MONEY MARKET

&
INSTRUMENTS

What is Money Market?

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).

Asegment of the financialmarket in which

financial instruments with high liquidity and
very short maturities are traded.

Continued.

It doesnt 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.

Features of Money Market?

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.

Continued..

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).

Objective of Money Market?

To provide a parking place to employ short

term surplus funds.

To provide room for overcoming short term

deficits.

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, adequately at reasonable cost.

Importance of Money
Market?

Development of trade & industry.

Development of capital market.
Smooth functioning of commercial
banks.
Effective central bank control.
Formulation of suitable monetary
policy.
Non inflationary source of finance to
government.

Composition of Money
Market?
Money Market consists of a number of submarkets which collectively constitute the
money market. They are,
Call Money Market
Commercial bills market or discount market
Acceptance market
Treasury bill market

Instrument of Money
Market?
A variety of instrument are available in a
developed money market. In India till 1986,
only a few instrument were available.
They were
Treasury bills
Money at call and short notice in the call
loan market.
Commercial bills, promissory notes in the
bill market.

New instrument
Now, in addition to the above the
following new instrument are available:
Commercial

papers.
Certificate of deposit.
Banker's Acceptance
Repurchase agreement
Money Market mutual fund

CALL MONEY MARKET

Call money market is that part of the
national money market where the day to
day surplus funds, mostly of banks are
traded in.
They are highly liquid, their liquidity being
exceed only by cash.
The loans made in this market are of the
short term nature.

Continued..

Banks borrow from other banks in order to

meet a sudden demand for funds, large
payments, large remittances, and to
maintain cash or liquidity with the RBI.
Thus, to the extent that call money is used
in India for the purpose of adjustment of
reserves.

Participants in the call money

market
Scheduled commercial banks
Non-scheduled commercial banks
Foreign banks
State, district and urban, cooperative banks
Discount and Finance House of India (DFHI)

Securities Trading Corporation of India

(STCI).
The DFHI and STCI borrow as well as lend, like
banks and primary dealers, in the call market.

CALL RATES

The rate of interest paid on call loans is known

as call rate.
Call rate is highly variable from day to day,
often from hour to hour.
It is very sensitive to changes in demand for
and supply of call loans.
Eligible participants are free to decide on
interest rates in call/notice money market.
Calculation of interest payable would be based
on FIMMDAs (Fixed Income Money Market and
Derivatives Association of India).

CALL RATE IN INDIA

CALL RATE IN INDIA has reached as high a

level as 30% in December 1973.
It is an alarming level for any short-term rate
of interest to reach, 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, it became
necessary to regulate call rates within
reasonable limits.
Indian Banks Association (IBA) in 1973 fixed a
ceiling of 15% on the level of call rate.

Continued
The IBA lowered this ceiling of 15% to
12.5% in March 1976, 10 % in June 1977,
and 8.6% in March 1978, and 10.0% in April
1980.
And current call rate in India is 8%.
There are now two call rates in India: one,
the interbank call rate, and the other,
the lending rate of DFHI.

DEALING SESSION
Deals in the call/notice money market can
be done up to 5.00 pm on weekdays and
2.30 pm on Saturdays or as specified by RBI
from time to time.
LOCATION OF CALL MONEY MARKET IN
INDIA
Mumbai, Calcutta, Chennai, Delhi, and
Ahmadabad.

TREASURY BILLS MARKET

Treasury bills (TBs), offer short-term
investment opportunities, generally up to
one year.
They are thus useful in managing shortterm liquidity.
Types of treasury bills through auctions
91- Day, 182- day, 364- day, and 14- day
TBs

91- DAY TREASURY BILL

Treasury bills are not self-liquidating in the
way genuine trade bills are, although the
degree of their liquidity is greater than that
of trade bills.
If we were to arrange short-term financial
instruments according to their liquidity, the
descending order would be cash, call loans,
treasury bills and commercial bills.

Continued.
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.
As unlike ordinary trade bills, treasury bills
are claims against the government, they do
not require any gardening or further
endorsement or acceptance

Important qualities of treasury

bills
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

TYPES OF TREASURY BILLS

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 shortterm finance.
TBs, also known as ad hocs in short, has
been discontinued through the signing of
two agreements between the government
and the RBI.

Continued
The instrument of ad hoc Treasury bill and
the system of issuing it were introduced in
India in 1937.
Government shall maintain with the RBI a
cash balance of not less than Rs.50crore on
Fridays and Rs.4 crore on other days free of
obligation to pay interest.

Continued
whenever the balance falls below these
minimums, the government account would
be replenished by the creation of ad hocs in
favour of the RBI.
The
government issued these bills to
replenish their cash balance. They also
provide
a
medium
to
the
state
governments,
semi-governments,
and
foreign central banks to invest their
temporary surpluses.

182- DAYS TREASURY BILLS

MARKET

With a view to widening the short-term

money market, and to providing more outlets
for temporary surplus fund, the authorities in
India had introduced, in November 1986, a
major innovation in the form of new money
market instrument- the 182-day Treasury bill.
It used to be sold in the market by the RBI in
auctions which were monthly in the
beginning; they were made fortnightly from
July 1988.

Continued..
It is important to note that no specific
amount of funds was sought to be raised
through the auctions of these bills.
The
amount raised in each auction
suspended upon the funds available with
the market participants, and the funds they
desired to invest in these bills. Thus, the
new bill had become a handy instrument for
banks, financial institution.

The 182-day bills could be purchased by

any person resident in India, including
individuals, firms, companies, banks, and
financial institutions.
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.

364-DAY TREASURY BILL

MARKET
Upon discounting the 182-day Treasury bill
the authorities introduced a new money
market instrument, namely 364-day TBs
with effect from April 1992.
It is being auction regularly every fortnight.
Its features are very similar to those which
the 182-day bill had.
The RBI dose not purchase and rediscount
this bill.

14-DAYS TREASURY BILLS

MARKET
With a view to further diversify the TBs
market; the authorities have introduced
recently two types of 14-day TBs:
On April 1, 1997 which is known as
intermediate treasury bill (ITB)
Second on may 20, 1997.
ITB has replaced the 91-day tap Treasury bill.

Continued..
It is sold only to state governments, 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.
It is issued in a book entry from i.e. by
credit to subsidiary general ledger account.
It can be repaid/renewed at par on the
expiration of 14 days from the date of issue.
The disadvantage of 14-day ITB is that it is
not tradable or transferable.

Summary of TBs
Treasury bills are available for a minimum
amount of Rs.25,000 and in multiples of Rs.
25,000. Treasury bills are issued at a
discount and are redeemed at par. Treasury
bills are also issued under the Market
Stabilization Scheme (MSS).
91-day T-bills are auctioned every week on
Wednesdays.
182-day and 364-day T-bills are auctioned
every alternate week on Wednesdays.

Continued
T-bills auctions are held onthe Negotiated
Dealing System (NDS)and the members
electronically submit their bids on the
system.
DEFECTS OF TREASURY BILLS
Poor Yield
Absence of Competitive Bids
Absence of Active Trading

Type of

Day of

Day of

T-bills

Auction

Payment*

91-day

Wednesday

Following Friday

182-day

Wednesday of non- Following Friday

reporting week

364-day

Wednesday of
reporting week

Following Friday

COMMERCIAL BILLS
MARKET
Funds for working capital required by
commerce and industry are mainly provided
by banks through cash credits, overdrafts,
and purchase/discontinuing of commercial
bills.
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.

It shows the liquidity to make the payment

on a fixed date when goods are bought on
credit.
Accordingly
to the Indian Negotiable
Instruments Act, 1881, it is a written
instrument containing as unconditional
order, signed by the maker, directing a
certain person to pay a certain sum of
money only to, or to the order of, a certain
person, or to the bearer of the instrument.

INLAND BILLS
Be drawn or made in India, 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, or may be
payable in India or drawn on a party resident
in India
Drawn in India and made payable outside
India.
A related classification of bills is export bills
and import bills

What purpose bill of exchange

used?
Commercial bills may be used for financing
the movement and storage of goods
between countries, before export (preexport credit), and also within the country.
In India the use of bill of exchange appears
to be in vogue for financing agricultural
operations, cottage and small scale
industries, and other commercial and trade
transactions.

ACCOMMODATION AND SUPPLY BILLS

Apart from the genuine bill of exchange, i.e.
bills which evidence sale and /or dispatch of
goods, there are other bills which are known
to
the
money
market.
They
are
accommodation bills and supply bills.
As accommodation bill is defined as one
in which a person, called as accommodation
party, puts his name (accept it) to
accommodate another person without
receiving and consideration. Such bill is
sometimes called, a kite or wind bill.

BANKERS ACCEPTANCE
A banker's acceptance is a short-term
investment plan created by a company or
firm with a guarantee from a bank.
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.

The terms for these instruments are usually 90

days, but this period can vary between 30 and
180 days. Companies use the acceptance as a
time draft for financing imports, exports and
trade.
In India, 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.
Under the bill market schemes introduced by
RBI in 1952, banks are required to select the
borrowers after careful examination of their
means, respectability, and dealings for
conversion of their advances in to bills.

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.
Acceptances are traded at discounts from
face value in the secondary market.
BAs are guaranteed by a bank to make
payment.

DISCOUNT MARKET
DISCOUNTING SERVICE
The central banks help banks in their
liquidity management by providing them
discounting and refinancing facilities.
The RBI are in abundance liquidity (funds)
to banks on occasions when liquidity
shortages threaten economic stability.
The central bank performs his function
through its discount window or discounting
mechanism.

Bank borrow funds temporarily at the

discount window of the central bank.
They are permitted to borrow or are given
the privilege of doing so from the central
bank against certain types of eligible paper,
such as the commercial bill or treasury bill,
which the central bank stands ready to
discount for the purpose of financial
accommodation to banks.

DISCOUNT AND FINANCE HOUSE

OF INDIA
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.

Continued
It should use surplus funds to even out the
imbalance in liquidity in the banking system
subject to the RBI guidelines.
It
should create ready market for
commercial bills, treasury bills, and
government guaranteed securities by being
ready to purchase from and sell to the
banking system such securities.

COMMERCIAL PAPER
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.

Only company with high credit rating issues

CPs
Subsequently, primary dealers and satellite
dealers were also permitted to issue CP to
enable them to meet their short-term
funding requirements for their operations.
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.

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, whichever is lower.
As regards FIs, they can issue CP within the
overall umbrella limit fixed by the RBI i.e., issue
of CP together with other instruments viz., term
money borrowings, term deposits, certificates
of deposit and inter-corporate deposits should
not exceed 100 per cent of its net owned funds,
as per the latest audited balance sheet.

Only a scheduled bank can act as an IPA for

issuance of CP.
Individuals,
banking companies, other
corporate bodies registered or incorporated
in India and unincorporated bodies, NonResident Indians (NRIs) and Foreign
Institutional Investors (FIIs) etc. can invest
in CPs.
Amount invested by single investor should
not be less than Rs.5 lakh (face value).
However, investment by FIIs would be
within the limits set for their investments by
Securities and Exchange Board of India

Continued..
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

With a view to further widening the range of

money market instruments and give investors
greater flexibility in deployment of their shortterm surplus funds, Certificates of Deposit
(CDs) were introduced in India in 1989.
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

CDs can be issued by

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 shortterm resources within the umbrella limit
fixed by RBI.

AGGREGATE AMOUNT on CD
Banks have the freedom to issue CDs
depending on their requirements.
An FI may issue CDs within the overall
umbrella limit fixed by RBI, i.e., issue of CD
together with other instruments, viz., term
money, term deposits, commercial papers
and inter-corporate deposits should not
exceed 100 per cent of its net owned funds,
as per the latest audited balance sheet.

MINIMUM SIZE OF ISSUE AND DENOMINATIONS

Minimum amount of a CD should be Rs.1 lakh, i.e.,
the minimum deposit that could be accepted from a
single subscriber should not be less than Rs.1 lakh
and in the multiples of Rs. 1 lakh thereafter.
INVESTORS
CDs can be issued to individuals, corporations,
companies, trusts, funds, associations, etc. NonResident Indians (NRIs) may also subscribe to CDs,
but only on non-repatriable basis, which should be
clearly stated on the Certificate. Such CDs cannot
be endorsed to another NRI in the secondary
market.

MATURITY
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.

Other aspect of CD

CDs may be issued at a discount on face value.

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, i.e., cash reserve ratio (CRR) and
statutory liquidity ratio (SLR), on the issue price
of the CDs.
CDs in physical form are freely transferable by
endorsement and delivery.

Structure of Indian Money Market?

I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (Discount And Finance House of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

II.

UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis

III. CO-OPERATIVE SECTOR

1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks

Thank you