MONEY MARKET & ITS INSTRUMENTS

MONEY MARKET
y The money market is a mechanism that

deals with the lending and borrowing of short term funds. y Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. y It is a wholesale debt market for low-risk, highly liquid, short term instruments.

Money market instruments
y y y y y y y y y y y y

Certificates of Deposit Commercial Paper Inter-bank participation certificates Inter-bank term money Treasury Bills Bill rediscounting Call/notice/term money CBLO Market Repo Bank Acceptance Federal Funds Commercial Bills

Certificates of Deposit
y CDs are short-term borrowings in the form of UPN issued y y

y y y

by all scheduled banks and are freely transferable by endorsement and delivery. Introduced in 1989 Maturity of not less than 7 days and maximum up to a year. FIs are allowed to issue CDs for a period between 1 year and up to 3 years Subject to payment of stamp duty under the Indian Stamp Act, 1899 Issued to individuals, corporations, trusts, funds and associations They are issued at a discount rate freely determined by the market/investors

Commercial Papers
y Short-term borrowings by corporates, financial y y y y y y y

institutions, primary dealers from the money market Can be issued in the physical form (Usance Promissory Note) or demat form Introduced in 1990 When issued in physical form are negotiable by endorsement and delivery and hence, highly flexible Issued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5 lacs . Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing company Issued at discount to the face value

Interbank participation certificate
y These instruments are used by scheduled

commercial banks other than Regional Rural Bank, IBP with risk sharing is issued for 91 to 180 days in respect of advances classified under health code status. y IBP with out risk sharing can have a tenour of 90 days.

Money at call and short notice
y Money at short notice is for a maturity of or

up to 14 days. y Money for higher maturity is known as inter-bank deposit. y The participants are bank and all India financial institutions permitted by RBI

Treasury Bill
y The Treasury bills are short-term money market

instrument to finance the short term requirements of Government of India. y The purchase price is less than the face value. y At maturity the government pays the Treasury Bill holder the full face value. y The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.

Types of TB
y A) 14-day TB- maturity is 14 days, its auction is on

every Friday of every week, the notified amount is Rs 100 crores. y B) 91 days TB, auction is on every Friday, amount 100 crores. y C) 182 days TB, auction is on every alternate wednes day, notified amount 100 crores. y D) 364 days TB, auction is on every alternate wednes day, notified amount is Rs. 500 crores.

Market Repos
y Repo (repurchase agreement) instruments enable

collateralized short-term borrowing through the selling of debt instruments y A security is sold with an agreement to repurchase it at a pre-determined date and rate y Reverse repo is a mirror image of repo and reflects the acquisition of a security with a simultaneous commitment to resell y Average daily turnover of repo transactions (other than the Reserve Bank) increased from Rs.11,311 crore during April 2001 to Rs. 42,252 crore in June 2006.

Collateralised Borrowing and Lending Obligation (CBLO)
y Operationalised as money market instruments by y y y y

the CCIL in 2003 Follows an anonymous, order-driven and online trading system On the lenders side main participants are mutual funds, insurance companies. Major borrowers are nationalized banks, PDs and non-financial companies The average daily turnover in the CBLO segment increased from Rs. 515 crore (2003-04) to Rs. 32, 390 crore (2006-07)

Call/notice/ term money
y Money borrowed or lent on demand for

short period. y Money is borrowed/lent for a day ²call money. y When money is borrowed or lent for more than a day and up to 14 days- notice money.

Commercial Bills
y Negotiable instruments accepted by buyers for goods or services obtained by them on credit. y Bill of exchange . y Promissory notes.

Federal Funds
y 1. Term is generally over night/week-end y 2. Not backed by collateral - unsecured loans y 3. Highly liquid market y 4. Depository institutions use this market to

buy/sell excess deposits in order to manage their liabilities. y 5. For banks, this is sometimes referred to as ´hot moneyµ

Bankers Acceptance
y Banks guarantee payments to secure orders

of goods from manufacturers. y Are a type of ´letter of creditµ that guarantees a payment by the bank on a specific date y Particularly useful between foreign trading partners where there is a high level of asymmetric information.

Bill Rediscounting
y Under this seller draws a bill of exchange & the

buyer accepting it , there after the seller get it discounted with the bank collects the money against the bill. y In case of borrowers having working capital limit of Rs 5 crores and above, al least 25% of this for financing inland credit sales should be by way of a bill finance. y Banks have a facility to rediscount the bill with RBI and other approved institutions like LIC,GIC, UTI, ICICI, IFCI, ETC.

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