money market

1. MONEY MARKETS PROF. PARVEEN SULTANA

3. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).

4. A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

5. It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost.

7. FORM OF FINANCIAL MARKETS TIME PERIOD

8. OVERVIEW OF FINANCIAL MARKETS

10. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market.

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

14. Development of capital market.

15. Smooth functioning of commercial banks.

16. Effective central bank control.

17. Formulation of suitable monetary policy.

19. SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI Gilts in 2004)

20. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend.

21. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders

23. Commercial bills market or discount market

24. Acceptance market

27. Money at call and short notice in the call loan market.

29. Certificate of deposit.

30. Inter-bank participation certificates.

31. Repo instrument

32. Banker's Acceptance

33. Repurchase agreement

35. CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act)

36. They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits

37. A CD is a time deposit with a bank.

38. Like most time deposit, funds can not withdrawn before maturity without paying a penalty.

39. CD’s have specific maturity date, interest rate and it can be issued in any denomination.

40. The main advantage of CD is their safety.

43. CP is very safe investment because the financial situation of a company can easily be predicted over a few months.

44. Only company with high credit rating issues CP’s.

46. Rating Requirement All eligible participants should obtain the credit rating for issuance of Commercial Paper Credit Rating Information Services of India Ltd. (CRISIL) Investment Information and Credit Rating Agency of India Ltd. (ICRA) Credit Analysis and Research Ltd. (CARE) Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

47. Maturity CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day. CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). To whom issued

48. Repo Rates and Reverse Repo Rates RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system It helps banks to invest surplus cash It helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better rates An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously.

49. Meaning of Repo It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

51. They are usually very short term repurchases agreement, from overnight to 30 days of more.

52. The short term maturity and government backing usually mean that Repos provide lenders with extreamly low risk.

54. Call Money Market Banks borrow in this market for the following purpose To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows.

56. BA’s are guaranteed by a bank to make payment.

57. Acceptances are traded at discounts from face value in the secondary market.

58. BA acts as a negotiable time draft for financing imports, exports or other transactions in goods.

60. They are issued with three-month, six-month and one-year maturities.

61. T-bills are purchased for a price that is less than their par(face) value; when they mature, the government pays the holder the full par value.

63. Gilt edged securities The term government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.

64. Structure of Indian Money Market ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India).3. Commercial banksi. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

65. Structure of Indian Money Market UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperativei. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks

67. Dichotomized and loosely integrated

68. Irrational structure of interest rates

69. Highly volatile market

70. Seasonal stringency of loan able funds

71. Lack of funds in the money market

73. Presence of central bank

74. Availability of proper credit instrument

75. Existence of sub-market

76. Ample resources

77. Existence of secondary market

79. Widening of call Money market

80. Introduction of innovative instrument

81. Offering of Market rates of interest

82. Promotion of bill culture

83. Entry of Money market mutual funds

84. Setting up of credit rating agencies

85. Adoption of suitable monetary policy

86. Establishment of DFHI

89. THE END