Money Market

Sub: Financial Services and Markets

Sem -3
BOOK- VASANT DESAI & BHARTI PATHAK
 Introduction & concept
• The money market is key component of the financial
system. It is a market for short term funds with the
maturity ranging from overnight to one year.
• The money market does refer to particular place where
the short term funds are dealt with. It includes all the
institutions, intermediaries dealing with short term funds.
• A money market is a mechanism that deals with the
lending and borrowing of short term funds (less than one
year)
• It includes instruments that are deemed to be the close
substitutes of money like trade bills, promissory notes,
etc
 Features of Money Market
 It is market purely for short term funds.
 It deals with financial assets having a maturity period
less than 1 year.
 Transactions have to be conducted without the help of
brokers.
 Transactions take place through phone i.e. oral
communication .
 It comprises of several sub – markets.
 Components of money market are central bank,
commercial banks, NBFC etc
 Role & Importance of Money market
 Development of trade and industry.
 Development of capital market.
 Smooth functioning of commercial banks
 Effective central bank control
 Formulation of suitable monetary policy
 Non inflationary source of finance to government.
 Functions of Money Market
 Providing balancing mechanism to even out the demand
for and supply of short-term funds.
 Provide focal point for central bank intervention for
influencing liquidity.
 Provides reasonable access to suppliers and users of
short term funds to fulfill their borrowings.
 A Money Market helps to avoid seasonal fluctuations in
interest rates.
 It enhances the amount of liquidity available to the entire
country.
 It provides profitable investment opportunities for short
term surplus funds , helps to enhance the profit of
financial institutions and individuals.
 Money Market Instruments
 Treasury Bills (T-Bills)
 Commercial Paper (C.P.)
 Certificate of Deposits (C.D.)
 Commercial Bills (C.B.)
 Call/ Notice Money Market
 CBLO (Collateralized Borrowings & lending
Obligations)
 Treasury Bills (T-Bills)
 T- Bills are most marketed money market security.
 They are issued with 3 months, 6 months, and 1 year
maturities.
 T- Bills are short term instruments used by the
government to raise short term funds
 T- Bills are purchased for a price that is less than their
par (Face) value , when they mature the govt. pays the
holder the full par value.
 At present there are 91- day, 182- day, and 364-day T-
bills.
 T- Bills are available for minimum amt. of Rs. 25,000 & in
multiples thereof.
• Types of T-Bills
 On- tap Bills (Purchased from RBI…But they were
discontinued from April, 1997)
 Ad hoc Bills (Introduced in 1955, Decided between
govt. and RBI , that the govt. would maintain with RBI ,
a cash balance of not less than 50 crore on Friday and
Rs.4 crs. on other days and whenever the bal. fall below
minimum, the ad hoc bills were created in favour of RBI )
 Auctioned T- Bills (Introduced in 1992, RBI receives
bids in an auction from various participants and issues
bills)
 Commercial Paper (C.P.)
 CP is short term unsecured loan issued by a corporation
typically financing day to day operations.
 It is very safe investments becoz, the financial situation
of a company can easily be predicted over a few months.
 Only company with high credit rating issues CPs.
 Issuers:
 Creditworthy corporate
 Primary dealers
 All India Financial Institutions
 Largest issuers of commercial papers are leasing and
finance cos.
 It attracts stamp duty.
• Guidelines relating to CPs:
 Corporate, primary dealers and all India financial
institutions are eligible to issue.
 Minimum credit rating P2 of crisil
 Maturity period of minimum of 7 days and maximum up
to 1 year from the date of issue.
 Amt. of 5 lakhs minimum and multiples thereof
 Certificate of Deposits (C.D.)
 A CD is time deposit with bank.
 Like most time deposits funds cannot withdrawn before
maturity without paying a penalty
 CDs have specific maturity date , interest rate and it can
be issued in any denomination.
 Main advantage of CD is their safety
 Anyone can earn more than savings account interest.
 It is short term tradable time deposits issued by
commercial banks and financial institutions.
 Minimum amt. Rs. 1 lakhs and in multiples thereof.
 Maturity period 7 days to 1 year for bank and 1 to 3 for
FI.
 No lock in period.
• Guidelines for issuing CDs:
 Can be issued by scheduled commercial banks
excluding RRB and Local area banks.
 Minimum amt of CD should be Rs.1 lakhs
 Commercial Bills (C.B.)

 Commercial Bills are negotiable instruments drawn by

the seller on the buyer which are in turn accepted and
discounted by commercial banks.
 Buyer is drawee and seller is drawer.
 Bills of exchange are negotiable instruments drawn by
the seller on the buyer for the value of goods delivered to
him . Such bills are called trade bills. When the trade
bills are accepted by commercial banks they are called
commercial bills.
 The banks discounts this bills by keeping a certain
margin and credits the proceeds.
 Types of CB

 Demand bill (Payable on demand)

 Usance bill (Payable after specified time)
 Clean bill (documents are enclosed & delivered against
the acceptance by the drawee )
 Documentary bill (Documents are delivered against the
pyt. Accepted by the drawee)
 Inland bill
 Foreign bill
 Hundi (Bills of exchange for financing the movement of
agriculture products )
 Derivative usance promissory notes. (The usance
period up to 90 days and stamp duty is exempted.)
 Call/ Notice Money Market
 Call/ Notice money is the money borrowed or lent on
demand for very short period .
 When money is borrowed or lent for a day it is known as
call (overnight) money. It must be noted that the holidays
&/ or Sundays are excluded for this purpose .Thus
money borrowed in a day and repaid on the next working
day is CALL MONEY.
 Where money is borrowed or lent for more than a day
and up to 14 days it is NOTICE MONEY. No collateral
security is required for covering this transactions.
• Factors influencing call money market rate:
 Liquidity conditions
 Reserve requirements (Cut in CRR reduces call rates)
 Structural factors (Govt. laws, conditions etc)
• Term money market
 Here the funds are traded up to a period of 3 to 6
months
 It is still not developed in India.
 CBLO (Collateralized Borrowings & lending
Obligations)
 Launched by clearing corporation of India Ltd (CCIL)
 Provides liquidity to non- banking entities hit by
restrictions on access to the call money market.
 Minimum auction market lot for is Rs. 50 lakhs
 Minimum order lot for normal market is fixed at Rs. 5
lakhs
 In auction market , the borrower will submit their offers
and lenders will give their bids specifying discount rate
and maturity period. The bids and offers will be through
an auction screen, which will be open from 9:45 am to
1:30 pm, on every working day.
 In normal market, members will place their buy/sell
order on the screen which will remain open from 9:30am
to 3:30pm
• Money Market Intermediaries
 Discount and finance house of India (DFHI) [It was
set up by the objective of deepening and activating the
money market.]
 Money Market Mutual Funds
• Tools for managing liquidity in the money
market:
 Reserve requirements
 Interest rates
 Bank rates
• Organized sector and Unorganized sector:
 The Organized sector of the money market consists of
the RBI, commercial banks, large sized joint stock cos.
Lending money, financial intermediaries like LIC, GIC etc
 The Unorganized sector of money market is made up of
Indigenous bankers, money lenders, traders, etc.
 The Unorganized money market conveys the impression
that the indigenous agencies providing credit have
neither a system nor any organization among
themselves.
 References
1. INDIAN FINANCIAL SYSTEM BY “BHARTI PATHAK”
(3RDEDITION)
 Money Market Instruments – pg. no.= 48, 49, 50, 58,
59, 60, 61, 64, 65, 68, 69, 73, 74, 75, 76, 79, 80, 82, 83,
84, 85, 88, 89

2. “Financial Markets & services” by VASANT

DESAI (T1)