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Chapter 4: Money

Market

Chapter Objectives
To understand:
1. Characteristics, functions and benefits of money
market.
2. Development of Money market in India
3. Different Money Market Instruments
4. Money Market Intermediaries
5. Link between money market and monetary policy
6. Tools for managing liquidity in the money market
7. Money market derivatives

Characteristics of Money Market


A collection of markets for several short
term debt
instruments
Wholesale market
Principal feature is honor
Need -based marketin the money market can be
both secured and unsecured,
Transactions in the money market can be
both secured and unsecured

Functions of Money Market


To provide a
balancing mechanism
focal point for central bank
intervention
reasonable access to short term
funds

Benefits of an Efficient
Money Market
Provides a stable source of funds to banks

Encourage development of non -bank


entities
Facilitates government market borrowing
Makes effective monetary policy actions
Helps in pricing different floating -interest
products

Role of the Reserve Bank in


the Money Market
to ensure liquidity
to ensure an adequate flow of credit to
the
productive sectors of the
economy
to bring about order in the foreign
exchange market

Money Market Instruments


Treasury bills

Commercial Paper
Call/Notice money market
Certificates of Deposit
Commercial Bills
Collateralised Borrowing and
Lending
Obligation

Features of T-bills
- Short term instruments issued by RBI on
behalf of the government
- negotiable and highly liquid securities
- absence of default risk
- assured yield, low transaction cost
- security for SLR purposes
- not issued in scrip form

Types of T- bills
- On tap bills
- Ad hoc bills
- Auctioned T- bills: 91-day;

182-day;

and 364-day TBillsCash Management Bills (CMBs)


Cash Management Bills
(CMBs)new short-term instrument of
less than 91 day maturity

Sale of T - bills

- Conducted through an auction


- Non-competitive bids also accepted

Types of auctions:

- Multiple price auction


- Uniform price auction

Size of T- Bills Market (Rs in


billion)
O/S

2002-03

2010-11

2011-12

2012-13

91-day 1,067 32916


54779
71,708
364-day
2,612 11345
17,038
29,900
182-day
5514
10423
16126
Implicit yield at cut-off prices (Average)
91-day
5.73%
7.31%
9.02%
8.18%
364-day
5.89%
6.56%
8.35%
8.04%
182-day
6.48%
8.42%
8.17%

Commercial Paper
- An unsecured short term promissory note
issued at a discount
- Issuers creditworthy corporates, primary dealers
and all India financial institutions
-Largest issuers of CPs Leasing and Finance
companies
- Usually privately placed with investors.
- Attracts stamp duty.
- Underwriting not mandatory

Process for issuing CP


- A resolution to be passed by the Board of
Directors
- CP issue to be rated
- Select an Issuing and Paying Agent for
verification of documents
- Arrange for dealers for placement of CP
- Report to the RBI regarding the issue

Guidelines relating to CPs


- Corporates, primary dealers and all India
financial institutions eligible to issue a CP.
- Minimum credit rating P2 of Crisil
- Maturity period of minimum of 7 days and
maximum upto one year from the date of issue.
- Minimum of Rs 5 lakh and multiples
- To be issued in demat form
- Banks can provide credit enhancement facility

Size of CP market (Rs. in


crores)
2002-03 2010-11 2011-12
2012-13
O/S
1,92,340

5749 80,305

91,190

Commercial Bills
- A short term, negotiable and self
liquidating instrument with low risk.
Types: Demand bill
Usance bill
Clean bill
Documentary bill
Inland bill
Foreign bill
Hundi
Derivative Usance Promissory Note

Certificates of Deposit
- A short- term tradeable time deposit issued by
commercial banks and financial institutions.
- Issued at a discount to face value.
- Minimum amount Rs 1 lakh and in multiples there of
- Maturity period : 7 days to one year for banks
: 1 to 3 years for FIs.
- No lock- in period
- Transferable by endorsement
- Banks to maintain appropriate reserve requirement on issue of
CDs.
Issued in demat form
Key investors-Mutual Funds, insurance companies, corporates
Cost attractive vis--vis time deposits

Size of CD market
Amount In Crores
2002-03

2010-11 2011-

122012-13
O/S
3,40,250

908

4,24,740 4,19,530

Constitute 4.3% of aggregate deposits

Call/Notice Money Market


- Banks borrow/lend money for a period ranging
between 1-14 days.
- No collateral security required
- Highly liquid , risky , and volatile market
- Banks trade money to adhere to CRR
requirement
-

Average daily turnover in 2004-05 Rs.14,170 cr.


and in 2012-13 Rs.32,330 cr.

Call Money Borrowing and Lending rate-4.5% to


8.2%

Factors influencing Call


Rate Volatility
- Liquidity conditions
- Reserve requirement prescriptions
- Structural factors
- Investment policy of non-bank participants.
- Liquidity changes and gaps in the foreign
exchange market

Measures for curbing high


volatility
- Increasing the number of participants
- Through repos
- Freeing of interbank liabilities from reserve
requirements
The share of the call money market in the total
overnight money market transactions declined
from 51% in April 2005 to 20 percent in March
2009.

Collateralised Borrowing
and Lending Obligations
(CBLO)
- Launched by CCIL

: To provide liquidity to non-bank entities

It is an obligation by the borrower to return the borrowed money and an authority to


the lender to receive money lent, at a specified future date with an option to
transfer the authority to another person for value recived.
Collateral or cash margin with CCIL as cover
-No lock -in period
-

Original tenure varies between one day and one year

NDS members and associate members can access CBLO

Two types of markets: Normal and Auction

-Trading volumes have grown: Dominant segment accounting for 80% of the total
volume
-Average daily turnover during March 2005 was Rs.9625 crore which increased to
Rs.83,270 crore in March 2013
-

Link between Money


Market and Monetary Policy
in
India
Objectives
of monetary policy
- Price stability
- Growth
Instruments used to influence monetary conditions
- Direct instruments such as reserve requirements,
limits on refinance, administrative interest rates,
Qualitative and Quantitative restrictions on credit
- Indirect instruments such as open market
operation and repos

Tools for managing liquidity


in the money market
- Reserve requirements: CRR (4%) & SLR(23%)
- Interest rates : Base rate:10% -10.25%
Bank rate :9%
- Refinance from RBI
- Liquidity Adjustment Facility: operates through repo and
reverse repo auctions; coupled with OMOs and MSS provides
RBI greater flexibility in managing liquidity
Marginal Standing Facility Rate 9%
- Repos: Types: Interbank repos, RBI repos: Borrowing rate
(Reverse Repo) 7% and Lending rate( repo) 8%
- Market stabilisation scheme (MSS): deals with enduring
capital inflows without affecting short-term liquidity
management role of LAF.

Money Market Derivatives


- Interest rate swap
- Forward rate swap
- Interest rate futures