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7/27/2019 moneymarketitsinstruments-120411145313-phpapp01

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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 doesnt actually 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 provide room for overcoming short term

deficits.

To enable the central bank to influence andregulate 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 commercialbanks.

o Effective central bank control.

o Formulation of suitable monetarypolicy.

o Non inflationary source of finance to

government.


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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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Scheduled commercial banks Non-scheduled commercial banks

Foreign banks

State, district and urban, cooperative banks Discount and Finance House of India (DFHI)

Securities Trading Corporation of India(STCI).

The DFHI and STCI borrow as well as lend, likebanks and primary dealers, in the call market.


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The rate of interest paid on call loans isknown as call rate.

Call rate is highly variable from day to day,often from hour to hour.

It is very sensitive to changes in demand forand supply of call loans.

Eligible participants are free to decide oninterest rates in call/notice money market.

Calculation of interest payable would bebased on FIMMDAs (Fixed Income MoneyMarket and Derivatives Association of India).


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CALL RATE IN INDIA has reached as high alevel as 30% in December 1973.

It is an alarming level for any short-term rateof interest to reach, and as bank defaulted in

a major way in respect of cash and liquidityrequirements at that time due to theprohibitively high cost of call money, itbecame necessary to regulate call rates within

reasonable limits. Indian Banks Association (IBA) in 1973 fixed

a ceiling of 15% on the level of call rate.


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Continued

The IBA lowered this ceiling of 15% to 12.5%in March 1976, 10 % in June 1977, and 8.6%in March 1978, and 10.0% in April 1980.

And current call rate in India is 8%.

There are now two call rates in India: one, theinterbank call rate, and the other, the lendingrate of DFHI.


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DEALING SESSIONDeals in the call/notice money market can be

done up to 5.00 pm on weekdays and 2.30pm on Saturdays or as specified by RBI fromtime to time.

LOCATION OF CALL MONEY MARKET IN INDIAMumbai, Calcutta, Chennai, Delhi, andAhmadabad.


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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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Treasury bills are not self-liquidating in theway genuine trade bills are, although thedegree of their liquidity is greater than that oftrade bills.

If we were to arrange short-term financialinstruments according to their liquidity, thedescending order would be cash, call loans,treasury bills and commercial bills.


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Treasury bills are highly liquid because there

cannot be a better guarantee of repaymentthen the one given by the government andbecause the central bank of country is alwayswilling to purchase or discount them.

As unlike ordinary trade bills, treasury billsare claims against the government, they donot require any gardening or furtherendorsement or acceptance


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The high liquidity Absence of risk of default

Ready availability

Assured yield Low transaction cost

Eligibility for inclusion in statutory liquidityratio (SLR)

Negligible capital depreciation


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Ordinary TBs Ad hoc TBs

The ordinary TBs are issued to the public andthe RBI for enabling the government to meetthe needs of supplementary short-termfinance.

TBs, also known as ad hocs in short, has beendiscontinued through the signing of twoagreements between the government and theRBI.


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The instrument of ad hoc Treasury bill and

the system of issuing it were introduced inIndia in 1937.

Government shall maintain with the RBI acash balance of not less than Rs.50crore onFridays and Rs.4 crore on other days free ofobligation to pay interest.


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whenever the balance falls below these

minimums, the government account would bereplenished by the creation of ad hocs infavour of the RBI.

The government issued these bills to

replenish their cash balance. They alsoprovide a medium to the state governments,semi-governments, and foreign central banksto invest their temporary surpluses.


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With a view to widening the short-termmoney market, and to providing more outletsfor temporary surplus fund, the authorities inIndia had introduced, in November 1986, a

major innovation in the form of new moneymarket instrument- the 182-day Treasurybill.

It used to be sold in the market by the RBI in

auctions which were monthly in thebeginning; they were made fortnightly fromJuly 1988.


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Continued..

It is important to note that no specificamount 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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The 182-day bills could be purchased by anyperson resident in India, including

individuals, firms, companies, banks, andfinancial institutions.

The 182-day bill was quit liquid because ofthe availability of refinance facility against it

and the existence of the secondary market init.


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Upon discounting the 182-day Treasury billthe authorities introduced a new moneymarket instrument, namely 364-day TBs witheffect from April 1992.

It is being auction regularly every fortnight.

Its features are very similar to those whichthe 182-day bill had.

The RBI dose not purchase and rediscountthis bill.


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With a view to further diversify the TBs market;the authorities have introduced recently twotypes of 14-day TBs:

On April 1, 1997 which is known as

intermediate treasury bill (ITB)

Second on may 20, 1997.

ITB has replaced the 91-day tap Treasury bill.


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Continued..

It is sold only to state governments, foreign

central banks, and other specified bodies inorder to provide them with alternatearrangements in place of 19-day tap TBs forinvestment of their temporary cash surplus.

It is issued in a book entry from i.e. by creditto subsidiary general ledger account.

It can be repaid/renewed at par on theexpiration of 14 days from the date of issue.

The disadvantage of 14-day ITB is that it isnot tradable or transferable.


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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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T-bills auctions are held on the NegotiatedDealing System (NDS) and the memberselectronically submit their bids on thesystem.

DEFECTS OF TREASURY BILLS Poor Yield Absence of Competitive Bids Absence of Active Trading


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Type of Day of Day of

T-bills Auction Payment*91-day Wednesday Following Friday182-day Wednesday of non-

reporting weekFollowing Friday

364-day Wednesday ofreporting week

Following Friday


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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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INLAND BILLS Be drawn or made in India, and must be

payable in India Be drawn upon any person resident in India FOREIGN BILLS Drawn outside India and may be payable in

and by a party outside India, or may bepayable in India or drawn on a party residentin India

Drawn in India and made payable outsideIndia.

A related classification of bills is export billsand import bills


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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 buyer

will 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 the

privilege 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 commercial

bills, 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 view

to 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.

CP b i d f t iti b t


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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 ForeignInstitutional 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 Usance 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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Banks have the freedom to issue CDsdepending on their requirements.

An FI may issue CDs within the overallumbrella limit fixed by RBI, i.e., issue of CD

together with other instruments, viz., termmoney, term deposits, commercial papersand inter-corporate deposits should notexceed 100 per cent of its net owned funds,

as per the latest audited balance sheet.


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Minimum amount of a CD should be Rs.1 lakh,i.e., the minimum deposit that could be acceptedfrom a single subscriber should not be less thanRs.1 lakh and in the multiples of Rs. 1 lakhthereafter.

INVESTORSCDs can be issued to individuals, corporations,companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe toCDs, but only on non-repatriable basis, which

should be clearly stated on the Certificate. SuchCDs cannot be endorsed to another NRI in thesecondary market.


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The maturity period of CDs issued by banksshould be not less than 7 days and not morethan one year.

The FIs can issue CDs for a period not less

than 1 year and not exceeding 3 years fromthe date of issue.


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CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on

floating rate basis provided the methodology ofcompiling the floating rate is objective,

transparent and market-based. Banks have to maintain appropriate reserve

requirements, i.e., cash reserve ratio (CRR) andstatutory liquidity ratio (SLR), on the issue price

of the CDs. CDs in physical form are freely transferable by

endorsement and delivery.


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I :- ORGANISED STRUCTURE1. Reserve bank of India.2. DFHI (Discount And Finance House of India).3. Commercial banks

i. Public sector banksSBI with 7 subsidiaries

Cooperative banks20 nationalised banks

ii. Private banksIndian Banks

Foreign banks4. Development bankIDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.


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II. UNORGANISED SECTOR1. Indigenous banks2 Money lenders3. Chits

4. Nidhis

III. CO-OPERATIVE SECTOR1. State cooperative

i. central cooperative banksPrimary Agri credit societiesPrimary urban banks

2. State Land development bankscentral land development banks

Primary land development banks


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