surplus funds, Certificates of Deposit (CDs)

were introduced in India in 1989. Certificate of Deposit (CD) is a negotiable money

market instrument and issued in dematerialisedform or as a Usage Promissory Note against

funds deposited at a bank or other eligiblefinancial institution for a specified time period


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Scheduled commercial banks excludingRegional Rural Banks (RRBs) and Local AreaBanks (LABs)

Select all-India Financial Institutions that have

been permitted by RBI to raise short-termresources within the umbrella limit fixed byRBI.


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