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Money market & its instruments

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A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded. The money market is a mechanism that deals with the
lending and borrowing of short term funds (less than one year).1. As per RBI definitions
A market for short terms financial assets that are close substitute for money, facilitates
the exchange of money in primary and secondary market.
2. It doesnt actually deal in cash or money but deals with substitute of cash like trade
bills, promissory notes & It includes all individual, institution and intermediaries.govt
papers which can converted into cash without any loss at low transaction cost.
3. In Money Market transaction can not take place formal like stock exchange, only
through oral communication, relevant document and written communication transaction
can be done. It deals with financial assets having a maturity period less than one year
only. It is a market purely for short-terms funds or financial assets called near money.
4. It is not a single homogeneous market, it comprises of several submarket like call
money market, acceptance Transaction have to be conducted without the help of
brokers. & The component of Money Market are the commercial banks, acceptance
housesbill market. & NBFC (Non-banking financial companies).
5. To provide a reasonable access to users of short-term funds to meet their requirement
quickly, adequately at reasonable cost. To enable the central bank to influence and
regulate liquidity in the economy through its intervention in this market. To provide room
for overcoming short term deficits. To provide a parking place to employ short term
surplus funds.
6. o Development of trade & industry.o Development of capital market.o Smooth
functioning of commercial banks.o Effective central bank control.o Formulation of suitable
monetary policy.o Non inflationary source of finance to government.
7. Treasury bill market Acceptance market Commercial bills market or discount
market Call Money MarketMoney Market consists of a number of sub- markets which
collectively constitute the money market. They are,
8. A variety of instrument are available in a developed money market. In India till 1986,
only a few instrument were available.They were Treasury bills Money at call and short
notice in the call loan market. Commercial bills, promissory notes in the bill market.
9. Money Market mutual fund Repurchase agreement Bankers Acceptance
Certificate of deposit. Commercial papers.Now, in addition to the above the following
new instrument are available:
10. The loans made in this market are of the short term nature. They are highly liquid,
their liquidity being exceed only by cash. Call money market is that part of the national
money market where the day to day surplus funds, mostly of banks are traded in.
11. Banks borrow from other banks in order to meet a sudden demand for funds, large
payments, large remittances, and to maintain cash or liquidity with the RBI. Thus, to the
extent that call money is used in India for the purpose of adjustment of
reserves.Continued..
12. Securities Trading Corporation of India (STCI).The DFHI and STCI borrow as well as
lend, likebanks and primary dealers, in the call market. Discount and Finance House of

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India (DFHI) State, district and urban, cooperative banks Foreign banks Nonscheduled commercial banks Scheduled commercial banks
13. Calculation of interest payable would be based on FIMMDAs (Fixed Income Money
Market and Derivatives Association of India). Eligible participants are free to decide on
interest rates in call/notice money market. It is very sensitive to changes in demand for
and supply of call loans. Call rate is highly variable from day to day, often from hour to
hour. The rate of interest paid on call loans is known as call rate.
14. Indian Banks Association (IBA) in 1973 fixed a ceiling of 15% on the level of call
rate. It is an alarming level for any short-term rate of interest to reach, and as bank
defaulted in a major way in respect of cash and liquidity requirements at that time due to
the prohibitively high cost of call money, it became necessary to regulate call rates within
reasonable limits. CALL RATE IN INDIA has reached as high a level as 30% in
December 1973.
15. There are now two call rates in India: one, the interbank call rate, and the other, the
lending rate of DFHI. And current call rate in India is 8%. The IBA lowered this ceiling of
15% to 12.5% in March 1976, 10 % in June 1977, and 8.6% in March 1978, and 10.0% in
April 1980.Continued
16. LOCATION OF CALL MONEY MARKET IN INDIA Mumbai, Calcutta, Chennai, Delhi,
and Ahmadabad. DEALING SESSION Deals in the call/notice money market can be
done up to 5.00 pm on weekdays and 2.30 pm on Saturdays or as specified by RBI from
time to time.
17. 91- Day, 182- day, 364- day, and 14- day TBs Types of treasury bills through
auctions They are thus useful in managing short-term liquidity. Treasury bills (TBs),
offer short-term investment opportunities, generally up to one year.
18. If we were to arrange short-term financial instruments according to their liquidity, the
descending order would be cash, call loans, treasury bills and commercial bills. Treasury
bills are not self-liquidating in the way genuine trade bills are, although the degree of their
liquidity is greater than that of trade bills.
19. As unlike ordinary trade bills, treasury bills are claims against the government, they
do not require any gardening or further endorsement or acceptance Treasury bills are
highly liquid because there cannot be a better guarantee of repayment then the one given
by the government and because the central bank of country is always willing to purchase
or discount them.
20. Low transaction cost Assured yield Ready availability Absence of risk of default
The high liquidity Negligible capital depreciationEligibility for inclusion in statutory
liquidity ratio (SLR)
21. TBs, also known as ad hocs in short, has been discontinued through the signing of
two agreements between the government and the RBI. The ordinary TBs are issued to
the public and the RBI for enabling the government to meet the needs of supplementary
short-term finance. Ad hoc TBs Ordinary TBs
22. Government shall maintain with the RBI a cash balance of not less than Rs.50crore
on Fridays and Rs.4 crore on other days free of obligation to pay interest. The
instrument of ad hoc Treasury bill and the system of issuing it were introduced in India in
1937.
23. The government issued these bills to replenish their cash balance. They also provide
a medium to the state governments, semi-governments, and foreign central banks to

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invest their temporary surpluses. whenever the balance falls below these minimums, the
government account would be replenished by the creation of ad hocs in favour of the
RBI.
24. It used to be sold in the market by the RBI in auctions which were monthly in the
beginning; they were made fortnightly from July 1988. With a view to widening the shortterm money market, and to providing more outlets for temporary surplus fund, the
authorities in India had introduced, in November 1986, a major innovation in the form of
new money market instrument- the 182-day Treasury bill.
25. The amount raised in each auction suspended upon the funds available with the
market participants, and the funds they desired to invest in these bills. Thus, the new bill
had become a handy instrument for banks, financial institution. It is important to note
that no specific amount of funds was sought to be raised through the auctions of these
bills.Continued..
26. The 182-day bill was quit liquid because of the availability of refinance facility against
it and the existence of the secondary market in it. The 182-day bills could be purchased
by any person resident in India, including individuals, firms, companies, banks, and
financial institutions.
27. The RBI dose not purchase and rediscount this bill. Its features are very similar to
those which the 182-day bill had. It is being auction regularly every fortnight. Upon
discounting the 182-day Treasury bill the authorities introduced a new money market
instrument, namely 364-day TBs with effect from April 1992.
28. Second on may 20, 1997.ITB has replaced the 91-day tap Treasury bill. On April 1,
1997 which is known as intermediate treasury bill (ITB)With a view to further diversify
the TBs market; the authorities have introduced recently two types of 14-day TBs:
29. The disadvantage of 14-day ITB is that it is not tradable or transferable. It can be
repaid/renewed at par on the expiration of 14 days from the date of issue. It is issued in
a book entry from i.e. by credit to subsidiary general ledger account. It is sold only to
state governments, foreign central banks, and other specified bodies in order to provide
them with alternate arrangements in place of 19-day tap TBs for investment of their
temporary cash surplus.Continued..
30. 91-day T-bills are auctioned every week on Wednesdays. 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. Treasury bills are also issued
under the Market Stabilization Scheme (MSS). 182-day and 364-day T-bills are
auctioned every alternate week on Wednesdays.
31. Absence of Active Trading Absence of Competitive Bids Poor Yield DEFECTS OF
TREASURY BILLS T-bills auctions are held on the Negotiated Dealing System (NDS)
and the members electronically submit their bids on the system.
32. Type of Day of Day ofT-bills Auction Payment*91-day Wednesday Following
Friday182-day Wednesday of non- Following Friday reporting week364-day Wednesday
of Following Friday reporting week
33. 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. BILL OF
EXCHANGE Funds for working capital required by commerce and industry are mainly
provided by banks through cash credits, overdrafts, and purchase/discontinuing of
commercial bills.

34. 34. Accordingly to the Indian Negotiable Instruments Act, 1881, it is a written instrument
containing as unconditional order, signed by the maker, directing a certain person to pay
a certain sum of money only to, or to the order of, a certain person, or to the bearer of the
instrument. It shows the liquidity to make the payment on a fixed date when goods are
bought on credit.
35. 35. A related classification of bills is export bills and import bills Drawn in India and
made payable outside India. Drawn outside India and may be payable in and by a party
outside India, or may be payable in India or drawn on a party resident in India FOREIGN
BILLS Be drawn upon any person resident in India Be drawn or made in India, and
must be payable in India INLAND BILLS
36. 36. In India the use of bill of exchange appears to be in vogue for financing agricultural
operations, cottage and small scale industries, and other commercial and trade
transactions. Commercial bills may be used for financing the movement and storage of
goods between countries, before export (pre-export credit), and also within the country.
37. 37. As accommodation bill is defined as one in which a person, called as
accommodation party, puts his name (accept it) to accommodate another person without
receiving and consideration. Such bill is sometimes called, a kite or wind bill. Apart from
the genuine bill of exchange, i.e. bills which evidence sale and /or dispatch of goods,
there are other bills which are known to the money market. They are accommodation bills
and supply bills.
38. 38. This is especially useful when the credit worthiness of a foreign trade partner is
unknown. It is a guarantee from the bank that a buyer will pay the seller at a future date.
A good credit rating is required by the company or firm drawing the bill. A bankers
acceptance is a short-term investment plan created by a company or firm with a
guarantee from a bank.
39. 39. Under the bill market schemes introduced by RBI in 1952, banks are required to
select the borrowers after careful examination of their means, respectability, and dealings
for conversion of their advances in to bills. In India, there are neither specialised
acceptance agencies for providing this service on a commission basis nor is it provided to
any significant extent by commercial banks. The terms for these instruments are usually
90 days, but this period can vary between 30 and 180 days. Companies use the
acceptance as a time draft for financing imports, exports and trade.
40. 40. Banks maintain opinion registers on different drawers of bills and t BAs are
guaranteed by a bank to make payment. Acceptances are traded at discounts from face
value in the secondary market. BA acts as a negotiable time draft for financing imports,
exports or other transactions in goods.hey get reports from time to time on these
drawers of bills.
41. 41. The central bank performs his function through its discount window or discounting
mechanism. The RBI are in abundance liquidity (funds) to banks on occasions when
liquidity shortages threaten economic stability. The central banks help banks in their
liquidity management by providing them discounting and refinancing facilities.
DISCOUNTING SERVICE
42. 42. They are permitted to borrow or are given the privilege of doing so from the central
bank against certain types of eligible paper, such as the commercial bill or treasury bill,
which the central bank stands ready to discount for the purpose of financial

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accommodation to banks. Bank borrow funds temporarily at the discount window of the
central bank.
43. It should be the sole depository of the surplus liquid funds of the banking system as
well as the non-banking financial institutions. DISCOUNT HOUSE FUNCTION The
question of setting up of discount house in India was considered by the banking
commission in the early 1970s.
44. It should create ready market for commercial bills, treasury bills, and government
guaranteed securities by being ready to purchase from and sell to the banking system
such securities. It should use surplus funds to even out the imbalance in liquidity in the
banking system subject to the RBI guidelines.
45. 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. Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note.
46. CP is very safe investment because the financial situation of a company can easily
be predicted over a few months. Primary dealers (PDs) and the All-India Financial
Institutions (FIs) are eligible to issue CP. Subsequently, primary dealers and satellite
dealers were also permitted to issue CP to enable them to meet their short-term funding
requirements for their operations. Only company with high credit rating issues CPs
47. As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI
i.e., issue of CP together with other instruments viz., term money borrowings, term
deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per
cent of its net owned funds, as per the latest audited balance sheet. The aggregate
amount of CP from an issuer shall be within the limit as approved by its Board of
Directors or the quantum indicated by the Credit Rating Agency for the specified rating,
whichever is lower. CP can be issued for maturities between a minimum of 15 days and
a maximum up to one year from the date of issue.
48. However, investment by FIIs would be within the limits set for their investments by
Securities and Exchange Board of India Amount invested by single investor should not
be less than Rs.5 lakh (face value). Individuals, banking companies, other corporate
bodies registered or incorporated in India and unincorporated bodies, Non- Resident
Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. Only a
scheduled bank can act as an IPA for issuance of CP.
49. The investor in CP is required to pay only the discounted value of the CP by means
of a crossed account payee cheque to the account of the issuer through IPA. CP will be
issued at a discount to face value as may be determined by the issuer.
50. 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 With a view to further
widening the range of money market instruments and give investors greater flexibility in
deployment of their short- term surplus funds, Certificates of Deposit (CDs) were
introduced in India in 1989.
51. Select all-India Financial Institutions that have been permitted by RBI to raise shortterm resources within the umbrella limit fixed by RBI. Scheduled commercial banks
excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs)

52. 52. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD
together with other instruments, viz., term money, term deposits, commercial papers and
inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per
the latest audited balance sheet. Banks have the freedom to issue CDs depending on
their requirements.
53. 53. INVESTORSCDs can be issued to individuals, corporations, companies, 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. 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 the multiples of Rs. 1 lakh
thereafter.
54. 54. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years
from the date of issue. The maturity period of CDs issued by banks should be not less
than 7 days and not more than one year.
55. 55. CDs in physical form are freely transferable by endorsement and delivery. 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. Banks / FIs are also allowed
to issue CDs on floating rate basis provided the methodology of compiling the floating
rate is objective, transparent and market-based. CDs may be issued at a discount on
face value.
56. 56. I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (Discount And
Finance House of India). 3. Commercial banks i. Public sector banks SBI with 7
subsidiaries Cooperative banks 20 nationalised banks ii. Private banks Indian Banks
Foreign banks 4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
57. 57. II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4.
NidhisIII. CO-OPERATIVE SECTOR 1. State cooperative i. central cooperative banks
Primary Agri credit societies Primary urban banks 2. State Land development banks
central land development banks Primary land development banks

Money market and types of money market instruments


1. 1. Money Market and Types of Money MarketInstrumentsRead more at:
http://www.goodreturns.in/classroom/2011/07/money-market-and-types-of-money-marketinstruments-28.html Money Market is the part of financial market where instruments with
highliquidity and very short-term maturities are traded. The money market is used
byparticipants as a means for borrowing and lending in the short term, from several
daysto just under a year. Its the place where large financial institutions, dealers
andgovernment participate and meet out their short-term cash needs.They usually
borrow and lend money with the help of instruments or securities to generateliquidity. Due
to highly liquid nature of securities and their short-term maturities, moneymarket is

treated as safe place.Role of Reserve Bank of India: The Reserve Bank of India (RBI)
plays a key role ofregulator and controller of money market. The intervention of RBI is
varied curbing crisissituations by reducing key policy rates or curbing inflationary
situations by rising key policyrates such as Repo, Reverse Repo, CRR etc.Money Market
Instruments: Money Market Instruments provide the tools by which onecan operate in the
money market. Money market instrument meets short term requirementsof the borrowers
and provides liquidity to the lenders. The most common money marketinstruments are
Treasury Bills, Certificate of Deposits, Commercial Papers, RepurchaseAgreements and
Bankers Acceptance. a) Treasury Bills (T-Bills): Treasury Bills are one of the safest
money market instruments as they are issued by Central Government. They are zero-risk
instruments, and hence returns are not that attractive. T-Bills are circulated by both
primary as well as the secondary markets. They come with the maturities of 3-month, 6month and 1-year. The Central Government issues T-Bills at a price less than their face
value and the difference between the buy price and the maturity value is the interest
earned by the buyer of the instrument. The buy value of the T-Bill is determined by the
bidding process through auctions. At present, the Government of India issues three types
of treasury bills through auctions, namely, 91-day, 182-day and 364-day. b) Certificate of
Deposits (CDs): Certificate of Deposit is like a promissory note issued by a bank in form
of a certificate entitling the bearer to receive interest. It is similar to bank term deposit
account. The certificate bears the maturity date, fixed rate of interest and the value.
These certificates are available in the tenure of 3 months to 5 years. The returns on
certificate of deposits are higher than T-Bills because they carry higher level of risk. 1
2. 2. c) Commercial Papers (CPs): Commercial Paper is the short term unsecured
promissory note issued by corporate and financial institutions at a discounted value on
face value. They come with fixed maturity period ranging from 1 day to 270 days. These
are issued for the purpose of financing of accounts receivables, inventories and meeting
short term liabilities. The return on commercial papers is is higher as compared to T-Bills
so as the risk as they are less secure in comparison to these bills. It is easy to find buyers
for the firms with high credit ratings. These securities are actively traded in secondary
market. d) Repurchase Agreements (Repo): Repurchase Agreements which are also
called as Repo or Reverse Repo are short term loans that buyers and sellers agree upon
for selling and repurchasing. Repo or Reverse Repo transactions can be done only
between the parties approved by RBI and allowed only between RBI-approved securities
such as state and central government securities, T-Bills, PSU bonds and corporate
bonds. They are usually used for overnight borrowing. Repurchase agreements are sold
by sellers with a promise of purchasing them back at a given price and on a given date in
future. On the flip side, the buyer will also purchase the securities and other instruments
with a promise of selling them back to the seller. e) Bankers Acceptance: Bankers
Acceptance is like a short term investment plan created by non-financial firm, backed by
a guarantee from the bank. Its like a bill of exchange stating a buyers promise to pay to
the seller a certain specified amount at a certain date. And, the bank guarantees that the
buyer will pay the seller at a future date. Firm with strong credit rating can draw such bill.
These securities come with the maturities between 30 and 180 days and the most
common term for these instruments is 90 days. Companies use these negotiable time
drafts to finance imports, exports and other trade.Call money marketThe call money
market deals in short term finance repayable on demand, with a maturityperiod varying

from one day to 14 days. Commercial banks, both Indian and foreign, co-operative banks,
Discount and Finance House of India Ltd.(DFHI), Securities tradingcorporation of India
(STCI) participate as both lenders and borrowers and Life InsuranceCorporation of India
(LIC), Unit Trust of India(UTI), National Bank for Agriculture andRural Development
(NABARD)can participate only as lenders. The interest rate paid on callmoney loans,
known as the call rate, is highly volatile. It is the most sensitive section of themoney
market and the changes in the demand for and supply of call loans are promptlyreflected
in call rates. There are now two call rates in India: the Interbank call rate and thelending
rate of DFHI. The ceilings on the call rate and inter-bank term money rate weredropped,
with effect from May 1, 1989. The Indian call money market has been transformedinto a
pure inter-bank market during 200607. The major call money markets arein Mumbai,
Kolkata, Delhi, Chennai, Ahmedabad. 2
3. 3. Concept of Repo Rate and Reverse Repo RateRepo (Repurchase) Rate: Repo rate
also known as Repurchase rate is the rate at whichbanks borrow funds from the RBI to
meet short-term requirements. RBI charges someinterest rate on the cash borrowed by
banks. This interest rate is called repo rate. If the RBIwants to make it more expensive for
the banks to borrow money, it increases the repo rate;similarly, if it wants to make it
cheaper for banks to borrow money, it reduces the repo rate.Reverse Repo Rate:
Reverse Repo rate is the rate at which Reserve Bank of India (RBI)borrows money from
banks. This is the exact opposite of repo rate. RBI uses this tool whenit feels there is too
much money floating in the banking system. If the reverse repo rate isincreased, it means
the RBI will borrow money from the bank by offering lucrative rate ofinterest. Banks feel
comfortable lending money to RBI since their money would be in safehands and with a
good interest. It is also a tool which can be used by the RBI to drain excessmoney out of
the banking system.Money Market & Further, in case of money market, deals are
transacted on phone or through electronic systems as against capital market where
trading is through recognized stock exchanges.Benefits and functions of Money Market:
Money markets exist to facilitate efficient transfer of short-term funds between holders
and borrowers of cash assets. For the lender/investor, it provides a good return on their
funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to
cover short-term liabilities. One of the primary functions of money market is to provide
focal point for RBIs intervention for influencing liquidity and general levels of interest
rates in the economy. RBI being the main constituent in the money market aims at
ensuring that liquidity and short term interest rates are consistent with the monetary
policy objectives. 3 Stock Market is associated with high risk and high return as against
money market which is more secure. Individual players cannot invest in money market
as the value of investments is large, on the other hand, in capital market, anybody can
make investments through a broker. It deals in short term debt financing and
investments. On the other hand, Capital Market refers to stock market, which refers to
trading in shares and bonds of companies on recognized stock exchanges. Money
Market is a place for short term lending and borrowing, typically within a year. Capital
Market:
4. 4. The DFHI and STCI borrow as well as lend, like banks and primary dealers, in the call
market. At one time, only a few large banks, particularly foreign banks, operated in the
call money market.Short essay on Indian Money MarketIn India the money market plays a
vital role in the progress of economy. But, it is not welldeveloped when compared to

American and London money markets. In this market short-termfunds are borrowed and
lent among participants permitted by RBI.Money Market ensures that institutions which
have surplus funds earn certain returns on thesurplus. Otherwise these funds will be idle
with the institutions. Similarly, the money marketensures funds for the needy at
reasonable interest. This way liquidity position is assured bymoney market operations.Let
us now discuss the various money market instruments in India. In India the Money
Marketis regulated by RBI. Hence, the instruments traded and the players in the market
require to beapproved by RBI. The instruments currently traded are as follows:(i) Call
Money:Call money is a method of borrowing and lending for one day. This is also called
overnightmoney. The rate of interest used to be decided by RBI earlier. After 1989, the
interest rate wasderegulated and now the liquidity position (availability of funds)
determines the rate ofinterest. 4 Securities Trading Corporation of India (STCI).
Discount and Finance House of India (DFHI) and cooperative banks, state, district
and urban, foreign banks, non-scheduled commercial banks, scheduled commercial
banks, Participants in the call money market are Functions of the money marketThe
money market functions are transfer of large sums of money transfer from parties with
surplus funds to parties with a deficit allow governments to raise funds help to
implement monetary policy determine short-term interest ratesParticipants
5. 5. The lender issues a cheque or pay order or its account maintained with RBI in favour
ofborrower. Accordingly, RBI transfers funds by debit to lenders account to the
borrowersaccount.On repayment, the process is reversed through RBI. In times of tight
money, situation orliquidity crunch, the call money interest rate goes up even beyond 50
per cent per annum.Only permitted organizations like scheduled commercial banks, large
co-operative banks,DHFI, Primary dealers, NABARD are permitted to borrow funds
through call money market.However, funds can be provided or lent even by other entities
like LIC, GIC, large corporate,big mutual funds, etc.(ii) Notice Money / Short-term
Money:Under Notice/Short-term Money Market, funds are borrowed and lent for a
maximum periodof 14 days. Repayment requires a formal notice or demand from the
lender. Interest rate isdecided by the market forces. The market is similar to call money
market explained above.(iii) Treasury Bills:It is the most important money market
instrument for the central government. Treasury Billsare short-term promissory notes
issued by RBI on behalf of Central Government for raisingfunds to meet shortfalls in
revenue collections, i.e., to meet revenue expenditure.These are issued at discount to
face value. RBI auctions these Treasury Bills at regularperiodical intervals, i.e., weekly
and fortnightly. These days five types of Treasury Billsdepending upon their maturity are
auctioned by RBI.These are 14-day Treasury Bills; 28-day Treasury Bills, 91-day, 182 day
and 364 day TreasuryBills. Any person can invest in Treasury Bills. These are very high
liquid and safe instruments.Treasury Bills are approved securities for investment by banks
under SLR requirement.(iv) Commercial Bills:Banks are discounting Commercial Bills
drawn by business entities/organisations. Banks canget such discounted bills
rediscounted in Money Market. It is not necessary for banks torediscount each and every
discounted bill.Banks can certify the large number of bills intended to be rediscounted
through a singledocument known as "Derivative Usance Promissory Note" (DUPN). In
other words, DUPN isa money market instrument backed by genuine commercial
bills.Banks can get the value of DUPN discounted and obtain funds. This way banks can
borrowfunds without transferring the bills. It is necessary that the original bills in the

portfolio ofbanks should not be drawn for period exceeding 120 days. The maturity of
DUPN, however,should not exceed 90 days.(v) Commercial Paper:Commercial Paper
(C.P.) is a short-term money market instrument issued by eligiblecorporates for raising
funds to meet working capital needs. It was introduced in 1989. The C.P.is in nature of
negotiable usance promissory notes issued at a discount to face value.The C.P. should
have fixed maturity period of not less than 30 days and not more than oneyear.
Corporates having fund-based working capital facility of Rs. 4 crore or more from
banksare only eligible to issue C.Ps. Aggregate value of C.Ps. which can be issued by a
corporate islimited to the maximum working capital facility fixed by the banks.Investors in
C.Ps. should have a minimum investment of Rs. 10 lakh and multiples of Rs. 5lakh
thereafter. The RBI decides about the eligibility criteria for corporates to raise
fundsthrough C.Ps. on the basis of working capital fund limit (Rs. 4 crore or more);
minimumcurrent ratio (1.33); and minimum credit rating (P2 of CRISIL or A2 of ICRA,
etc.).Primary Dealers are also recently permitted to issue C.Ps. Funds raised through
C.Ps. shouldnormally be cheaper as compared to bank funds. Hence, corporates raise
funds through issueof C.Ps. only when the money market interest rates are fairly low.(vi)
Certificate of Deposits: 5
6. 6. It is another form of short-term time deposit. The receipt issued for such a deposit is
calledCertificate of Deposit. Banks can raise short-term funds, say for 3 or 6 months at
rate ofinterest different from its normal Time Deposit rate through issue of C.Ds. Interest
is paidfrom the date of purchase till maturity.Banks issue C.Ds. to manage liquidity and to
raise funds at marginally varying rate of interestas compared to short-term deposit rates.
As per RBI regulations C.Ds. can be issued for aminimum maturity of 3 months and a
maximum period of 1 year.Minimum investment should be of Rs.10 lakh and further
investments should be in multiple ofRs. 5 lakh. These are issued at discount to face
value. In India this instrument was firstintroduced in 1989. Individuals, Corporates, Trusts
and any persons can invest in Certificate ofDeposits.(vii) Inter-Bank Participation
Certificates:Inter-Bank Participation Certificates or simply Participation Certificates (PC)
are short-termpapers issued by scheduled commercial banks to raise funds from other
banks against big loanportfolios.When banks are short of liquidity to carry on their
immediate operations and need short-termfunds, they may approach other banks to
share/participate in their lending portfolios. In otherwords, part of the specified loans and
advances of the borrowing bank will be passed on to thelender-bank against cash.This
will have the effect of reducing the exposure of borrower-bank on its particular
loanportfolio and increase in the portfolio of lender-bank when the participation is
withoutrecourse basis.Borrower-banks can have access to the facility only, up to certain
percentage (currently 40%)of their standard or performing assets, i.e., Loans and
Advances which are being servicedwithout default. PCs. can be issued only for a
maximum period of 180 days and not less than a90-day period.(viii) Inter-Corporate
Deposits:Inter-Corporate Deposits or ICD is another money market instrument for
corporate to parktheir temporary surplus funds with other corporate. What a participation
certificate for banksis an inter-corporate deposits between corporate.Under ICD,
corporate lend temporary funds generally to their own group companies;otherwise the
credit risk will be higher. Any corporate can issue the instrument without therebeing any
prescription about minimum size of such lending and borrowings. This market is notwellregulated for want of adequate information.(ix) Repo Instruments:Repo or Repurchase

Transactions have been explained in Chapter 14. RBI conducts Repotransactions to


influence short-term interest level in money market. By Repo operation the RBItransmit
interest rate signals to the market. When it announces a fixed rate Repo for
certainnumber of days/period it conveys its intention to the market about the desirable
level of ashort-term interest rate.Due to greater level of integration among money market,
foreign exchange market andTreasury Bill Market, the Repo transactions ensure stability
of short-term rates in all the threemarkets. At the same time Repo transactions of RBI
provide an opportunity to banks to parttheir surplus funds with a minimum rate of
return.You may understand that when RBI conducts repos, the short-term interest rate in
the moneymarket may not go below the RBI repo rate as, if rate of interest is lower in
other markets,holders of funds may go for Repos with RBI. The RBI also provides
liquidity support, i.e.,infusion of funds into the market by conducting reverse Repo
transactions with PrimaryDealers against Government Securities. 6

Money market instruments


1. 1. VIDYA V. VISWANATHMar Athanasios College For Advanced Studies, Tiruvalla.
2. 2. Reservoir of short term funds. Geoffrey Crowther in his book An outline of Money
has stated Money market is a collective name given to the various firms and institutions
that deal with various grades of near money. Money market instruments are those
instruments, which have a maturity period of less than one year.MONEY MARKET
3. 3. Integrated interest rate structure Availability of ample resources Near money
assets Sub-markets Presence of a central bank. A developed commercial banking
system.Characteristics of adeveloped money market.
4. 4. Borrowings by the Government short term funds at very low interest. Profitable
Investment the excess reserves of commercial banks invested in near money assets.
Economic development Money market assures supply of funds; financing is done
through discounting of the trade bills, commercial banks, acceptance houses and
brokers.Functions of money market
5. 5. Self-sufficiency Of Commercial Banks commercial banks can meet their financial
requirements by recalling some of their loans. Savings And Investment encouraging
savings and investment by promoting liquidity and safety of financial assets.
Mobilization of Funds helps in transferring funds from one sector to another.
Importance For Central Bank If the money market is well developed, the central bank
implements the monetary policy successfully.
6. 6. The most active part of the money market is the market for overnight call and term
money between banks and institutions and repo transactions Money market instrument
meets short term requirements of the borrowers and provides liquidity to the lenders
Investment in money market is done through money market instruments.MONEY
MARKETINSTRUMENTS

7. 7. Ample liquidity as the investor can sell the security in the secondary market No
default risk as the securities carry sovereign guarantee. G-secs consist of Government
Promissory Notes, Bearer Bonds, Stocks or Bonds, Treasury Bills or Dated Government
Securities. Maturity ranges from of 2-30 years. Issued by the Government for raising
a public loan or as notified in the official Gazette.1.GOVERNMENT SECURITIES(GSecs)
8. 8. Participants are banks Money at call is a loan that is repayable on demand, and
money at short notice is repayable within 14 days of serving a notice.2. MONEY
MARKET AT CALL ANDSHORT NOTICE & Banks borrow call funds for a variety of
reasons to maintain their CRR, to meet their heavy payments, to adjust their maturity
mismatch etc.all other Indian Financial Institutions as permitted by RBI.
9. 9. RBI issues T-Bills for three different maturit Issued at a discount to face value. The
return to the investor is the difference between the maturity value and issue price.
Enable investors to park their short term surplus funds while reducing their market risk.
Short term (up to one year) borrowing instruments of the Government of India.3.
TREASURY BILLSies: 91 days, 182 days and 364 days
10. 10. normally give a higher return than Bank term deposit, and are rated by approved
rating agencies. Financial Institutions are allowed to issue CDs for a period between 1
year and up to 3 years. CDs are negotiable instrument. A CD is a time deposit,
financial product commonly offered to consumers by banks.4. CERTIFICATES
OFDEPOSITS
11. 11. Commercial bill is a short term, negotiable, and self-liquidating instrument with low
risk. Once the buyer signifies his acceptance on the bill itself it becomes a legal
document. Written instrument containing an unconditional order. Commercial bill is a
short term, negotiable, and self-liquidating instrument with low risk.5.COMMERCIAL
BILLS
12. 12. Interest rates fluctuate with market conditions, but are typically lower than banks
rates. Commercial paper is usually sold at a discount from face value. Commercial
Paper is a money-market security issued (sold) by large banks and corporations to get
money to meet short term debt obligations .6. COMMERCIAL PAPER
13. 13. Repo/Reverse Repo transactions can be done only between the parties approved by
RBI and in RBI approved securities They are usually used for overnight borrowing
Repo or Reverse Repo are transactions or short term loans in which two parties agree to
sell and repurchase the same security.7.Repurchase Agreements

Ppt on-money-market-1
1. 1. MONEY MARKET 1) Meaning of Money Market: Money market refers to the
market where money and highlyliquid marketable securities are bought and
sold having a maturityperiod of one or less than one year. It is not a place like
the stockmarket but an activity conducted by telephone. The money
marketconstitutes a very important segment of the Indian financialsystem.

The highly liquid marketable securities are also called as money market
instruments like treasury bills, governmentsecurities, commercial paper,
certificates of deposit, call money,repurchase agreements etc. According to
the Geoffrey, money market is thecollective name given to the various firms
and institutionsthat deal in the various grades of the near money.
2. 2. Disadvantage of Money Market? Structure of Indian Money Market?
Instrument of Money Market? Composition of Money Market? Importance of
Money Market? Objective of Money Market? Features of Money Market?
What is Money Market?CONTENTS
3. 3. Summary Recent development in Money Market? Characteristic features
of a developed money Market?Continued.
4. 4. A segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. The money market is a
mechanism that deals with the lending and borrowing of short term funds
(less than one year).1! What is Money Market?As per RBI definitions A
market for short terms financial assets that are close substitute for money,
facilitates the exchange of money in primary and secondary market.
5. 5. It doesnt actually deal in cash or money but deals with substitute of cash
like trade bills, promissory notesContinued. & It includes all individual,
institution and intermediaries.govt papers which can converted into cash
without any loss at low transaction cost.
6. 6. In Money Market transaction can not take place formal like stock exchange,
only through oral communication, relevant document and written
communication transaction can be done. It deals with financial assets having
a maturity period less than one year only. It is a market purely for shortterms funds or financial assets called near money.2 ! Features of Money
Market?
7. 7. It is not a single homogeneous market, it comprises of several submarket
like call money market, acceptance Transaction have to be conducted
without the help of brokers.Continued.. & The component of Money
Market are the commercial banks, acceptance housesbill market. & NBFC
(Non-banking financial companies).
8. 8. To provide a reasonable access to users of short- term funds to meet their
requirement quickly, adequately at reasonable cost. To enable the central
bank to influence and regulate liquidity in the economy through its
intervention in this market. To provide room for overcoming short term
deficits. To provide a parking place to employ short term surplus funds.3 !
Objective of Money Market?
9. 9. 4 ! Importance of Money Market?o Development of trade & industry.o
Development of capital market.o Smooth functioning of commercial banks.o
Effective central bank control.o Formulation of suitable monetary policy.o
source of finance to government.
10. 10. Treasury bill market Acceptance market Commercial bills market or
discount market Call Money Market5 ! Composition of Money Market?
Money Market consists of a number of sub- markets which collectively
constitute the money market. They are,
11. 11. 6 ! Instrument of Money Market?A variety of instrument are available in a
developed money market. In India till 1986, only a few instrument were
available.They were Treasury bills Money at call and short notice in the call
loan market. Commercial bills, promissory notes in the bill market.
12. 12. Money Market mutual fund Repurchase agreement Bankers
Acceptance Repo instrument Inter-bank participation certificates.
Certificate of deposit. Commercial papers.New instrument Now, in addition
to the above the following new instrument are available:

13. 13. T-Bills are so popular among money market instruments because of
affordability to the individual investors. 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. They are issued with three-month, six-month
and one-year maturities. (T-bills) are the most marketable money market
security.Treasury Bills (T-Bills)
14. 14. Anyone can earn more than a saving account interest. The main
advantage of CD is their safety. CDs have specific maturity date, interest
rate and it can be issued in any denomination. Like most time deposit, funds
can not withdrawn before maturity without paying a penalty. A CD is a time
deposit with a bank.Certificate of deposit (CD)
15. 15. Only company with high credit rating issues CPs. CP is very safe
investment because the financial situation of a company can easily be
predicted over a few months. CP is a short term unsecured loan issued by a
corporation typically financing day to day operation.Commercial paper (CP)
16. 16. Repos are safe collateral for loans. The short term maturity and
government backing usually mean that Repos provide lenders with extreamly
low risk. They are usually very short term repurchases agreement, from
overnight to 30 days of more. Repo is a form of overnight borrowing and is
used by those who deal in government securities.Repurchase agreement
(Repos)
17. 17. This is especially useful when the credit worthiness of a foreign trade
partner is unknown. BA acts as a negotiable time draft for financing imports,
exports or other transactions in goods. Acceptances are traded at discounts
from face value in the secondary market. BAs are guaranteed by a bank to
make payment. A bankers acceptance (BA) is a short-term credit investment
created by a non-financial firm.Bankers Acceptance
18. 18. 7 ! Structure of Indian Money Market?I :- ORGANISED STRUCTURE 1.
Reserve bank of India. 2. DFHI (discount and finance house of India). 3.
Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative
banks 20 nationalised banks ii. Private banks Indian Banks Foreign banks 4.
Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
19. 19. Continued..II. UNORGANISED SECTOR 1. Indigenous banks 2 Money
lenders 3. Chits 4. NidhisIII. CO-OPERATIVE SECTOR 1. State cooperative i.
central cooperative banks Primary Agri credit societies Primary urban banks 2.
State Land development banks central land development banks Primary land
development banks
20. 20. Limited participants. Limited secondary market. Limited instruments.
No contact with foreign Money markets. Absence of Bill market. Absence of
integration. Purchasing power of your money goes down, in case of up in
inflation.8 ! Disadvantage of Money Market
21. 21. Demand and supply of fund Existence of secondary market Ample
resources Existence of sub-market Availability of proper credit instrument
Presence of central bank Highly organaised banking system9 !
Characteristic features of a developed money Market?
22. 22. Setting up of security trading corporation of India ltd. (STCI)
Establishment of DFHI Adoption of suitable monetary policy Setting up of
credit rating agencies Entry of Money market mutual funds Promotion of bill
culture Offering of Market rates of interest Introduction of innovative
instrument Widening of call Money market Integration of unorganised sector
with the organised sector 10 ! Recent development in Money Market

23. 23. T-bills are considered to be one of the safest investments. T-bills are
short-term government securities that mature in one year or less from their
issue date. The easiest way for individuals to gain access to the money
market is through a money market mutual fund. Money market securities are
very liquid, and are considered very safe. As a result, they offer a lower return
than other securities. The money market specializes in debt securities that
mature in less than one year.11 ! Summary
24. 24. Repurchase agreement (repos) are a form of overnight borrowing backed
by government securities. Bankers acceptance (BA) are negotiable time
draft for financing transactions in goods. Commercial paper is an unsecured,
short-term loan issued by a corporation. Returns are higher than T- bills
because of the higher default risk. CDs are safe, but the returns arent great,
and your money is tied up for the length of the CD. Annual percentage yield
(APY) takes into account compound interest, annual percentage rate (APR)
does not. A certificate of deposit (CD) is a time deposit with a
bank.Continued.
25. 25. Thank you
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