Unit 1-Money Market: - Course Instructor Twesha Chharia

Unit 1-Money Market
-Course Instructor
Twesha Chharia

LOS
To have basic knowledge about money market
instruments.

To know importance of call and notice money
market.
10/13/2014 Financial Markets
Financial Market- Introduction
A Strong Financial System Is Necessary for a
Growing and Prosperous Economy.
Financial manager and investor dont operate
in vacuum.
Make decision within large and complex
financial environment( financial market and
institution , tax and regulatory authorities and
state of economy.

Environment determine available financial
alternatives and affects the outcomes of
various decisions.
Thus crucial for investor to have good
knowledge of environment in which they
operate.

Factors increasing Scope and efficiency
of global financial system

Changing Technology
Improving Communications

Eg: On click of a mouse an individual investor
in Nebraska can deposit funds in a European
bank or purchase a mutual fund that invests in
Chinese securities.
Fundamental Aspect of Financial
Markets Trust
Eg: An investor who deposits money in a bank,
buys stock through an online brokerage
account, or contacts her broker to buy a
mutual fund places her money and trust in the
hands of the financial institutions that provide
her with advice and transaction services.
Similarly, when businesses approach
commercial or investment banks to raise
capital, they are relying on these institutions
to provide them with funds under the best
possible terms, and with sound, objective
advice.

Y= F(K,L)

S
C
T
Funds
K FA
Equity
Treasury
Bonds
Deposit
Banks
Pension Funds
Profit
Link Between Financial System and the Economy
Savers
Households, Corporations and
Government
Intermediaries
Banks, Insurance Companies, Building Societies,
Trusts, Stock and Bond Markets
Investors
Small, Medium and Large
Private, Public, Domestic and Foreign
Major Players in a Financial Market
C
E
N
T
R
A
L

B
A
N
K
G
O
V
E
R
N
M
E
N
T

Functions Of Financial Market
Financial markets provide for financial
intermediation--financial savings (Surplus
Units) to investment (Deficit Units)
Financial markets provide payments system
Financial markets provide means to manage
risk
To position risk and return for financial
tools(the nature of financial market)

Classification of Financial Market
Money versus Capital Markets

Primary versus Secondary Markets

Organized versus Over-the-Counter Markets

Primary vs. Secondary Markets
PRIMARY
New Issue of
Securities(ipo)

Exchange of Funds for
Financial Claim

Funds for Borrower; an
IOU(contractual obligation)
for Lender
SECONDARY
Trading Previously Issued
Securities

No New Funds for Issuer

Provides Liquidity for Seller
Money vs. Capital Markets
Money
Short-Term, < 1 Year
High Quality Issuers
Debt Only
Primary Market Focus
Liquidity Market--Low
Returns
Capital
Long-Term, >1Yr
Range of Issuer Quality
Debt and Equity
Secondary Market Focus
Financing Investment--
Higher Returns
Organized vs. Over-the-Counter
Markets
Organized
Visible Marketplace
Members Trade
Securities Listed
Bombay Stock
Exchange
OTC
Wired Network of
Dealers
No Central, Physical
Location
All Securities Traded off
the Exchanges
Indian Financial System
Money Market Securities
Maturity of a year or less
Debt securities issued by corporations and
governments that need short-term funds
Large primary market center
Purchased by corporations and financial
institutions
Secondary market for securities
Money Market Securities
Treasury Bills
Commercial paper
Negotiable certificates of deposits
Repurchase agreements(Repo)
Call and notice money market
Treasury Bills-Introduction
Treasury bills (T-bills) offer short-term
investment opportunities, generally up to one
year.
Tb are short term ,rupee denominations
issued by RBI on behalf of GOI.
TB are issued in form of promissory notes by
the government to tide over short term
liquidity shortfalls.

Features of TB
They are thus useful in managing short-term
liquidity.
Zero default risk being sovereign paper
Highly liquid money market instrument
Eligible for inclusion in SLR.
Transparency

High degree of tradability and active
secondary market facilitates meeting
unplanned fund requirements.

Issuer
At present , the Government of India issues
treasury bills through auctions.

There are no treasury bills issued by State
Governments.

Investor
Commercial banks , FIIs
Scheduled urban co-operative banks,
Primary Dealers,
Insurance companies
Provident funds,
HUF and Individuals
who maintain funds account (current account)
and securities accounts (SGL account or GILT
account) with RBI
Purpose
Raised to meet short term requirement of
GOI.
RBI to perform open market operations

Size
Treasury bills are available for a minimum
amount of Rs.25,000 and in multiples of Rs.
25,000.

Treasury bills are issued at a discount and are
redeemed at par.

Types Of TB
At present , the Government of India issues
three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day.

Issuing Procedure of TB
In the primary market, treasury bills are issued
by auction technique.

FORM of issue
T bills are issued either in the form of
promissory notes or credited to investors SGL
account.
TB are issued at discount.
While 91-day T-bills are auctioned every week
on Wednesdays, 182-day and 364-day T-bills
are auctioned every alternate week on
Wednesdays.
The Reserve Bank of India issues a quarterly
calendar of T-bill auctions which is available at
the Banks website.
(URL:http://www.rbi.org.in).
It also announces the exact dates of auction,
the amount to be auctioned and payment
dates by issuing press releases prior to every
auction.
Type of Day of Day of
T-bills Auction Payment*
91-day Wednesday Following Friday
182-day Wednesday of non-reporting
week
Following Friday
364-day Wednesday of reporting
week
Following Friday
* If the day of payment falls on a holiday,
the payment is made on the day after the
holiday.

SALIENT FEATURES OF THE
AUCTION TECHNIQUE
The auction of treasury bills is done only at
Reserve Bank of India, Mumbai.

Bids are received at Mumbai office during
banking hours ie upto 2 pm on the date of
auction.

The bids are received in terms of price per Rs
100. For example, a bid for 91 day treasury bill
auction could be for Rs 97.50. Further, bids
cannot be submitted with prices for more
than two decimals.
The auction committee of Reserve Bank of
India decides the cut-off price and the results
are announced on the same day.

Bids above the cut-off price receive full
allotment ; bids at cut-off price may receive
full or partial allotment and bids below the
cut-off price are rejected.
TYPES OF AUCTIONS

Multiple Price Based or French Auction:
Under this method, all bids equal to or above
the cut-off price are accepted. However, the
bidder has to obtain the treasury bills at the
price quoted by him. This method is followed
in the case of 364days treasury bills and is
valid only for competitive bidders.

Uniform Price Based or Dutch auction: Under
this system, all the bids equal to or above the
cut-off price are accepted at the cut- off level.
However, unlike the Multiple Price based
method, the bidder obtains the treasury bills
at the cut-off price and not the price quoted
by him. This method is applicable in the case
of 91 days treasury bills only.

CLASSIFICATION OF BIDS
Competitive Bids
Competitive bids can be submitted by any
person or institutions like, banks, financial
institutions, Primary Dealers, firms,
companies, corporate bodies, institutions and
trusts in India.

Non Competitive Bids
State Governments, Provident Funds and
Nepal Rashtra bank are allowed to submit
non-competitive bids in the case of 91 days
treasury bills.
In the case of 364 days treasury bills however,
only State Governments can participate as
non-competitive bidders.

The Reserve Bank of India participates as a
non-competitive bidder in the auction.

All the non-competitive bids are accepted at
the weighted average price of the
competitive bids.
Clearing and Settlement
Investor open SGL(Subsidiary General Ledger)
account with RBI.

When transaction occur, seller issues an SGL
transfer form specifying the details of the
transaction.

SGL transfer form is then lodged by buyer with
the Public Accounts Department of RBI to
credit its account by debiting the value of
securities to seller account.

Yield of T bills

Where,P Purchase price
D Days to maturity
Day Count: For Treasury Bills, D = [actual number of days
to maturity/365]
Eg: Assuming that the price of a 91 day
Treasury bill at issue is Rs.98.20, the yield on
the same would be:-

= 7.35%

After say, 41 days, if the same Treasury bill is
trading at a price of Rs. 99, the yield would
then be

= 7.373%

Commercial Paper
Commercial Paper (CP) is an unsecured money
market instrument issued in the form of 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-term
borrowings and to provide an additional
instrument to investors.
Subsequently, primary dealers and all-India
financial institutions were also permitted to
issue CP to enable them to meet their short-
term funding requirements for their
operations.

A corporate would be eligible to issue CP
provided
a. the tangible net worth of the company, as
per the latest audited balance sheet, is not
less than Rs. 4 crore
b. company has been sanctioned working
capital limit by bank/s or all-India financial
institution/s; and

c. the borrowal account of the company is
classified as a Standard Asset by the financing
bank/s/ institution/s.

Credit rating for issue of CP
The minimum credit rating shall be A-2 [As per
rating symbol and definition prescribed by
Securities and Exchange Board of India (SEBI)].
Maturity Period:
CP can be issued for maturities between a
minimum of 7 days and a maximum of up to
one year from the date of issue.
However, the maturity date of the CP should
not go beyond the date up to which the credit
rating of the issuer is valid.
CP can be issued in denominations of Rs.5
lakh or multiples thereof
CP may be issued on a single date or in parts
on different dates as each CP shall have the
same maturity date.
Scheduled bank can act as an IPA for issuance
of CP
Issuing and Paying Agent
Scheduled bank can act as an IPA for issuance
of CP.
Rules and Responsibilities of Issuer,
IPA and Credit rating
Issuer:
a. Every issuer must appoint an IPA for
issuance of CP.
b. The issuer should disclose to the potential
investors its financial position as per the
standard market practice.

c. After the exchange of deal confirmation
between the investor and the issuer, issuing
company shall issue physical certificates to the
investor or arrange for crediting the CP to the
investor's account with a depository.

Investors shall be given a copy of IPA
certificate to the effect that the issuer has a
valid agreement with the IPA and documents
are in order (Schedule II given in the Master
Circular-Guidelines for Issue of Commercial
Paper dated July 1, 2011 and updated from
time to-time).

Issuing and Paying Agent
a. IPA would ensure that issuer has the
minimum credit rating as stipulated by the RBI
and amount mobilised through issuance of CP
is within the quantum indicated by CRA for
the specified rating or as approved by its
Board of Directors, whichever is lower.
b. IPA has to verify all the documents
submitted by the issuer viz., copy of board
resolution, signatures of authorised
executants (when CP in physical form) and
issue a certificate that documents are in order.
c. Certified copies of original documents
verified by the IPA should be held in the
custody of IPA.

Credit Rating Agency
a. Code of Conduct prescribed by the SEBI for
CRAs for undertaking rating of capital market
instruments shall be applicable to them (CRAs)
for rating CP.
b. Further, the credit rating agencies have the
discretion to determine the validity period of
the rating depending upon its perception
about the strength of the issuer.
Accordingly, CRA shall at the time of rating,
clearly indicate the date when the rating is
due for review.
c. While the CRAs can decide the validity
period of credit rating, CRAs would have to
closely monitor the rating assigned to issuers
vis-a-vis their track record at regular intervals
and would be required to make its revision in
the ratings public through its publications and
website

Investor
Individuals,
Banking companies,
Corporate bodies (registered or incorporated
in India) and unincorporated bodies,
Non-Resident Indians (NRIs)
Foreign Institutional Investors (FIIs)
CP are available at discount to face value.
TDS exemption.
Issue Price

F =face/maturity value
P= Issue price
I = interest rate
N= usuance period
Q. Given , interest rate =10% for 90 days. Find
issue price for 90 days.

Ans: 97.5936
Certificate of Deposit
Certificate of Deposit (CD) is a negotiable
money market instrument and issued in
dematerialised form or as a Usance
Promissory Note against funds deposited at a
bank or other eligible financial institution for a
specified time period.
Eligibility:-

(i) scheduled commercial banks {excluding
Regional Rural Banks and Local Area Banks};
(ii) select All-India Financial Institutions (FIs)
that have been permitted by RBI to raise
short-term resources within the umbrella limit
fixed by RBI.
Aggregate Amount:-
Banks have the freedom to issue CDs
depending on their funding requirements.


Minimum Size of Issue and
Denominations:-
Minimum amount of a CD should be Rs.1 lakh,
i.e., the minimum deposit that could be
accepted from a single subscriber should not
be less than Rs.1 lakh, and in multiples of Rs. 1
lakh thereafter.

Investors
Individuals,
corporations,
companies (including banks and PDs),
trusts, funds, associations, etc.
Non-Resident Indians (NRIs) may also
subscribe to CDs, but only on non-repatriable
basis, which should be clearly stated on the
Certificate.

Such CDs cannot be endorsed to another NRI
in the secondary market.
Maturity period
The maturity period of CDs issued by banks
should not be less than 7 days and not more
than one year, from the date of issue.

The FIs can issue CDs for a period not less than
1 year and not exceeding 3 years from the
date of issue.

Reserve Requirements
Banks have to maintain appropriate reserve
requirements, i.e., cash reserve ratio (CRR)
and statutory liquidity ratio (SLR), on the issue
price of the CDs
Loan/Buy Backs
Banks / FIs cannot grant loans against CDs.
Furthermore, they cannot buy-back their own
CDs before maturity.
Accounting
Banks / FIs may account the issue price under
the Head "CDs issued" and show it under
deposits.
Accounting entries towards discount will be
made as in the case of "Cash Certificates".
Banks / FIs should maintain a register of CDs
issued with complete particulars.
Discount Rate

F =face/maturity value
DR = Discounted value
I = interest rate
N= usuance period
Call/Notice money market
Under call money market, funds are
transacted on an overnight basis and under
notice money market, funds are transacted for
a period between 2 days and 14 days.

Participants
scheduled commercial banks (excluding RRBs),
co-operative banks (other than Land
Development Banks)
Primary Dealers (PDs
Prudential limit
Participant Borrowing Lending
Scheduled Commercial Banks On a fortnightly average
basis, borrowing outstanding
should not exceed 100 per
cent of capital funds (i.e.,
sum of Tier I and Tier II
capital) of latest audited
balance sheet. However,
banks are allowed to borrow
a maximum of 125 per cent
of their capital funds on any
day, during a fortnight.
On a fortnightly average
basis, lending outstanding
should not exceed 25 per
cent of their capital funds.
However, banks are allowed
to lend a maximum of 50 per
cent of their capital funds on
any day, during a fortnight.
Co-operative Banks Outstanding borrowings of
State Co-operative
Banks/District Central Co-
operative Banks/ Urban Co-
op. Banks in call/notice
money market, on a daily
basis should not exceed 2.0
per cent of their aggregate
deposits as at end March of
the previous financial year.
No Limit.
PDs PDs are allowed to borrow,
on average in a reporting
fortnight, up to 225 per cent
of their net owned funds
(NOF) as at end-March of the
previous financial year.
PDs are allowed to lend in
call/notice money market, on
average in a reporting
fortnight, up to 25 per cent
of their NOF.
Interest Rate
Eligible participants are free to decide on
interest rates in call/notice money market.

Calculation of interest payable would be based
on the Handbook of Market Practices brought
out by the Fixed Income Money Market and
Derivatives Association of India (FIMMDA).

Repurchase Agreement(Repos)
Repo is an agreement in which one party
agrees to buy back securities, which it initially
sells, at a later date and on a price higher than
the price at which it was initially sold.
This price difference represents the interest
payment and is referred to as Repo Rate.
So in simple terms, a Repurchase agreement
can be thought as a secured loan in which the
initial seller is the borrower and the initial
buyer is the lender.
If the term of transaction is just one day then
it is called overnight repo, otherwise it is
called term repo.

Role of RBI
To ensure that liquidity and short term rate of
interest are maintained at level consistent
with the monetary policy objectives of
maintaining price stability.
To ensure an adequate flow of credit to the
productive sectors of the economy.
To bring about order in the foreign exchange
market.

Commercial Bills
The working capital requirement of business
firms is provided by banks through cash-
credits / overdraft and purchase/discounting
of commercial bills.
Commercial bill is a short term, negotiable,
and self-liquidating instrument with low risk.
It enhances the liability to make payment in a
fixed date when goods are bought on credit.

Bills of exchange are negotiable instruments drawn by the seller
(drawer) on the buyer (drawee) or the value of the goods delivered to
him. Such bills are called trade bills.

When trade bills are accepted by commercial banks, they are called
commercial bills.

The bank discount this bill by keeping a certain margin and credits the
proceeds.


Unit 1-Money Market: - Course Instructor Twesha Chharia

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit 1-Money Market: - Course Instructor Twesha Chharia

Uploaded by

Copyright:

Available Formats

Unit 1-Money Market

You might also like