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Money

Market
Characteristics of Money
Market

Wholesale market of short term debt


instruments

Principal feature is honour

Need-based market

Interest rates are market determined

Main players are: RBI, Mutual funds, banks,


!"I, corporates, NB!Cs, #$CI, state
%o&ernments, P!s, P#'s, primary dealers and
NRIs
Money Market
Instruments

$reasury bills

Call(Notice money market- Call)o&erni%ht*


and short notice )up to +, days*

Certi-cates of deposit

Commercial bills

Commercial paper
$reasury bills

#hort-term instruments issued by RBI on


behalf of the %o&ernment

Repaid at par on maturity, issued at a discount

Ne%otiable and hi%hly li.uid securities

/bsence of default risk

/ssured yield, lo0 transaction cost

#ecurity for #1R purposes

$reasury bills can be purchased by any one


)includin% indi&iduals*2

/n unsecured short-term promissory note


issued at a discount

Issuers

credit0orthy corporates

primary dealers

/ll India -nancial institutions

iscount is freely determined by market


forces

Maturity period 3 days to upto one year2

Can be issued to indi&iduals, banks,


companies etc2

/n attracti&e source of 0orkin% capital funds


for corporate as the rates are less2

Ratin% re.uirement min2 P4 of CRI#I12

Minimum 5 lakhs and multiples2


Commercial Paper
/ short-term, ne%otiable and self li.uidatin%
instrument 0ith lo0 risk2
Bills of e6chan%e are ne%otiable instruments
dra0n by the seller on the buyer for the &alue of
the %oods deli&ered to him2 #uch bills are called
trade bills2
When trade bills are accepted by commercial
banks, they are called commercial bills2
Bank discounts this bill by keepin% a certain
mar%in and credit the proceeds2
Maturity period of bill &aries from 78 days, 98
days or :8 days2
Commercial Bills
/n unsecured, ne%otiable, short- term time deposit
issued by commercial banks and de&elopment
-nancial institutions2

Issued at a discount to face &alue2

Minimum amount Rs + lakh and in multiples


thereof

Maturity period
+5 days to one year for banks
+ to 7 years for !Is

$ransferable by endorsement

Banks to maintain appropriate reser&e


re.uirement on issue of Cs2

Issued in demat form

In&estors; indi&iduals, corporations, Mutual !unds


Certi-cates of eposit

Banks borro0(lend money for a period ran%in% bet0een


+ and +, days2

When borro0ed or lent-


for + day- o&erni%ht(call money
for 4 to +, day- notice money

No collateral security re.uired

"i%hly li.uid, risky, and &olatile market

Banks trade money to adhere to CRR re.uirement

Call rate is freely determined by market forces

RBI inter&enes in call money market throu%h repo


transactions

In&erse relationship bet0een call rates and short term


money market instruments
Call(Notice Money Market
Table 2: Interest Rates in the Money Market
(Percent per annum: Annual Averages)

Rep
o
Rate
Call
Rate
CB1
<
Rate
Market
Repo
Rate
:+ day
$-Bills
79,-day
$ Bills
CP
Rate
C
Rat
e
2 ! " # $ % & '
4888-8+ ++24 :2+ - - :28 :2= +82= :29
488+-84 =25 324 - - 328 327 :24 =28
4884-87 323 52: - - 52= 52: 323 929
4887-8, 328 ,29 - - ,29 ,23 92+ 527
488,-85 928 ,23 - - ,2: 524 52= 528
4885-89 924 529 527 52, 523 928 923 92+
4889-83 328 324 924 927 929 328 =25 32:
4883-8= 32= 92+ 524 525 32+ 325 :27 :2+
488=-8: 32, 32+ 92+ 925 32+ 324 +823 :24
488:-+8 ,2= 724 423 42= 729 ,2, 527 52,
48+8-++ 52: 523 52, 525 924 929 =23 323
48++-+4 =28 =2+ 32= 32: =2, =2, +82+ :29
48+7-+, )so far* =28 =2+ 32: =28 =24 =2+ :27 :28
$o pro&ide

a balancin% mechanism for demand >


supply

the focal point for central bank for


in?uencin% li.uidity and interest rates

reasonable access to short-term funds

ser&es as a benchmark for lon% term


interest rates
!unctions of Money Market

<b@ecti&es of the monetary policy

Price stability

(ro)th

Instruments of Monetary Policy

Reserve re*uirements: +RR (",'#-) . /0R(2"-)

Interest rates

1ank rate :%-(0ong2term rate)

Repo rate: $-

Reverse repo rate: '-

Re3nance 4rom R1I

open market operations

Repo
1ink Bet0een Money Market and
Monetary Policy in India