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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”.
The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.
It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.
It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only. 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.
Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).
To provide room for overcoming short term deficits. 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 a reasonable access to users of short-term funds to meet their requirement quickly. . To provide a parking place to employ short term surplus funds.
o Formulation of suitable monetary policy. o Non inflationary source of finance to government.o Development of trade & industry. . o Effective central bank control. o Development of capital market. o Smooth functioning of commercial banks.
Money Market consists of a number of submarkets which collectively constitute the money market. Call Money Market Commercial bills market or discount market Acceptance market Treasury bill market . They are.
They were • Treasury bills • Money at call and short notice in the call loan market. promissory notes in the bill market. only a few instrument were available. . • Commercial bills.A variety of instrument are available in a developed money market. In India till 1986.
Now. in addition to the above the following new instrument are available: Commercial papers. Banker's Acceptance Repurchase agreement Money Market mutual fund . Certificate of deposit.
their liquidity being exceed only by cash. They are highly liquid. The loans made in this market are of the short term nature. Call money market is that part of the national money market where the day to day surplus funds. mostly of banks are traded in. .
. Banks borrow from other banks in order to meet a sudden demand for funds. large remittances. Thus. large payments. and to maintain cash or liquidity with the RBI. to the extent that call money is used in India for the purpose of adjustment of reserves.Continued……. .
like banks and primary dealers.Scheduled commercial banks Non-scheduled commercial banks Foreign banks State. district and urban. in the call market. cooperative banks Discount and Finance House of India (DFHI) Securities Trading Corporation of India (STCI). . The DFHI and STCI borrow as well as lend.
Calculation of interest payable would be based on FIMMDA’s (Fixed Income Money Market and Derivatives Association of India). Eligible participants are free to decide on interest rates in call/notice money market. The rate of interest paid on call loans is known as call rate. often from hour to hour. It is very sensitive to changes in demand for and supply of call loans. Call rate is highly variable from day to day. .
Indian Banks’ Association (IBA) in 1973 fixed a ceiling of 15% on the level of call rate. it became necessary to regulate call rates within reasonable limits. It is an alarming level for any short-term rate of interest to reach. . CALL RATE IN INDIA has reached as high a level as 30% in December 1973. 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.
and the other. and 10.6% in March 1978.0% in April 1980. and 8. 10 % in June 1977. the interbank call rate. There are now two call rates in India: one. And current call rate in India is 8%.Continued…… The IBA lowered this ceiling of 15% to 12. the lending rate of DFHI.5% in March 1976. .
Chennai. Delhi.30 pm on Saturdays or as specified by RBI from time to time. Calcutta. DEALING SESSION Deals in the call/notice money market can be done up to 5. and Ahmadabad. . LOCATION OF CALL MONEY MARKET IN INDIA Mumbai.00 pm on weekdays and 2.
Treasury bills (TBs).day.day TBs . 182. They are thus useful in managing short-term liquidity. Types of treasury bills through auctions 91. and 14. generally up to one year.day.Day. 364. offer short-term investment opportunities.
treasury bills and commercial bills. . If we were to arrange short-term financial instruments according to their liquidity. Treasury bills are not self-liquidating in the way genuine trade bills are. the descending order would be cash. although the degree of their liquidity is greater than that of trade bills. call loans.
they do not require any gardening or further endorsement or “acceptance” . treasury bills are claims against the government. As unlike ordinary trade bills. 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.
The high liquidity Absence of risk of default Ready availability Assured yield Low transaction cost Eligibility for inclusion in statutory liquidity ratio (SLR) Negligible capital depreciation .
. Ordinary TBs Ad hoc TBs The ordinary TBs are issued to the public and the RBI for enabling the government to meet the needs of supplementary short-term finance. also known as ad hocs in short. TBs. has been discontinued through the signing of two agreements between the government and the RBI.
50crore on Fridays and Rs. Government shall maintain with the RBI a cash balance of not less than Rs. The instrument of ad hoc Treasury bill and the system of issuing it were introduced in India in 1937.4 crore on other days free of obligation to pay interest. .
semi-governments. the government account would be replenished by the creation of ad hocs in favour of the RBI. . whenever the balance falls below these minimums. The government issued these bills to replenish their cash balance. and foreign central banks to invest their temporary surpluses. They also provide a medium to the state governments.
the authorities in India had introduced. .the 182-day Treasury bill. they were made fortnightly from July 1988. and to providing more outlets for temporary surplus fund. in November 1986. a major innovation in the form of new money market instrument. With a view to widening the short-term money market. It used to be sold in the market by the RBI in auctions which were monthly in the beginning.
. Thus. the new bill had become a handy instrument for banks. The amount raised in each auction suspended upon the funds available with the market participants. It is important to note that no specific amount of funds was sought to be raised through the auctions of these bills.Continued…….. financial institution. and the funds they desired to invest in these bills.
firms. and financial institutions. banks. including individuals. The 182-day bills could be purchased by any person resident in India. . 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. companies.
It is being auction regularly every fortnight. Its features are very similar to those which the 182-day bill had. namely 364-day TBs with effect from April 1992. Upon discounting the 182-day Treasury bill the authorities introduced a new money market instrument. . The RBI dose not purchase and rediscount this bill.
ITB has replaced the 91-day tap Treasury bill.With a view to further diversify the TBs market. . 1997 which is known as intermediate treasury bill (ITB) Second on may 20. the authorities have introduced recently two types of 14-day TBs: On April 1. 1997.
Continued……. 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. by credit to subsidiary general ledger account.e. It can be repaid/renewed at par on the expiration of 14 days from the date of issue. It is sold only to state governments. . It is issued in a book entry from i. The disadvantage of 14-day ITB is that it is not tradable or transferable..
25. Treasury bills are also issued under the Market Stabilization Scheme (MSS). 91-day T-bills are auctioned every week on Wednesdays. . 25. 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays. Treasury bills are available for a minimum amount of Rs. Treasury bills are issued at a discount and are redeemed at par.000.000 and in multiples of Rs.
DEFECTS OF TREASURY BILLS Poor Yield Absence of Competitive Bids Absence of Active Trading . T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system.
Following Friday reporting week 364-day Wednesday of reporting week Following Friday .Type of T-bills 91-day Day of Auction Wednesday Day of Payment* Following Friday 182-day Wednesday of non.
BILL OF EXCHANGE 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. . and purchase/discontinuing of commercial bills. Funds for working capital required by commerce and industry are mainly provided by banks through cash credits. overdrafts.
directing a certain person to pay a certain sum of money only to. a certain person. it is a written instrument containing as unconditional order. . signed by the maker. It shows the liquidity to make the payment on a fixed date when goods are bought on credit. or to the bearer of the instrument. Accordingly to the Indian Negotiable Instruments Act. or to the order of. 1881.
A related classification of bills is export bills and import bills . and must be payable in India Be drawn upon any person resident in India FOREIGN BILLS Drawn outside India and may be payable in and by a party outside India. INLAND BILLS Be drawn or made in India. or may be payable in India or drawn on a party resident in India Drawn in India and made payable outside India.
cottage and small scale industries. In India the use of bill of exchange appears to be in vogue for financing agricultural operations. and also within the country. . Commercial bills may be used for financing the movement and storage of goods between countries. and other commercial and trade transactions. before export (pre-export credit).
Such bill is sometimes called. puts his name (accept it) to accommodate another person without receiving and consideration. i. Apart from the genuine bill of exchange. They are accommodation bills and supply bills. As “accommodation bill” is defined as one in which a person. bills which evidence sale and /or dispatch of goods. a kite or wind bill. .e. called as accommodation party. there are other bills which are known to the money market.
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. This is especially useful when the credit worthiness of a foreign trade partner is unknown. . A banker's acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank.
Companies use the acceptance as a time draft for financing imports. In India. and dealings for conversion of their advances in to bills. 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. but this period can vary between 30 and 180 days. banks are required to select the borrowers after careful examination of their means. The terms for these instruments are usually 90 days. . respectability. exports and trade. Under the bill market schemes introduced by RBI in 1952.
Acceptances are traded at discounts from face value in the secondary market. Banks maintain opinion registers on different drawers of bills and they get reports from time to time on these drawers of bills. BA acts as a negotiable time draft for financing imports. . exports or other transactions in goods. BA’s are guaranteed by a bank to make payment.
DISCOUNTING SERVICE The central banks help banks in their liquidity management by providing them discounting and refinancing facilities. . 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.
such as the commercial bill or treasury bill. Bank borrow funds temporarily at the discount window of the central bank. which the central bank stands ready to discount for the purpose of financial accommodation to banks. They are permitted to borrow or are given the privilege of doing so from the central bank against certain types of eligible paper. .
The question of setting up of discount house in India was considered by the banking commission in the early 1970s. DISCOUNT HOUSE FUNCTION It should be the sole depository of the surplus liquid funds of the banking system as well as the non-banking financial institutions. .
It should use surplus funds to even out the imbalance in liquidity in the banking system subject to the RBI guidelines. . and government guaranteed securities by being ready to purchase from and sell to the banking system such securities. treasury bills. It should create ready market for commercial bills.
. Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. 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.
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 CP’s Subsequently. Primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. CP is very safe investment because the financial situation of a company can easily be predicted over a few months. .
they can issue CP within the overall umbrella limit fixed by the RBI i. As regards FIs. CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. 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. certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds.. whichever is lower. as per the latest audited balance sheet.e.. term deposits. . term money borrowings. issue of CP together with other instruments viz.
Individuals. other corporate bodies registered or incorporated in India and unincorporated bodies. NonResident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. However. Only a scheduled bank can act as an IPA for issuance of CP. can invest in CPs.5 lakh (face value). 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. banking companies.
CP will be issued at a discount to face value as may be determined by the issuer. 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. .
Certificates of Deposit (CDs) were introduced in India in 1989. With a view to further widening the range of money market instruments and give investors greater flexibility in deployment of their shortterm surplus funds. 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 .
. Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
term deposits. viz.. term money.e. An FI may issue CDs within the overall umbrella limit fixed by RBI. . as per the latest audited balance sheet. issue of CD together with other instruments. Banks have the freedom to issue CDs depending on their requirements. i. commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds..
but only on non-repatriable basis.. corporations. associations.1 lakh and in the multiples of Rs. the minimum deposit that could be accepted from a single subscriber should not be less than Rs. companies. funds. i. Such CDs cannot be endorsed to another NRI in the secondary market.e.Minimum amount of a CD should be Rs. 1 lakh thereafter. INVESTORS CDs can be issued to individuals. which should be clearly stated on the Certificate. . trusts. NonResident Indians (NRIs) may also subscribe to CDs. etc.1 lakh.
The maturity period of CDs issued by banks should be not less than 7 days and not more than one year. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. .
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. Banks have to maintain appropriate reserve requirements.. on the issue price of the CDs. cash reserve ratio (CRR) and statutory liquidity ratio (SLR). . CDs may be issued at a discount on face value.e. i. CDs in physical form are freely transferable by endorsement and delivery.
Reserve bank of India. Development bank IDBI. UTI etc. . NABARD. Private banks Indian Banks Foreign banks 4. GIC. 2. LIC. Commercial banks i.I :.ORGANISED STRUCTURE 1. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalised banks ii. DFHI (Discount And Finance House of India). ICICI. 3. IFCI.
Chits 4. central cooperative banks Primary Agri credit societies Primary urban banks 2. UNORGANISED SECTOR 1. State cooperative i. CO-OPERATIVE SECTOR 1. Indigenous banks 2 Money lenders 3. State Land development banks central land development banks Primary land development banks .II. Nidhis III.