CHAP-13

MONEY MARKEY

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Introduction of money market
 Money market is the market for dealing in
monetary asset of short-term nature.
 Short-term funds up to one year and for financial
assets that are close substitutes for money are
dealt in the money market.
 Money market instruments have the
characteristics of liquidity, (quick conversion into
money) ,minimum transaction cost and no loss
in value.

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Contd…..
 Money market provides access to
providers and users of short-term funds to
fulfill their borrowings and investment
requirements at an efficient market
clearing price.
 It is the major mechanism through which
the RBI influences liquidity and the level of
interest rates.

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FEATURES
 It is a wholesale market.
 The volumes are very large and generally
transactions are settled on a daily basis.
 Trading in the money market is conducted
over the telephone followed by written
confirmation from both the borrowers and
lenders.

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Contd…..
 Participants in the money market are:
 Commercial banks
 Mutual funds
 Investment institutions
 Financial institutions
 RBI

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INSTRUMENTS
 Call money
 Term money
 Certificates of deposit
 Commercial paper
 Money market mutual funds
 Commercial bills
 Treasury bills
 Inter corporate funds

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Call/notice money market
 Call money is interbank market until 1987,except
for UTI and LIC which were allowed to operate
as lender since 1971.
 Apart from banks primary dealers are also
participate in the call/notice market as both
borrowers and lenders.
 Mutual funds set up in the private sector,
approved by SEBI were also participate as
lenders.

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Contd…..
Other participants were
GIC,IDBI,NABARD,DFHI,STCI,and
corporate.
 in call/notice money minimum size of
each transaction is 3crores.

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TERM MONEY MARKET
 The factors that have inhibited the development
of term money are:
 Statutory pre-emotions on interbank liabilities
 Regulated interest rate
 High degree volatility in the call money rates
 Availability of sector specific refinance
 Cash credit system of financing

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Contd…
 Absence of asset liability
 Inadequate development of money market

 The daily turnover of term money

transaction during March 2000 is between
Rs.951-1489crores(Rs.23-967crores in
March1999.

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TRESURY BILLS
 Treasury bill of the central govt have been
issued since the inception of the bank.
 They were issued for 91 days.
 They are claim against the govt
 They are negotiable and can be
rediscounted with the bank, they are
highly liquid

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Contd…
 The features of treasury bills are:
 Absence of default risk
 Easy availability
 Assured yield
 Low transaction cost
 Security for SLR
 Negligible capital depreciation

 There were 14,91,364days treasury bills in vogue in

1997

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14DAYS TREASURY BILLS
 Treasury bill of 14 day was announced on
May 20,1997 to meet the cash
management needs of economy, to
facilitate the emergence of more
comprehensive yield curve.
 The first auction was held on June
6,1997and the amount at the end of
March2000 stood at Rs.325crores

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What is intermediate treasury bills?

 Intermediate treasury bills were introduced

on April 1,1997 to cater the needs of
investing the surplus funds of state
govt,foreign bank and other specified
bodies with whom RBI has special
arrangement.

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Features of 14day treasury bill
 It would be sold on a non-transferable basis for minimum
amount of Rs.1,00,000 or multiple and issued only in
book form
 The bill would be repaid/renewed at par on the expiry of
14daysfrom he date of their issue
 The discount rate would be set quarterly
 The bills would be rediscounted at 50basis points higher
than the discount rate.
 The amount of intermediate treasury bills were
Rs.2383crores at the end of March2000 of which the
share of state govt was 96.18%

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91 days treasury bills
 There are two types of 91 days treasury bills,
ordinary and ad hoc.
 Ordinary treasury bills are issued to the public
and the RBI for enabling the central govt to meet
the temporary requirement for funds.
 Ad hoc treasury bills are created in favour of RBI
and are being phased out under an agreement
with the RBI and the govt of India because they
get automatically monetized.
 Treasury bills are repaid at par on maturity.

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182 days treasury bills
 These bills were reintroduced from the year
1999-2000 to enable the development of a
market for govt securities.
 They are not rediscounted with RBI.
 They are offered for sale on an auction basis.
 The cut off yield varied between
8.53%and9.97% in 1999-2000.the amount is
places at Rs.1590crores in the central budget
2000-01.

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364 days treasury bills
 It was introduced at the end of April 1992
 They are a part of market loans.
 The auction of these bills were on a fortnightly basis
 These bills offer short term investment opportunity to
financial institutions like banks and other parties
 These bills are not rediscounted with RBI
 The notified amount was Rs.500core per auction in
1999-2000
 The outstanding amount is Rs 12996crores,the cut off
yield was 9.24%in June 2000

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Primary dealers
 In the primary market 15 PDs had given a bidding
commitment of Rs.22110crores in treasury bills and bids
tendered were Rs.42317crores in 1999-00
 The accepted bids were Rs.18662crores for treasury
bills ratio of 43.85%
 In the primary market out of the total issues of treasury
bills 46% is PD
 The development on PDs was Rs.57crores in 91days
and 67crores in 14days treasury bills in 1999-2000

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Certificates of deposits (CD)
 Cds are being issued in India since 1989,by
banks either directly to the investors or through
the dealers.
 They are interest bearing ,maturity dated
obligation of banks and part of bank deposits
 They are negotiable certificates of deposit
 The minimum issue of CD is Rs.10,00,000 and
additional in the multiple of 5,00,000

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Contd….
 CDs are issued at face value between
2weeks to 5 yrs
 They are issued for 90 days
 The amount of CDs in 1999-2000 varies
from 1227-3494crores

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Commercial paper
 CP was introduced in Jan 1990 for
corporate borrowers for their short term
borrowings and provide additional
instrument
 CP applies to all non banking financial and
non financial co’s

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features
 Tangible net worth is not less than 5 crores
 Working capital is not less than 4crores
 Credit rating of P2 from credit rating services of
India and A2 from investment information and
credit rating agency of India Ltd
 Borrowers a/c is classified under health code
No1
 Current ratio is 1.33:1

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MONEY MARKET MUTUAL
FUNDS
 MMMF enables small investors to participate in
the money market.
 MMMFs are set up by schedule commercial
banks and public financial institutions.
 They are allowed to set up as a separate entity
in the foam of trust.
 Only individual can subscribe to MMMFs
 The minimum lock-in period is 15days

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