MONEY MARKETS OF INDIA

Osho Kharbanda,
Delhi School of Management, Delhi Technological University.
 LET’S START WITH A QUESTION?

James Simons Jack Welch Warren Buffet

Renaissance Technologies General Electric Berkshire Hathaway

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 TYPES OF FINANCIAL MARKETS
➤ Any marketplace where buyers and sellers participate in the
trade of assets such as equities, bonds, currencies and
derivatives.
➤ Financial markets are typically defined by having transparent
pricing, basic regulations on trading, costs and fees, and
market forces determining the prices of securities that trade.

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 TYPES OF FINANCIAL MARKETS
Capital Market

Financial Markets Money Market

Cash or Spot Market

Derivative Market

Forex & The Interbank Market

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 CAPITAL MARKETS
➤ A capital market is one in which individuals and institutions
trade financial securities.
➤ Organisations and institutions in the public and private sectors
also often sell securities on the capital markets in order to raise
funds(Long-Term).
➤ Thus, this type of market is composed of both the primary and
secondary markets.
➤ Stock markets allow investors to buy and sell shares in publicly
traded companies.
➤ A bond is a debt investment in which an investor loans money to
an entity (corporate or governmental), which borrows the funds
for a defined period of time at a fixed interest rate.

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 CASH OR SPOT MARKETS
➤ Investing in the cash or "spot" market is highly sophisticated,
with opportunities for both big losses and big gains.
➤ In the cash market, goods are sold for cash and are delivered
immediately.
➤ Prices are settled in cash "on the spot" at current market
prices. This is notably different from other markets, in which
trades are determined at forward prices.
➤ Dominated by institutional market players such as hedge
funds, limited partnerships and corporate investors.

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 DERIVATIVE MARKETS
➤ The derivative is named so for a reason: its value is derived
from its underlying asset or assets.
➤ A derivative is a contract, but in this case the contract price is
determined by the market price of the core asset.
➤ It can be used quite effectively as part of a risk management
program.
➤ Examples of common derivatives are forwards, futures,
options, swaps and contracts-for-difference (CFDs).

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 FOREX & THE INTERBANK MARKETS
➤ The interbank market is the financial system and trading of
currencies among banks and financial institutions, excluding
retail investors and smaller trading parties.
➤ The forex market is where currencies are traded. The forex
market is the largest, most liquid market in the world with an
average traded value that exceeds $1.9 trillion per day.

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 WHAT ARE MONEY MARKETS?
➤ “ A market for short terms financial assets that are close substitute for
money, facilitates the exchange of money in primary and secondary
market”.
➤ Money market transactions are generally used for funding the
transactions in other markets including Government securities market
and meeting short term liquidity mismatches.
➤ Within the one year, depending upon the tenors, money market is
classified into:
Overnight market : The tenor of transactions is one working day.
Notice money market : The tenor of the transactions is from 2 days to
14 days.
Term money market : The tenor of the transactions is from 15 days to
one year.

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 STRUCTURE OF MONEY MARKETS IN INDIA
Indian Money Market

Organised Unorganised
Reserve bank of India Indigenous Bankers
Schedule Commercial Banks Domestic Money
Lenders Nidhis & Chit Funds
Development Banks Traders & Friends
Investment Institutions Brokers & Dealers
Regional Rural Banks
Foreign Banks
State Financial Corp.
Discounted & Finance House of India
Sub Markets

Call Money Market Bill Market 364 day Bill Market Certificate of Deposit Commercial Paper’s

Commercial Bills Treasury Bills

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 OBJECTIVES OF MONEY MARKETS
➤ To provide a parking place to employ short term surplus
funds.
➤ To provide room for overcoming short term deficits.
➤ To enable the central bank to influence and regulate liquidity
in the economy through its intervention in this market.
➤ To provide a reasonable access to users of short-term funds to
meet their requirement quickly, adequately at reasonable cost.

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 MONEY MARKET IN INDIA
➤ The definition of money for money market purposes is not confined to
bank notes but includes a range of assets that can be turned into cash
at short notice.
➤ The average turnover of the money market in India is over Rs. 40,000
crores daily.
➤ This is more than 3 percents of the total money supply in the Indian
economy and 6 percent of the total funds that commercial banks have
let out to the system. This implies that 2 percent of the annual GDP of
India gets traded in the money market in just one day.
➤ The major player in the money market are Reserve Bank of India (RBI),
Discount and Finance House of India (DFHI), banks, financial
institutions, mutual funds, government,big corporate houses.

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 FEATURES OF INDIAN MONEY MARKETS
➤ Existence of Unorganised Money Market.
➤ Absence of Integration
➤ Diversity in Money Rates of Interest
➤ Seasonal Stringency of Money
➤ Absence of the Bill Market
➤ Highly volatile call money market
➤ Absence of a well organised Banking System
➤ Availability of credit instruments

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 ROLE OF RESERVE BANK OF INDIA
➤ The Reserve Bank of India is the most important constituent of the
money market.
➤ The aims of the Reserve Bank’s operations in the money market are:
To ensure that liquidity and short term interest rates are maintained at
levels consistent with the monetary policy objectives of maintaining
price stability.
To ensure an adequate flow of credit to the productive sector of the
economy and
To bring about order in the foreign exchange market.
➤ The Reserve Bank of India influence liquidity and interest rates through a
number of operating instruments - cash reserve requirement (CRR) of
banks, conduct of open market operations (OMOs), repos, change in
bank rates and at times, foreign exchange swap operations.

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 HISTORY OF INDIAN MONEY MARKETS
➤ Till 1935, when the RBI was set up the Indian money market
remained highly disintegrated, unorganised, narrow, shallow and
therefore, very backward.
➤ The planned economic development that commenced in the year
1951 market an important beginning.
➤ The nationalisation of banks in 1969, setting up of various
committees such as the 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
liberalization and globalization process in 1991 gave a further fillip
for the integrated and efficient development of India money market.

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 DEVELOPMENTS IN INDIAN MONEY MARKETS
➤ Deregulation of the Interest Rate : In recent period the
government has adopted an interest rate policy of liberal
nature. It lifted the ceiling rates of the call money market,
short-term deposits, bills re-discounting, etc. Commercial
banks are advised to see the interest rate change that takes
place within the limit. There was a further deregulation of
interest rates during the economic reforms. Currently interest
rates are determined by the working of market forces except
for a few regulations.

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 DEVELOPMENTS IN INDIAN MONEY MARKETS
➤ Money Market Mutual Fund (MMMFs) : In order to provide
additional short-term investment revenue, the RBI
encouraged and established the Money Market Mutual Funds
(MMMFs) in April 1992. MMMFs are allowed to sell units to
corporate and individuals. The upper limit of 50 crore
investments has also been lifted. Financial institutions such
as the IDBI and the UTI have set up such funds.
➤ Establishment of the DFI : The Discount and Finance House
of India (DFHI) was set up in April 1988 to impart liquidity
in the money market. It was set up jointly by the RBI, Public
sector Banks and Financial Institutions. DFHI has played an
important role in stabilising the Indian money market.

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 DEVELOPMENTS IN INDIAN MONEY MARKETS
➤ Liquidity Adjustment Facility (LAF) : Through the LAF, the
RBI remains in the money market on a continue basis through
the repo transaction. LAF adjusts liquidity in the market
through absorption and or injection of financial resources.
➤ Electronic Transactions : In order to impart transparency
and efficiency in the money market transaction the electronic
dealing system has been started. It covers all deals in the
money market. Similarly it is useful for the RBI to watchdog
the money market.

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 DEVELOPMENTS IN INDIAN MONEY MARKETS
➤ Establishment of the CCIL : The Clearing Corporation of India
limited (CCIL) was set up in April 2001. The CCIL clears all
transactions in government securities, and repose reported on the
Negotiated Dealing System.
➤ Development of New Market Instruments : The government has
consistently tried to introduce new short-term investment
instruments. Examples: Treasury Bills of various duration, Commercial
papers, Certificates of Deposits, MMMFs, etc. have been introduced in
the Indian Money Market.
These are major reforms undertaken in the money market in India. Apart
from these, the stamp duty reforms, floating rate bonds, etc. are some
other prominent reforms in the money market in India. Thus, we can
conclude that the Indian money market is developing at a good speed.

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 MONEY MARKETS INSTRUMENTS
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.
Following new instrument are available:
Commercial papers.
Certificate of deposit.
Bankers Acceptance.
Repurchase agreement (Repo Markets).
Money Market mutual fund.

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 Thank you..

Any Questions?
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