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MONEY

Definition of 'Monetary Aggregates'


Broad categories measuring the total value of the money supply within an economy. In the United States, the standardized monetary aggregates and their measured contents are known as: M0 Physical cash and coin M1 All of M0 plus demand deposits, travelers checks M2 All of M1 plus savings deposits, money market shares There is also an M3 aggregate that includes larger (greater than $100,000) time deposits and institutional funds. The M3 measure is no longer tracked by the Federal Reserve as of 2006, although analysts still calculate the figure broadly. The Federal Reserve uses monetary aggregates to measure the effects of open-market operations, like changing the discount rate or trading in Treasury securities.

'Monetary Aggregates'
Monetary aggregates are watched closely by economists and investors, as they give a clear picture of the true size of the working money supply. Frequent reporting of the M1 and M2 measures (data is published weekly) allows investors to measure the rate of change in the monetary aggregates and overall monetary velocity. If the monetary aggregates are growing too quickly, it could trigger inflationary fears (more money chasing after the same amount of goods and services leads to rising prices) and cause central-banking groups to raise interest rates or otherwise halt money-supply growth. While the monetary aggregates were once key in determining overall central-banking policy, the past few decades have shown a lower correlation between changes in the money supply and key metrics like inflation, and GDP.

Money Market:
-A market where short term funds are borrowed and lent is called money market. -A money market is a market for short-term financial assets which are near substitutes for money. -The money market comprises of individuals, institutions, and the government. Demanded by ------merchants, traders, brokers, manufacturers, speculators, government institutions Supplied by----------commercial banks, insurance companies, non-banking financial concerns and central bank of the country DEFINITIONS:

According to the McGraw Hill Dictionary of Modern Economics, money market is the term designed to include the financial institutions which handle the purchase, sale, and transfers of short term credit instruments. The money market includes the entire machinery for the channelizing of short term funds. Concerned primarily with small business needs for working capital, individuals borrowing, and government short term obligations, it differs from the long-term or capital market which devote its attention to dealings in bonds, corporate stocks and mortgage credit.

According to Geoffrey, money market is the collective name given to the various firms and institutions that deal in the various grades of the near money. According to Reserve Bank of India, a money market is the centre for dealings, mainly of short term character, in money assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders. It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers agents comprising institutions and individuals and also the government itself.

General characteristics
short term funds are borrowed and lent no fixed place dealings are done with or without the help of brokers close substitute of money. It can be converted into money with ease, speed, without loss and with minimum transaction cost funds are traded for a maximum period of one year presence of large number of sub markets, inter-bank call money, bills re discountings, treasury bills etc.,

Objectives
Providing an equilibrium mechanism for ironing out short-term surplus and deficits 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 of money market


source of capital ideal investment effective monetary management economic development efficient banking system facilitating trade helpful to government

Functions of money market


investment function financing function facilitating function

Segment/sub-markets
Call money market: it deals in money at call and short-notice. This market deals with extremely short period loans., say a day, overnight, or maximum of 7 days. Collateral loan market: refer to the money made available against the collateral or securities such as stock, bonds etc., loans are granted against the backing of securities. The collateral is returned to the borrower after the repayment of the loan. Bill market: specialised segment of the market that deals in the purchase and sale of various types of commercial bills eg., bills of exchange and treasury bills.

Conti...

Discount market: the market where bankers acceptances are discounted is known as discount market. This offers the advantage of temporary funds to traders. Acceptance market: a market that deals with bankers acceptance is known as Acceptance market. It consists of the draft issued by the bank and undertaking to make payment of the money specified on the draft of demand. Bank has to make payment either to the order of a specified party or to the bearer, the sum specified in the instrument.

Capital market
Capital market may be defined as a market for borrowing and lending long-term capital funds required by business enterprises. it is a market for financial assets that have long or indefinite maturity.

Characteristics:
- securities market- dealings in the market are done through securities like shares, debentures etc., -security prices- prices are determined by demand and supply -participants- financial intermediaries like insurance companies, investment companies, pension funds, etc. Non-financial business enterprises, ultimate economic units like households and governments. -location- it exists all over the economy, wherever suppliers and users of capital get together tend to do business

Composition of Indian capital market:


the gilt-edged securities market the industrial securities market The gilt-edged securities market is also known as government securities market. It is a market for government and semi-government securities Features: -guaranteed return on investment -no speculation -institutional based investors are compelled by law to invest a portion of their funds in securities -predominated by institutions like LIC, GIC, the provident funds and commercial banks -heavy volume of transactions industrial securities market comprised of new issue market ie., the primary market and secondary market ie., the stock exchange market

Points of difference Term of finance

Capital market Long-term funds

Money market short-term funds

Nature of capital

Used for fixed and working capital needs


Mobilization and effective utilization

Meant for working capital needs

Main function

Lending and borrowing to facilitate liquidity adjustments

Main constituents

Primary and secondary market

Call money market, treasury bill market, commercial bill market etc Depositors and borrowers Commercial banks and discount houses Low market risk Low

Link Institution Risk Price fluctuations

Investors and enterpreneurs Investment houses and mortgage banks High credit, high risk high

Liquidity
Dominant institutions

low
Non-banking and

High
Commercial banks

INDIAN MONEY MARKET: Indian money market consists of the unorganised and organised sector Unorganised sector: Unregulated non-bank financial intermediaries Indigenous bankers Money lenders Organised sector: Reserve bank of India Commercial banks Foreign banks Co operative banks Financial corporations Mutual funds Discount and Finance House of India Limited (DFHI)

Organised sector of the Indian Money Market

SUB MARKET Call money market Treasury bill mkt T he Repo mkt Commercial and trade bill mkt Mutual funds Commercial paper market

PARTICIPATING INSTITUTIONS RBI DFHI Banks

INSTRUMENTS Treasury bills Repos Inter bank call money

Development Commercial and Financial Institutions trade Bill Finance Companies Mutual Funds Commercial paper Certificates of deposits Participation certificates

The Treasury Bill Market: The market which deals in treasury bills is known as the treasury bill market. They are the short term liabilities of the central government. They are a permanent source of funds for the central government.

The Repo Market:


Repo is a money market instrument which helps in collateralised short-term borrowings and lending through sale/purchase operations in debt instruments. Under the Repo transaction, securities are sold by their holder to an investor with an agreement to repurchase them at a predetermined rate and date. The Commercial Bill market: It is the sub-market in which the trade bills or the commercial bills are handled. The purpose of a commercial bill is to reimburse the seller while the buyer delays payment. The Certificate of Deposit Market: It is a certificate issued by a bank to depositors of funds that remain on deposit at the bank for a specified period.

Commercial Paper: It is a short-term instrument of raising funds by corporates. It is essentially a sort of unsecured promissory note sold by the issuer to the investor or via some agent like a merchant banker or a security house. It was introduced in the Indian money market in January 1990. The Market Mutual Funds: It was introduced by RBI in April1992. The objective of the scheme was to provide an additional short-term avenue to the individual investors.

Characteristics of Indian money market: lack of integration lack of rational interest rates structure absence of organised bill market shortage of funds in the money market seasonal stringency of funds and fluctuations in interest rates inadequate banking facilities

INDIAN CAPITAL MARKET Role of Capital Market in Indias industrial growth: for financing five year plans mobilisation of savings and acceleration of capital formation promotion of industrial growth raising long-term capital ready and continuous market proper channelization of funds provision of a variety of services

Role of FDI in economic development


Different forms of foreign capital:
Direct Entrepreneurial Investment- Foreign Direct Investment Portfolio Investment Foreign aid: all official grants and concessional loans, in currency or in kind, which are broadly aimed at transferring resources from developed to less developed nations on developmental or income distributional grounds

Need for Foreign Capital


low capital formation need for high level of investment development of basic economic infrastructure exploitation of productive resources backwardness in technology Making balance of payment favourable filling the gap of private entrepreneurs

Indian governments policy towards foreign capital: in 1991 government announced a specified list of high technology and high investment priority industries wherein automatic permission was granted for FDI upto 51% and subsequently to 100% for many of these industries in service sector, in addition to hotels 51% of FDI was allowed in tourist related areas hiring of foreign technicians and testing of indigenously developed technology abroad earlier required approval, now it has been removed portfolio investment is allowed upto 24% of the paid-up capital of the company Foreign investors can set up subsidiaries subject to disinvestment of 25% of their equity to Indian entities FDI is allowed upto 26% in the insurance sector FDI of 74% in basic and cellular telecom services FDI of 10O% petroleum sector FDI of 74% in banking sector

Foreign investment flows to India

(US $ million)

year 1991-92 1993-94 1999-2000 2000-01

Direct investment 129 586 2,155 4,029

Portfolio investment 4 3,567 3,026 2,760

2004-05 2005-06
2006-07 2007-08 2008-09

6,051 8,961
22,826 34,362 35,168

9,315 12,492
7,003 27,271 -13,855

Sect oral composition of FDI:

Service sector---------13,519 million dollors (20% of 66,938 million dollors) computer hardware and software 11.1% telecommunication 6% Construction----5.1% Housing and real estate----4.6% Automobile industry ------4.1%

Significance of FDI:
Helps to raise the level of investment Helps in stabilising prices and provides for import of raw-materials and scarce spare parts Improve in the infrastructural facility Supplements domestic savings Facilitates transfer of technology Overall development of the economy

Harmful effects of FDI: special concessions to foreign investors payment of dividends and royalty profit oriented production Agreements loaded in favour of foreigners multiple collaborations and over-import of equipments restrictive clause in agreements distortions of economic structure foreign resources used to acquire existing assets increase in regional inequalities Political interference technology transfers not necessarily conducive to development

Stock exchange board of India--SEBI:


Need : -to promote an orderly and healthy growth of the securities market -to provide for protection of investors interest -to sustain the growth momentum -educate investors -providing proper infrastructure for facilitating automatic expansion of business Prior to setting up of SEBI, capital issues in India were regulated by the Capital issues (Control) Act of 1947. Government of India set up the Securities and exchange board of India on April 12,1988 on the basis of the recommendations of the high powered committed on stock exchange reforms headed by G.S.Patel. SEBI was given a legal status by Securities and Exchange Board of India Ordinance 1992. The members of SEBI comprised of professional brokers, financial consultants, merchant bankers, investors, stock exchange authorities, finance ministry etc.,

Functions of SEBI:
regulates business in stock exchange and other securities market registering and regulating working of stock brokers, bankers to an issues. Trustees of trust deeds and other intermediaries associated with the securities market promotes investors education and training of inter-mediaries of securities market regulates substantial acquisition of shares and take over of companies

registering as well as regulating working of collective investment schemes including mutual funds
prohibiting fraudulent and unfair trade practices relating to securities market

Powers of SEBI:

to oversee constitution as well as the operations of mutual funds including presentation of accounts, following the decision to allow the entry of private sector and joint sector mutual funds.
all stock exchanges in the country have been brought under the annual inspection regime of SEBI ensuring orderly growth of stock markets and investors protection it has been made the regulatory authority in regard to new issues of companies power to register and regulate new intermediaries in the capital market empowered to impose penalties on different intermediaries for defaults

Steps taken by SEBI to improve stock market and capital market:

SEBI has drawn up a programme for inspecting stock exchanges to improve the functioning of stock exchanges SEBI has introduced a number of measures to reform the primary market, minimise malpractices in allotment of oversubscribed issues etc., SEBI has issued regulations relating to stock-brokers and sub-brokers in October 1992 which covers registration of brokers and sub-brokers, their general obligations and responsibilities, procedures for inspection of their operations broad basing of governing bodies of stock exchanges with a view to have greater degree of autonomy and independence merchant banking has been statutorily brought under the regulatory framework of SEBI SEBI issued separate guidelines for developing financial institutions in Sept 1992 SEBI has notified regulations for mutual funds SEBI has made it mandatory for brokers to maintain separate accounts for their clients and for themselves SEBI has issued directives to the stock exchanges to ensure that contract notes are issued by brokers to clients within 24 hours of the execution of the contract UTI has also been brought under the regulatory jurisdiction of SEBI SEBI has issued guidelines for overseas investment by VCF(Venture Capital Funds) SEBI has enhanced the investment limit for FIIs in government securities from $2 billion to $ 2.6 billion.

Conti....,

FIIs can invest in the India capital market provided they are registered with SEBI SEBI ruled that trades executed by the members of BSE and NSE shall by reported on the reporting platforms of the respective stock exchanges who would host such information on their websites SEBI has stipulated that Permanent Account Number (PAN) would be the sole identification number for all participants in the securities market, irrespective of the amount of transactions , which effect from JULY 2, 2007.

Definition and meaning of stock exchange:


According to Securities Contracts (Regulation) Act of 1956, stock exchange is defined as an association, organisation or body of individuals, whether incorlporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.

The stock exchange is a highly organised market for the purchase and sale of secondhand quoted or listed securities. Quoting or listing implies incorporating that security in the register of stock exchange so that it can be bought and sold there.

Functions of stock exchange: ready and continuous market protection to investors provides information to assess the real worths of securities proper channelization of funds promotion of industrial growth accelerates capital formation raising long-term capital impact on company performance economic barometer

Advantages of a stock exchange: Benefits to the community Benefits to the company Benefits to the investors

NATIONAL STOCK EXCHANGE NSE: the National Stock Exchange of India was set up on the basis of the recommendations of the High Powered Study Group on Establishment of New Stock Exchanges NSE commenced its operation in April 1993, in the wholesale debt market(WDM) the capital market segment commenced operations in Nov 1994 and Derivatives segment commenced in June 2000 the biggest stock exchange in India which was set up in 1992 incorporated with an equity capital 25 crores NSE provides facilities for trading of equity instruments, warrants, debentures, preferences shares etc., NSE has adopted fully automated screen based trading system which allows trading members to trade from their office through a communication network the board of NSE comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation etc.,

Objectives of NSE: establishing a nationwide trading facility for equities, debt instruments and others ensuring equal access to investors all over the country through an appropriate communication network providing a fair, efficient and transparent securities market to investors using electronic trading systems enabling shorter settlement cycles meeting the current international standards of securities markets

BOMBAY STOCK EXCHANGE-BSE: it was originally established in 1875 under the name of The Native Share and Stockbrokers Association as a voluntary non-profit organisation it is the oldest stock exchanges in Asia, much older than the Tokyo Stock Exchange, which was founded in 1878 the governing board consists of 9 elected directors ,an executive director, 3 government nominees, a RBI nominee and 5 public representatives is the apex body which regulates the exchange and decides its policies the members of the BSE are free to install their own trading terminals at any place in the country the BSE has a separate Listing Department to grant approval for listing of securities of companies in accordance with the provisions of the Securities Contracts Act 1956 for listing in BSE minimum of Rs. 10 crore issued equity capital the exchange has introduced a new category called Z Group from July 1999 for companies which have not complied with and are in breach of provisions of the listing agreement BOLT system which is in effect from March 14, 1995 enables traders to trade online

Conti.., as per 19(2)(b) of the Securities Contracts Regulation Rules 1957, securities of a company listed on a stock exchange only when at least 25% of each class or kind is offered to the public for subscription circuit filters imposed for the price of a security to move within a prescribed band is called circuit filters. BSE has created history by launching the first Exchange traded financial derivatives product in India, the Sensex Futures BSE is maintaining a database of fake/forged, stolen, lost and duplicate securities in physical form with the clearing house, so that distinctive numbers submitted by members in case of physical securities on delivery may be matched against the database to weed out bad paper from circulation at the time of introduction of such securities in the market. all transactions in all groups of securities in the equity segment and fixed- income securities listed on the exchange are settled on T+3 basis