3. Money Market
Money market refers to the market that deals with short term
financial assets that are close substitutes of money, usually
with maturities of less than one year.
A well functioning money market provides a relatively safe
and steady income-yielding avenue.
It meets the short-term requirements of borrower and provides
liquidity or cash to the lenders.
It is a wider market linked through the telecommunication
networks.
4. Continued…
The money market too has the primary market and secondary
market.
In the primary market, the Govt. securities like T-Bills and
Govt. bonds are auctioned.
The secondary market deals in trading of T-Bills, Govt. and
corporate bonds, and other money market instruments.
Money market enables the institutions with surplus funds to
lend to those who have temporary fund shortages.
5. Money Market Players
• Government
• Central Bank
• Commercial Banks
• Co-operative Banks
• Provident Funds
• Financial Institutions
• Corporate Units
• Mutual Funds
• FIIs
• Primary Dealers or Market Makers.
6. Primary Dealers
• Primary Dealer system was introduced in 1996 with the
objective of strengthening the securities market infrastructure
and improvement in the secondary market trading, liquidity
and turnover in govt. securities.
• The obligations of PDs include:
Participating in the primary market in a substantial and
consistent manner.
Serving as a market maker in the secondary market by
providing two way quotes.
7. List of Primary Dealers
A. Bank PDs
1. Citibank , Mumbai Branch
2. Standard Chartered Bank
3. Bank of America
4. J P Morgan Chase Bank
5. HSBC Bank
6. Bank of Baroda
7. Canara Bank
8. Kotak Mahindra Bank Ltd.
9. Corporation Bank
10. HDFC Bank
11. ABN AMRO Bank
12. Axis Bank
8. Continued…
B. Stand alone PDs
1 IDBI Gilts
2 ICICI Sec P D Ltd.
3 PNB Gilts Ltd.
4 SBI DFHI Ltd
5 STCI PD Ltd
6 Deutsche Securities (India) Pvt Ltd
7 Morgan Stanley Primary Dealer Pvt. Ltd.
8 Nomura Fixed Income Securities Pvt. Ltd.
9. Liquidity Adjustment Facility
• LAF is a facility extended by the Reserve Bank of India to the
scheduled commercial banks (excluding RRBs) and primary
dealers to avail of liquidity in case of requirement or park
excess funds with the RBI in case of excess liquidity on an
overnight basis against the collateral of Government securities
including State Government securities.
• Basically LAF enables liquidity management on a day to day
basis.
• The operations of LAF are conducted by way of repurchase
agreements (repos and reverse repos) with RBI being the
counter-party to all the transactions.
10. Continued…
• The interest rate in LAF is fixed by the RBI from time to time.
• Currently the rate of interest on repo under LAF (borrowing
by the participants) is 6.25% and that of reverse repo (placing
funds with RBI) is 5.25%.
• LAF is an important tool of monetary policy and enables RBI
to transmit interest rate signals to the market.
11. How are the Government
Securities issued?
• Government securities are issued through auctions conducted
by the RBI.
• Auctions are conducted on the electronic platform called the
NDS (Negotiated Dealing System) – Auction platform.
• Commercial banks, Scheduled Urban co-operative banks,
Primary Dealers, insurance companies and provident funds,
who maintain funds account (current account) and securities
accounts (SGL – Subsidiary General Ledger Account) with
RBI, are members of this electronic platform.
12. Continued…
• The RBI, in consultation with the Government of India, issues
an indicative half-yearly auction calendar which contains
information about the amount of borrowing, the tenor of
security and the likely period during which auctions will be
held.
• A Notification and a Press Communique giving exact
particulars of the securities, viz., name, amount, type of issue
and procedure of auction are issued by the Government of
India about a week prior to the actual date of auction.
13. Continued…
• RBI places the notification and a Press Release on its website
(www.rbi.org.in) and also issues an advertisement in leading
English and Hindi newspapers.
• Information about auctions is also available with the select
branches of public and private sector banks and the Primary
Dealers.
14. SGL-Subsidiary General Ledger
Account
• Reserve Bank of India, keeps the records of holding of various
investors in the securities issued by Central and State
Government.
• The SGL, in short keeps the names of all investors in a
particular security at any point of time. The securities are
held in electronic form in SGL accounts.
• Securities kept on behalf of customers by banks or PDs are
kept in a segregated CSGL A/c with the RBI.
• Thus, if the bank or the PD buys security for his client, it gets
credited to the CSGL account of bank or PD with the RBI.
15. Trading in Govt. Securities
• There is an active secondary market in Government securities.
• The securities can be bought / sold in the secondary market by
three ways:
(i) Over the Counter (OTC) or
(ii)through the Negotiated Dealing System (NDS) or
(iii)the Negotiated Dealing System-Order Matching (NDS-OM).
16. Negotiated Dealing System
• The Negotiated Dealing System (NDS) for electronic dealing
and reporting of transactions in government securities was
introduced in February 2002.
• It facilitates the members to submit electronically, bids or
applications for primary issuance of Government Securities
when auctions are conducted.
17. Continued…
• In August, 2005, RBI introduced an anonymous screen based
order matching module on NDS, called NDS-OM.
• This is an order driven electronic system, where the
participants can trade anonymously by placing their orders on
the system or accepting the orders already placed by other
participants.
• NDS-OM is operated by the Clearing Corporation of India
Ltd. (CCIL) on behalf of the RBI.
• Direct access to the NDS-OM system is currently available
only to select financial institutions like Commercial Banks,
Primary Dealers, Insurance Companies, Mutual Funds, etc.
18. Continued…
• Facilities are also available for trading in Government
securities on stock exchanges (NSE, BSE) which cater to the
needs of retail investors.
19. Money Market Instruments
• Treasury Bill
• Dated Govt. Securities
• Commercial Paper
• Certificate of Deposit
• Repos
• Term Money
• Call/Notice Money market
• Commercial Bills
20. Treasury Bill
• Treasury Bills are short term (up to one year) borrowing
instruments of the Government.
• They do not pay interest prior to maturity; instead they are
sold at a discount and redeemed at par.
• The discount represents the interest rate on the instrument.
21. Features of Treasury Bills
• Treasury Bills are issued by the RBI on behalf of the
Government of India, by acting as an issuing agent.
• Issued to meet the short term requirements of GOI.
• Zero default risk
• Assured Yield
• Low transaction cost
• T-Bills are issued on auction basis.
22. Types of Treasury Bills
• At present, the GOI issues three types of treasury Bills:
91-day T-Bill
182-day T-Bill
364-day T-Bill
• In 1997, in order to enhance the depth of the money market in
India, the RBI decided to introduce 14-day and 28-day T-Bills.
• However, so far, only 14-day and 182-day T-Bills have seen
the light.
• Later, the RBI had withdrawn the 14-day and 182-day T-Bills
with effect from May 14, 2001.
• With effect from April, 2005 the GOI reintroduced 182-day
Treasury Bill.
23. Adhoc Treasury Bills
• Ad hoc T-Bills are issued in favor of the RBI when the govt.
needs cash.
• They are neither issued nor available to the public.
• These bills are purchased by RBI at discount and are held in
its issue department.
24. Size of the Treasury Bills
• The minimum denomination of 91-day treasury bills is Rs.
25000, i.e., the minimum amount of bids for the 91-day T-bills
are to be made for a minimum amount of Rs. 25000 and in
multiples thereafter.
• The minimum amount of the 364-day T-Bills is Rs. 10,00,00.
The bidding of treasury bills normally takes place in multiples
of Rs. 1 crore.
25. Auctions
Type of T-
Bill
Day of Auction Day of Payment
91-day Wednesday Following Friday
182-day Wednesday of Non-reporting
week
Following Friday
364-day Wednesday of reporting week Following Friday
26. Yield on Treasury Bills
Yield = (100-P / P) * (365/D) * 100
•Where P = Purchase price, D = Days to Maturity
27. Commercial Paper
• Commercial Papers are the unsecured promissory notes issued
by the corporates to raise short-term funds from the money
market.
• CPs were introduced in India in 1990.
• Issued at discount.
• Redeemed at par
28. Denomination
• They can be issued in denominations of Rs. 5 lakhs and its
multiples thereof.
29. Maturity
• CP can be issued for maturities between a minimum of 7 days
and a maximum up to 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.
• The maturity date of the CP shall not go beyond the date up to
which the credit rating of the issuer is valid.
31. Eligibility to issue Commercial
Papers
a) the tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs. 4 crore;
b) Eligible participants/issuers shall obtain credit rating for
issuance of CP from any one of the SEBI registered CRAs.
The minimum credit rating shall be ‘A3’ as per rating symbol
and definition prescribed by SEBI. The issuers shall ensure at
the time of issuance of the CP that the rating so obtained is
current and has not fallen due for review.
32. Investors of Commercial Papers
• Individuals
• Banking Companies
• Corporate bodies registered or incorporated in India
• Non-Resident Indians (NRIs)
• Foreign Institutional Investors (FIIs)
33. Maximum Amount to be raised
• The Board of Directors of the issuing company decides the
aggregate amount of CP.
• However, it should be accepted by the credit rating agency for
the specified rating.
• If the credit rating agency indicates a lower amount than
approved by the Board of Directors of the issuing company,
the amount accepted by the credit rating agency alone can be
issued.
34. Procedure for Issuance
• Every issuer must appoint an IPA for issuance of CP.
• The issuer should disclose to the potential investors, its latest
financial position as per the standard market practice.
• After the exchange of confirmation of the deal between the
investor and the issuer, the issuer shall arrange for crediting
the CP to the Demat account of the investor with the
depository through the IPA (Scheduled Bank acting as an
IPA).
• The issuer shall give to the investor a copy of IPA certificate
to the effect that the issuer has a valid agreement with the IPA
and documents are in order.
36. Trading and Settlement of CP
• All OTC trades in CP shall be reported within 15 minutes of
the trade to (FIMMDA) Fixed Income Money Market and
Derivatives Association of India reporting platform.
• OTC trades in CP shall be settled through the clearing house
of the NSE, i.e., the National Securities Clearing Corporation
Limited (NSCCL), BSE, i.e., Indian Clearing Corporation
Limited (ICCL), and the clearing house of the MCX-SX
Clearing Corporation Limited (CCL), as per the norms
specified by NSCCL, ICCL and CCL from time to time.
• The settlement cycle for OTC trades in CP shall either be T+0
or T+1.
37. The Yield
• Y = (F/P - 1)*100*365/N
• Where Y = Yield, F = Face Value, P = Issue Price, N = No. Of
days
38. Continued…
• For example, a corporate issues a 90 days commercial paper at
Rs. 97.5936. The face value is Rs. 100. Calculate the yield for
this commercial Paper.
• Y = (100/97.5936 – 1) * 100 * 365/90
• Y = 9.999% or = 10%
39. Certificate of Deposit
• These are another money market instrument introduced by the
RBI in 1989.
• Certificate of Deposits are the money market instruments
issued by banks in the form of promissory notes.
40. Features of CDs
• CD is a marketable document of title to a time deposit of a
bank.
• CDs are issued at a discount to face value.
• CDs are freely transferable by endorsement and delivery.
• CDs are issued in demat form only
41. Minimum Size and Denomination
• CDs should be issued in denomination of Rs. 1 lakh.
• The minimum marketable lot from a single subscriber should
not be less than Rs. 1 lakh and in multiples of Rs. 1 lakh
thereafter.
42. Maturity Period
• The maturity period of CDs are from 7 days to one year.
• CDs mature on a specified date and have no grace period.
44. Investors of the CDs
• Individuals
• Companies
• NRIs
• Primary Dealers
45. Yield on CDs
• Y = (F/I – 1)*100*365/N
• Where Y=Yield, F=Face Value, I=Issue Price, N=No. of days.
46. Dated Govt. Securities
• Dated Government securities are long term securities and
carry a fixed or floating coupon (interest rate) which is paid on
the face value, payable at fixed time periods (usually half-
yearly).
• The tenor of dated securities can be up to 30 years.
• Since the date of maturity is specified in these securities, they
are described as dated securities.
• For example, an 8.24% GOI 2018 Bond is a central Govt.
security maturing in 2018 and it carries a coupon of 8.24%
payable half yearly.
• The dated govt. securities are sold through auctions conducted
through the NDS.
47. Continued…
• The Repayment of dated securities is done by the RBI and
therefore these are considered as risk-free investments.
• These securities are eligible as SLR investments.
• The market for the dated govt. securities is also known as the
Govt. bond market or G-Sec market.
48. Features of Government Securities
• Issued at face value
• Ample liquidity as the investor can sell the security in the
secondary market
• Interest payment on a half yearly basis on face value
• Can be held in Demat form.
• Rate of interest and tenor of the security is fixed at the time of
issuance and is not subject to change.
• Maturity ranges from 2-30 years.
• Securities qualify as SLR (Statutory Liquidity Ratio)
investments.
49. Segments of dated Government
securities market in India
• Primary Market: The Primary Market consists of the issuers
of the securities, viz., Central and Sate Government and
buyers include Commercial Banks, Primary Dealers, Financial
Institutions, Insurance Companies & Co-operative Banks.
• Secondary Market: The Secondary Market includes
Commercial banks, Financial Institutions, Insurance
Companies, Provident Funds, Trusts, Mutual Funds, Primary
Dealers and Reserve Bank of India. Even Corporates and
Individuals can invest in Government Securities. The
eligibility criteria is specified in the relative Government
notification.
50. Auctions
• Yield Based or multiple-price auction: In this type of
auction, RBI announces the issue size or notified amount and
the tenure of the paper to be auctioned. The bidders submit
bids in term of the yield at which they are ready to buy the
security. If the Bid is more than the cut-off yield then its
rejected otherwise it is accepted
51. Continued…
• Price Based or Uniform Price auction: In this type of
auction, RBI announces the issue size or notified amount and
the tenure of the paper to be auctioned, as well as the coupon
rate. The bidders submit bids in terms of the price. Bids at
price lower then the cut off price are rejected and bids higher
then the cut off price are accepted. Price Based auction leads
to a better price discovery then the Yield based auction.
52. Call/Notice Money Market
• The call money market is an integral part of the Indian Money
Market, where the day-to-day surplus funds (mostly of banks)
are traded.
• The loans are of short-term duration varying from 1 to 14
days.
• The money that is lent for one day in this market is known as
"Call Money", and if it exceeds one day (but less than 15
days) it is referred to as "Notice Money".
53. Borrowers in call money market
• All scheduled commercial Banks
• All co-operative banks
• All primary dealers
54. Lenders in Call Money Market
• All scheduled commercial Banks
• All co-operative banks
• All primary dealers
• Selected Financial Institutions
• Selected Insurance Companies
• Select Mutual Funds
55. Call Rates
• The interest paid on call loans is known as the call rates.
• The rate of interest on call money is calculated on a daily
basis.
• The call rate is expected to freely reflect the day-to-day
market scarcities or lack of funds.
• These rates vary from day-to-day and within the day , often
from hour to hour.
56. Continued…
• High rates indicates a tightness of liquidity in the financial
system and while low rates indicates an easy liquidity position
in the market.
• The rate is largely subjected to influence by the forces of
supply and demand for funds.
57. Term Money
• Term money market is the inter-bank market of more than 14
days maturity.
• This market is also affected by the reserve requirements of the
banks.
58. Operational Mechanism
• Once the deal is stuck the funds are immediately available to
the borrowing bank and are repaid with interest on the
next/due date.
59. Purpose
• In India call money is used mainly to even out the short-term
mismatches of assets and liabilities and to meet short-term
requirements of banks.
• Some banks may borrow and lend simultaneously from the
market if they find an opportunity to arbitrage.
• Banks also borrow from this market to meet the CRR
requirements.
60. Role of Primary Dealers in the Call
Market
• Primary Dealers have a significant role in the call market.
• Some co-operative and regional rural banks, which are not
allowed to participate directly in the call market can access the
market through primary dealers.
61. Repos
• Repo is a money market instrument, which enables
collateralised short term borrowing and lending through
sale/purchase operations in debt instruments.
• Under a repo transaction, a holder of securities sells them to an
investor with an agreement to repurchase at a predetermined
date and rate.
• In the money market, this transaction is nothing but
collateralised lending as the terms of the transaction are
structured to compensate for the funds lent and the cost of the
transaction is the repo rate
62. ELIGIBLE INSTRUMENTS
• Different instruments can be considered as collateral security
for undertaking the ready forward deals and they include
Government dated securities, Treasury Bills, corporate bonds,
money market securities and equity.
63. Mechanism
• Before entering into the deal, the sale and repurchase price are
determined.
• The buyer gets the securities and the seller gets the cash.
• After the repo period expires, the seller purchases the
securities by returning the money.
• For the use of money in the intervening period i.e. the repo
period, the seller pays interest at an agreed rate, which is
adjusted in the repurchase price of the security.
67. Commercial Bills
• Funds for working capital required by industries are mainly
provided by banks through cash credits, overdrafts and
purchase/discounting of commercial bills.
• Bill of Exchange
The financial instrument which is traded in the bill market of
exchange. It is used for financing a transaction in goods that
takes some time to complete.
