Money Market

Contents
• Introduction.
• History.
• Characterstics.
• Objectives.
• Importance.
• Functions.
• Segments .
• Reference.
 Introduction
Money Market is a market where short term
instruments that mature in a year or earlier
are traded.
Money market is a market for short-term
financial assets which are near substitutes for
money.
 History
Till 1935,When RBI was set up the indian money market
remained highly disintegrated, unorganised ,narrow,shallow
and there fore very backward.
The planned economic development that commenced in
the year 1951 marked an important beginning in the annals
of the market. The nationalisation of banks in 1969, the
setting up of various committiees such as Sukhmoy
Chakraborty Committee (1982), the Vaghul Working Group
(1986) , the setting up of discount and finance house of
india ltd.(1988), The Securities Trading Corporation of
India (1994) and The Commencement of Liberalisation
and GLOBALISATION process in 1991 gave aurther fillip for
the integrated and efficient development of indian money
market.
 Characterstics
 Short term funds are borrowed and lent.
 No fixed place for conduct of operations.
 Dealings may be conducting with or without the
help of brokers.
 The short term financial assets that are dealt in
are close substitutes of money.
 Funds are traded for a maximum period of one
year.
 Presence of a large number of sub markets such
as inter-bank call money, bills rediscounting,
treasury bills etc.
 Objectives
• Providing an equilibrium mechanism for
ironing out short term surplus and deficit.
• Providing a focal point for central bank
intervention for influencing liquidity in the
economy.
• Providing access to users of short term
money to meet their requirements at a
reasonable price.
 Importance
• Source Of capital
• Ideal investment
• Effective Monetary management
• Economic Development
• Efficient Banking System
• Facilitating Trade
 Functions
• Investment Function
• Financing Function
• Facilitating Function
 Institutions Operating In Money
Market
• Commercial banks
• NBFC
• Acceptence Houses
• Central Bank
 Organized V/S Unorganized Money
Market
Feature Organized Sector Unorganized Sector
Interest Rates Reasonable real interest Exorbitant rate of interest.
rate
institutions Comprises RBI, SBI Comprises of indigenious
together with its bankers,money lenders
associates,20 public sector and other non banking
commercial banks,private financial intermediaries like
sector commercial banks chit funds etc.
including foreign
banks,regional rural banks,
non scheduled commercial
banks and other non
banking financial
intermidiaries comprising
LIC,GIC and UTI
instruments Includes Tbs,CDs,CPs,call Includes hundi-indigenous
funds etc. bills of exchange.
 Segments /Sub-Markets
 Call Money Market
 Collateral Loan Market
 Bill Market
 Acceptance Market
 Certificate Of Deposit
 CALL MONEY MARKET
• A market where call funds are borrowed and
lent is called call money market. Call funds
include very short period funds such as
money-at –call and short notice etc.
 Features of call money market
• Call and notice money- call money market deals
invery short period funds. The period ranges from
overnight to a fortnight. Whereas call money is
repayable on the immediate next working day,
notice money is repayable within a fortnight.
These transactions are not covered by any
collateral security.
• Sensitive segment- any change in demand and
supply of short term funds in the financial system
Is quickly reflected in call money rates
BENEFITS of CALL MONEY MARKET
 Quick Funds
 Best Investments
 Profitability
 HISTORY OF INDIAN CALL MONEY
MARKET
• Although call money market became
operational worldwide after the First World
War, there were only few participants like few
rich individuals and foreign exchange banks.
• Call Money Market in India was
operationalized with the inauguration of the
RBI in the year 1935 with the banks taking
part in it.
 CONT’D…
 From early 1970, LIC and UTI were permitted
to operate in call market,but only as supplier
of call loans.
 State Bank Of India and its subsidiaries
entered the call money market in October
1970 and at that point of time institutional
investors were prohibited from operating in
this market .
 COMMITTEES
• SUKHMOY CHAKRABORTY COMMITTEE(1982)-
deregulation of interest rate on call loans
• THE VAGHUL WORKING GROUP(1986)-Wanted the total
freeing of call money rate and recommended the
setting up of discount house
• DFHI(1988)-Rates were made totally free and market
determined with effect from May1,1989,operate as
lender and borrower.
• SPECIAL INSTITUTIONS-GIC,IDBI and NABARD were
allowed entry from may2,1989 as lenders
• STCI(1994)-Permission to operate in market both as a
lender and borrower
• PRIVATE MUTUAL FUND (1995)-Allowed to operate as
lender
 MODE OF OPERATION
• THOSE INVOLVING BANKS-Transaction conducted over the
telephone .Lender issues a RBI cheque in favour of borrowing bank
which is acknowledged by call money borrowing receipt. On the
reversal day, the borrowing bank repays the amount with interest
by issuing the RBI cheque and the lender returns the duly
discharged receipt.
• THOSE INVOLVING DFHI-borrower and lender approach the DFHI by
spelling out their terms such as quantum and availability of funds
,interest rates etc. the transaction when confirmed results in
exchange of DSA.DFHI issues a call deposit receipt to the lender and
in turn receives a RBI cheque for the money borrowed. In case of
lending,DFHI gives a RBI cheque for the amount lent in exchange for
call deposit receipt. On the reversal day ,lender surrenders the duly
discharged call deposit receipt and the borrower in turn issues a RBI
cheque for the amount borrowed with interest.
 CALL MONEY RATE
• The rate of interest on call loans is called call
money rate. The rate of call money is strikingly
varying and volatile. The factors responsible
are CRR requirements, fluctuating corporate
demand ,volume of bank deposits, vagaries
noticed in GSM, cyclical fluctuation etc.
 CERTIFICATE OF DEPOSITS
• Certificates of Deposit (CDs) were introduced in
India in 1989.
• 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.
 CONT’D…
• Minimum amount of a CD should be Rs.5 lakh,
i.e., the minimum deposit that could be accepted
from a single subscriber should not be less than
Rs.5 lakh and in the multiples of Rs. 1 lakh there
after. INVESTORS CDs can be issued to individuals,
corporations, companies, trusts, funds,
associations, etc.
• The maturity period of CDs issued by banks
ranges from 3 Days to 12 Months that issued by
specified financial institutions can have a
maturity period upto 3 years.
• With the announcement of Credit Policy On
April-27-2000 the maturity period was
reduced from 3 Months to 15 Days.
 COMMERCIAL PAPER MARKET
• Commercial Paper is the short term unsecured promissory
note issued by corporate and financial institutions at a
discounted value on face value.
• 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.
• They come with fixed maturity period ranging from 15 days
to one year.
• These are issued for the purpose of financing of accounts
receivables, inventories and meeting short term liabilities.
• The return on commercial papers 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.
Capital market
 Introduction to capital market
• Capital market is a market for financial assets
which have a long or indefinate maturity. it
considers of financial institutions like icici, uti,
lic etc which play the role of lenders in the
market. Whereas borrowers are Bussiness
units and corporate.
• Capital market is a market where buyers and
sellers engage in trade of financial securities
like bonds, stocks etc.
 Regulator of capital market
• Securities and exchange board of india is the
regulatory authority established under sebi
act 1992 and is principal regulator for stock
exchange in india. It protects investors, intrest,
and promotes the indian security market.
• Rbi is responsible for implementing monetary
and credit policies.
• Nse- it sets out and implements rules and
regulations to govern the security market.
 Functions of capital market
• To mobilise the financial resources on nation
wide scale. It is source of mobilizing idle saving
from the economy
• To ensure most effective allocation of mobilised
financial resources by directing the same either
to such projects providing highest yield or
underdeveloped priority areas.
• Provision of investment avenue- diverse
investment avenue for public in bonds, equity,
mutual funds Etc. so they can spread risk
 Significance of capital market
• Continuous availability of funds
• Speed up economy and growth.
• Capital formation- through mobilisation of
ideal resources it generates savings, which is
made available to various segments. This
helps in increasing capital formation
 Structure of capital market
• Gilt edged market- it refers the market for
government and semi government securities
which carries fixed rate of interest. It is totally
secured. its types are bearer bonds, promisory
notes
• Industrial securities market- it deals with new
issue market(public issue, right issue, bonus
issue)and old issue market(stock exchange)
• Development financial institutions- they provide
long and medium term finance to industry trade
and agriculture. Like idbi, sidbi, lic etc
 CAPITAL MARKET INSTRUMENTS
1.Industrial securities-these are most popular
securities in the market. Classified into ownership
securities that is equity shares and preference
shares and creditorship securities(debentures)

2.Gilt edged securities- these are government and

semi government securities. These are
o Promisory notes- negotiable instruments issued
by central or state govt. it promise for payment of
principal and interest.
• Bearer bonds- vests the ownership with the
person who is having mere possesion of it. The
tranfer of such securities can be made by mere
delivery. If its lost ownre losses all his rights.
• Public sector undertaken bonds-these are debt
instuments issued by various public sector
unitssuch as indian railways, coal india ltd etc.
they have 7 yrs maturity are are normally secured
 Classification of capital market
Capital market can be broken down into
primary market and capital market. Primary
market where new stocks and bonds are
issued to investors through underwriters ,
banks etc in form of initial public offering. and
secondary market where existing stocks and
bonds are traded through stock exchange.
Markets such asnew york stock exchange,
london stock exchange.
 Difference between primary market
and secondary market
Basis for comparison Primary market Secondary market

meaning The place where fresh issue The place where pre issued
of shares is made. securities are dealt with.

Another name New issue market Old issue market

Type of purchasing direct Indirect

How many times a Only once Multiple times

securities can be sold

price fixed Fluctuates, depends on

demand and supply force
 Methods of floatation of new issues
• Public issue-raising directly from public through
prospectus
• Right issue- they are proposed to existing
shareholders at a price much lower than the
market price.
• Bonus share-in this no additional amount is paid
by shareholders as these are dividend paid in
form of shares.
• Offer to employees-it enables the employess to
become the shareholders and thereby share the
profit of company
 Difference between money market
and capital market
Basis for comparison Money market Capital market

meaning Financial market for lending Financial market where long

and borrowing for short term securities are issued
period and traded

Financial instruments Treasury bills, commercial Shares, debentures, bonds

bills, trade credit etc etc

Risk factor Low Comparatively high

time Within a year More than a year

Return on investment less Comparatively high