MONEY MARKET AND MONEY MARKET

INSTRUMENTS
MEMBERS
 WHAT IS MONEY MARKET?

 Money market means a market where money or its

equivalent can be traded. It is a wholesale market of
short term debt instrument and is synonym of liquidity

RBI defines it as “ 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).
 MONEY MARKET

FIN ANCIALM ARKETS

MONEY MARKET CAPITAL MARKET

 FEATURES OF MONEY MARKET

It is market purely for short-term funds or financial

assets called near money.

It deals with financial assets having a maturity period up

to one year only.

It deals with only those assets which can be converted

into cash readily without loss and with minimum
transaction cost.
 FEATURES OF MONEY MARKET
(contd)

Generally transactions take place through phone i.e.,

oral communication.

Transactions have to be conducted without the help of

brokers.

The components of a money market are the Central

Bank, Commercial Banks, Non-banking financial
companies, discount houses and acceptance house.
 OBJECTIVE OF MONEY MARKET
To provide a reasonable access to users of short-term
funds to meet their requirement quickly, 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 parking place to employ short term

surplus funds.
 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.

 COMPOSITION OF MONEY MARKET

The money market is not a single homogeneous market. It consists

of a number of sub-markets which collectively constitute the
money market. The main sub-divisions of the Money Market are:

Call Money Market

Commercial bills market or discount market

Acceptance market

Treasury bill market

 MONEY MARKET INSTRUMENTS

Treasury Bills
Certificate of Deposit
Commercial Paper
Bankers Acceptance
Inter bank participation certificates.
Repurchase Agreements
Collateralized Borrowing and Lending Obligation
Money Market Mutual Funds
 TREASURY BILLS (T-BILLS)

 One of the safest money market instruments.

 Short term borrowing instruments of the Central

Government of the Country issued through the Central
Bank i.e RBI in this case.

 They are zero risk instruments, and hence the returns are
not so attractive.
 CERTIFICATE OF DEPOSIT (CD)

A CD is a time deposit with a bank.

CDs have specific maturity date and an interest rate

and they can be issued in any denomination.

Like most time deposit, funds can not withdrawn

before maturity without paying a penalty

The main advantage of CD is their safety

 COMMERCIAL PAPER (CP)

 CP is a short term unsecured loan issued by a

corporation typically financing day to day operation.

 CP is very safe investment because the financial

situation of a company can easily be predicted over a
few months.

 Only company with high credit rating issues CP’s.

 BANKER'S ACCEPTANCE

It is a short term credit investment created by a non

financial firm and guaranteed by a bank to make
payment.

 Acceptances are traded at discounts from face value

in the secondary market.
INTER BANK PARTICIPATION CERTIFICATES
 REPURCHASE AGREEMENTS (Repos)

Repo is a form of overnight borrowing and is used

by those who deal in government securities.

The short term maturity and government backing

usually mean that Repos provide lenders with
extremely low risk.

Repos are safe collateral for loans.

 COLLATERALIZED BORROWING AND LENDING
OBLIGATION (CBLO)
 Is an RBI approved Money Market instrument.

 Backed by Gilts as Collaterals

 Creates an obligation on the borrower to repay the money

borrowed along with interest on a predetermined future date
and a Right and Authority to the lender to receive money lent
along with interest on a predetermined future date.

 It is a mechanism to borrow and lend funds against securities

for maturities of 1 day to 1 year.
 MONEY MARKET MUTUAL FUNDS

 An individual player cannot invest in majority of the

Money Market Instruments.

 Hence for retail market, money market instruments are

repackaged into Money Market Funds.

Investment in Money Markets

Direct Investment in Money Market

Instruments
Investment in Money Market Funds
 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 nationalized banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
 STRUCTURE OF INDIAN MONEY
MARKET (contd)

II. UNORGANISED SECTOR

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

III. CO-OPERATIVE SECTOR

1. State cooperative
Central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
Central land development banks
Primary land development banks
 RECENT DEVELOPMENT IN MONEY
MARKET
Integration of unorganized sector with the organized
sector

Widening of call Money market

Introduction of innovative instrument

Offering of Market rates of interest

Promotion of bill culture

 RECENT DEVELOPMENT IN MONEY
MARKET (contd)
Entry of Money market mutual funds

Setting up of credit rating agencies

Adoption of suitable monetary policy

Establishment of DFHI

Setting up of Security Trading Corporation of India ltd.

(STCI)