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The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset, which can be quickly converted into money with minimum transaction cost. PARTICIPANTS IN MONEY MARKET Lenders: These are the entities with surplus lendable funds likeBanks (Commercial, Co-operative & Private) Mutual Funds Corporate Entities with bulk lendable resources of minimum of Rs. 3 crores per transaction Financial Institutions Borrowers: These are entities with deficit funds and includes the ones as above. FEATURES OF MONEY MARKET
1. It is a collection of market for following instruments- Call money, notice money,
repos, term money, treasury bills, commercial bills, certificate of deposits, commercial papers inter-bank participation certificates, inter-corporate deposits, swaps, etc. 2. The sub markets have close inter- relationship & free movement of funds from one sub-market to another. 3. A network of large number of participants exists which will add greater depth to the market. 4. Activities in the money market tend to concentrate in some centre, which serves a region or an area. The width of such area may vary depending upon the size and needs of the market itself. 5. The relationship that characterizes a money market is impersonal in character so that competition is relatively pure. 6. Price differentials for assets of similar type will tend to be eliminated by the interplay of demand & supply. 7. A certain degree of flexibility in the regulatory framework exists and there are constant endeavors for introducing a new instruments / innovative dealing techniques. 8. It is a wholesale market & the volume of funds or financial assets traded are very large i.e. in crores of rupees. MONEY MARKET INSTRUMENTS Some of the money market instruments are CALL MONEY Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and upto 14 days it is called 'Notice money' otherwise the amount is known as Call money'. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions. Features
maturity is in 14 days. FIs so far have not been allowed to invest in this instrument. 182-day Tbill. the lowest risk category instruments are the treasury bills. In view of the short tenure of such transactions. Commercial banks. It serves as an outlet for deploying funds on short term basis to the lenders having steady inflow of funds. 91-day Tbill. The notified amount for this auction is Rs. • 2 .maturity is in 182 days. The usual investors in these instruments are banks who invest not only to part their short-term surpluses but also since it forms part of their SLR investments. RBI decides the cut off yield and accepts all bids below this yield. Based on the bids received at the auctions. insurance companies and FIs.maturity is in 364 days. 100 crores. • • • 364-Day Tbill. both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. RBI issues these at a prefixed day and a fixed amount. TREASURY BILLS MARKET In the short term. • 14-day Tbill. 100 crores. Specified All-India Financial Institutions.maturity is in 91 days. It is a completely inter-bank market hence non-bank entities are not allowed access to this market. These are four types of treasury bills. The notified amount for this auction is Rs. 2. Its auction is on every Friday of every week. Co-operative Banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements. The notified amount for this auction is Rs. Its auction is on every alternate Wednesday (which is a reporting week). Mutual Funds and certain specified entities are allowed to access Call/Notice money only as lenders. 500 crores. 100 crores. Its auction is on every alternate Wednesday (which is not a reporting week). Its auction is on every Friday of every week.• • • • • • The call market enables the banks and institutions to even out their day to day deficits and surpluses of money. The notified amount for this auction is Rs. Interest rates in the call and notice money market are market determined. A considerable part of the government's borrowings happen through Tbills of various maturities.
These Tbills. The secondary market for this instrument does not have much depth but the instrument itself is highly secure. Low yield on Tbills. would divert the funds from this market to other markets. A CD is a negotiable promissory note. The specified entities are not allowed to lend beyond 14 days. An ICD is an unsecured loan extended by one corporate to another. which is maintained by RBI. The rates on these deposits are determined by various factors. the next lowest risk category investment option is the certificate of deposit (CD) issued by banks and FIs. Though RBI allows CDs upto one-year maturity. The foreign and private banks. if banks already hold the minimum stipulated amount (SLR) in government paper. CDs are issued by banks and FIs mainly to augment funds by attracting deposits from corporates. this market allows funds surplus corporates to lend to other corporates. especially. 5. Allowed in 1989. INTER-CORPORATE DEPOSITS MARKET Apart from CPs. The development of the term money market is inevitable due to the following reasons • Declining spread in lending operations • Volatility in the call money market • Growing desire for fixed interest rates borrowing by corporate • Move towards fuller integration between forex and money market • Stringent guidelines by regulators/management of the institutions CERTIFICATES OF DEPOSITS MARKET After treasury bills. Most of the time. INTER-BANK TERM MONEY Inter bank market for deposits of maturity beyond 14 days and upto three months is referred to as the term money market. the maturity most quoted in the market is for 90 days. unless the investor requests specifically. Existing mainly as a refuge for low rated corporates. A CD is issued at a discount to the face value. secure and short term (upto a year) in nature. they are issued not as securities but as entries in the Subsidiary General Ledger (SGL). generally a result of high liquidity in banking system as indicated by low call rates. Low call rates would mean higher liquidity in the market. Also the better-rated corporates can borrow from the banking system 3 . etc. corporates also have access to another market called the inter corporate deposits (ICD) market. The transactions cost on Tbill are nonexistent and trading is considerably high in each bill. can be traded in the market. This would be particularly so. high net worth individuals. The yield on Tbills is dependent on the rates prevalent on other investment avenues open for investors. trusts. which are issued at a discount. the discount rate being negotiated between the issuer and the investor. which do not have large branch networks and hence lower deposit base use this instrument to raise funds. the issue of CDs reached a high in the last two years as banks faced with a reducing deposit base secured funds by these means. Also the interest rate on one-year bank deposits acts as a lower barrier for the rates in the market. CDs were one of RBI's measures to deregulate the cost of funds for banks and FIs. immediately after its issue and immediately before its redemption.
Investment in CP 7. Mode of Issuance 8. (b) the working capital (fundbased) limit of the company from the banking system is not less than Rs. Ltd. 4 crore. CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. Denominations 6. is not less than Rs. Maturity 5. investment by FIIs would be within the 30 per cent limit set for their investments in debt instruments. CP can be issued only in a dematerialized form through any of the depositories approved by and registered with SEBI. Further. (DCR India) or such other credit rating agency as may be specified by the Reserve Bank of India from time to time. ICDs are unsecured. The ICD market is not well organized with very little information available publicly about transaction details. CP will be issued at a discount to face value as may be determined by the issuer. Payment of CP 4 . (CRISIL) or the Investment Information and Credit =Rating Agency of India Ltd. 3. Banks and All-India financial institutions are prohibited from underwriting or co-accepting issues of Commercial Paper.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. Commercial Paper (CP) Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP 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. If the maturity date is a holiday. as per the latest audited balance sheet. the company would be liable to make payment on the immediate preceding working day. 10. (CARE) or the Duff & Phelps Credit Rating India Pvt. A company shall be eligible to issue CP provided . Who can issue Commercial Paper (CP) 2. other corporate bodies registered or incorporated in India and unincorporated bodies.and lend in this market. All eligible participants should obtain the credit rating for issuance of Commercial Paper. (ICRA) or the Credit Analysis and Research Ltd. Rating Requirement 4.(a) the tangible net worth of the company.CP can be held only in dematerialized form. Highly rated corporate borrowers. from either the Credit Rating Information Services of India Ltd. primary dealers (PDs) and satellite dealers (SDs) and allIndia financial institutions (FIs) which have been permitted to raise resources through money market instruments under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP. However. the rates in this market are higher than those in the other markets. for the purpose..5 lakh or multiples thereof. Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). the participants shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review. CP can be issued in denominations of Rs. 9. and hence the risk inherent in high. banking companies. As the cost of funds for a corporate in much higher than a bank. CP may be issued to and held by individuals. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.
The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later modified into New Bills Market scheme (NBMS) in 1970. If the bank needs fund during the currency of the bill then it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related discount rate. RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system. discounted by the discounting bank. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions. 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. from the drawee. the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. COMMERCIAL BILLS Bills of exchange are negotiable instruments drawn by the seller (drawer) of the goods on the buyer (drawee) of the goods for the value of the goods delivered. Under the scheme. Central/State Govt securities). which were originally discounted by them. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds. with approved institutions (viz. commercial banks can rediscount the bills. 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. Development Financial Institutions. Thus.GOVERNMENT SECURITIES MARKET 5 . Commercial Banks.11. Similarly. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. So the need for physical transfer of bills has been waived and the bank that originally discounts the bills only draws DUPN. the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA. TERMINOLOGY . With the intention of reducing paper movements and facilitate multiple rediscounting. These bills are called trade bills. Uses of Repo It helps banks to invest surplus cash It helps investor achieve money market returns with sovereign risk. the RBI introduced an instrument called Derivative Usance Promissory Notes (DUPN).). The rate of interest agreed upon is called the Repo rate. The maturity proceeds or face value of discounted bill. whether a given agreement is termed as Repo or a Reverse Repo depends on which party initiated the transaction. These DUPNs are sold to investors in convenient lots of maturities (from 15 days upto 90 days) on the basis of genuine trade bills. 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. Primary Dealer. etc. If the bill is payable at a future date and the seller needs money during the currency of the bill then he may approach his bank for discounting the bill. READY FORWARD CONTRACTS It is a transaction in which two parties agree to sell and repurchase the same security. Mutual Funds. On maturity of CP. These trade bills are called commercial bills when they are accepted by commercial banks.. will be received by the bank.
the good going to the highest bidder. It is designed for institutions with regular flow of investible resources requiring investment outlets. No periodic interest payment is made. irrespective of the bid-prices tendered. called cut-off price. Discount The amount by which the market price of a security is below its par value. The buyer of zero coupon bonds receives one and only one payment. at maturity of the bond. determined at the auction. bond or security. Partly Paid Stock An innovative instrument for which the payment is made in installments. Par Value (face value. competitive bids are accepted at the minimum discounted price. a characteristic that allows both issuer and investor to share the risk inherent in changing interest rates. These instruments give a variable rate. Floating Rate Bonds Floating Rate Bond is an instrument whose periodic interest or dividend rates are indexed to some reference index such as Treasury bills etc. The difference between the issue price and the redemption price represents the return to the investor. An auction sale is conducted by an auctioneer who permits buyers to bid one against other. nominal value) It is the nominal price of a share or security. below/at the cutoff DATED GOVERNMENT SECURITIES The Government securities comprise dated securities issued by the Government of India and 6 . Uniform Price Auction In the case of this auction. if it falls below the par value it is below par.Zero Coupon Bonds Bonds issued at discount and repaid at face value. Multiple Price Auction Under a multiple price auction. Tap Stock A gilt edged security from an issue that has not been fully subscribed and it released into the market slowly when its market price reached predetermined levels. Zero Coupon Bonds bear no reinvestment risk but they are prone to interest rate risk making their prices highly volatile. Auction A special market in which there is one seller and many buyers. If the market value of a security exceeds the par value it is said to be above par. Premium An amount in excess of the nominal value of the share. every bidder gets allocation according to his bid and apparently the issuer collects a premium from all bidders quoting lower than the cut-off yield.
The investors in government securities are mainly banks. Since then. depend on bond issues for raising funds.state governments. liquidity in gilts is also aided by the primary dealer network set up by RBI and RBI's own open market operations. The date of maturity is specified in the securities therefore it is known as dated government securities. Investments in rest of PSU bonds are taxed like any other bonds. RBI adopted the market driven auction method in FY 1991-92. This phenomena has increased of late as the primary capital markets have been dull for the last two years. These securities are repoable. insurance companies. These include the following1. FIs. where the central bank decides the coupon or discount rate based on the response received. These bonds referred to as taxfree bonds. This has been changing of late. a few of the domestic players used to trade in these securities with a majority investing in these instruments for the full term. the lowest risk category instruments in the economy. The Government borrows funds through the issue of long term-dated securities. Foreign institutional investors can also invest in these securities up to 100% of funds-in case of dedicated debt funds and 49% in case of equity funds. only the better managed PSUs approach the markets to raise the funds. In one of its first moves to deregulate interest rates in the economy. The corporate bond market consists of issuers of three different categories. provident funds and trusts. These investors are required to hold a certain part of their investments or liabilities in government paper. Public sector unit bonds 3. with a good number of banks setting up active treasuries to trade in these securities. These securities are eligible for SLR requirements. Most of these securities are issued as fixed interest bearing securities. as an agent of the Government. FIs. Due to their poor financial condition. though the government sometimes issues zero coupon instruments and floating rate securities also. The FIs. Subsequently this has been removed. Till recently. These securities are open to all types of investors including individuals and there is an active secondary market. The investors in these markets are mainly banks. At present. These securities are issued through auctions conducted by RBI. This has diverted a lot of corporates to issue bonds.government owned financial institutions (FIs). Next in line are the PSUs. manages and services these securities through its Public Debt Offices (PDO) located at various places. government owned public sector units (PSUs) and private corporates. Private corporates also access the bond market to raise funds. There are highly rated and hence quote the lowest rate of funds. the interest in government securities has gone up tremendously and trading in these securities has been quite active. banks faced a 5% ceiling on their investment in corporate debentures. Features RBI. before 1997. Simultaneously banks have been warned about their non-performing assets (NPAs) among their 7 . The PSUs are also given an advantage in terms of tax breaks for the investors on investments in specified PSU bonds. Perhaps the most liquid of the long term instruments. mutual funds etc. obviously get traded at lower yields. there are dated securities with a tenor up to 20 years in the market. Financial institutional bonds 2. the corporate bond market is not so big. They are not generally in the form of securities but in the form of entries in RBI's Subsidiary General Ledger (SGL). which do not have access to retail deposits like banks. though a lot of PSUs are in the high-risk category. Corporate bonds/debentures As compared to the large size of government securities market both in terms of primary market as well as secondary market.
and 100% for debt funds. 8 . FIs pay less coupon on their issues.regular advance. the rates on these bonds have come down from the high levels in 1995 and 1996. some PSU bonds and the top rated corporates. The investment of FIIs in this category will have to fall within the overall limit of 49% for the equity funds. mainly to save on issue expenses. The rates in these markets differ for different issuer categories. This downward trend has been mainly due to higher liquidity with the banking system along with the new found enthusiasm of banks for bonds in comparison to loans due to capital adequacy requirements. Most of the bond issues are institutional in nature with the issuer approaching institutional investors and placing the bonds rather than making a public issue. Trading in these bonds is quite thin with some activity confined to FI bonds. In line with the general trend in the interest rates in the economy. While top rated private corporates and PSUs are treated on par. This has forced a majority of them to invest in debentures giving a fillip to this market.