MONEY MARKET

MONEY MARKET
• Dealing with financial securities which have a maturity period of 1
year
• E.g. Treasury bill
• Place where demand and supply of short funds are met
• A.K.A market for “short term funds”
• Function:
• It channelize savings and transfer funds in to short term investments
• Composition:
• Consists of Lenders and Borrowers
 MONEY MARKET
• Lender:
• Central bank , controller of money market, reservoir of funds
• Borrower:
• Commercial bank act as both lender and borrower
• Provide short term loans to money market
• Act as both lender and borrower
• Broker:
• Intermediary between lender and borrower.
• Gets commission for the service
 Structure of Money market

• Consists of Organized and Unorganized

• Organized structure:
• RBI, Nationalized banks, private sector banks, Foreign banks
• Unorganized:
• Indigenous bankers
• Money lenders
• Indigenous bankers:
• Individual or private firm which receives deposits, deals in hundies
or engages itself in lending money“
• E.g. Marwaris
• These bankers were not regulated.
 OBJECTIVES OF MONEY MARKET

• Providing borrowers such as individual investors, government, etc.

with short-term funds at a reasonable price.
• It also enables lenders to turn their idle funds into an effective
investment. In this way, both the lender and borrower are at a
benefit.
• RBI regulates the money market. Therefore, in turn, helps to regulate
the level of liquidity in the economy.
• Since most organizations are short on their working capital
requirements. The money market helps such organizations.
• It is an important source of finance for the government sector for
both national and international trade. And hence, provides an
opportunity for the banks to park their surplus funds.
 Sub Markets in the money market
• Call money market
• Short term securities market
• Collateral loan market
• Bill market
• Acceptance market
 Sub Markets in the money market
• Call money market:
• Interbank borrowing & lending
• Usually of short period of days to weeks
• Highly liquid
• Generally unsecured
• Interest vary from day to day
• Commercial banks are the usual lenders and borrowers in this
market
 Sub Markets in the money market
• Short term securities market:
• Commercial banks invest in this
• At times of difficulty, banks sells in this market or borrow from
RBI against these securities to enhance cash reserves
• Collateral loan
• It means pledged as security for repayment of a loan
• E.g. Govt securities, gold, silver, stocks of companies etc.
 Sub Markets in the money market
• Bill Market
• refers to the market for short-term bills generally of three
months maturity.
• A bill is a promise to pay a specified amount by the borrower to
the creditor
 Money Market Instruments
• Money market instruments are securities that provide
businesses, banks, and the government with large amounts of
low-cost capital for a short time.
• Following are the money market instruments:
• Treasury bills
• Certificate of deposits
• Commercial papers
• Usance of promissory notes
• Bills of exchange
 Treasury bill

• T-bills are one of the most popular money market instruments.

• They are short term finance bill, issued by the government
• Highly liquid and risk free
• RBI buys and issues these T- bills
• It is issued for 91, 182 and 364 days
• It is floated through auctions conducted by RBI
• The Government of India issues it at a discount for 14 days to 364 days.
• These instruments are issued at a discount and repaid at par at the time
of maturity. Also, a company, firm, or person can purchase TB’s.
• And are issued in lots of Rs. 25,000 for 14 days & 91 days and Rs.
1,00,000 for 364 days.
 Certificate of Deposit

• CD’s is a negotiable term deposit accepted by commercial banks. It is

usually issued through a promissory note.
• Banks issue certificates of deposit to raise short-term cash
• Have a short maturity of 3 months and a year
• Banks are not permitted to buy back these before the maturity
• Only scheduled banks are allowed to sell these CD’s to individuals,
companies
• Not allowed to grant loans based on CD
• Also, the CD’s can be issued by scheduled commercial banks at a
discount.
•  CDs are a safer and more conservative investment than stocks and
bonds, offering lower opportunity for growth, but with a non-volatile,
guaranteed rate of return.
 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
• A corporate would be eligible to issue CP provided –
• a. the tangible net worth of the company, as per the latest audited balance
sheet, is not less than Rs. 4 crore
• b. Secure a credit rating of P2 from CRISIL
• c. It shares should be listed on one or more stock exchanges
• Only a scheduled bank can act as an Issuing and paying agent for issuance
of CP.
• Individuals, banking companies, other corporate bodies (registered or
incorporated in India) and unincorporated bodies, Non-Resident Indians
(NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs
 Usance Promissory notes
• A promissory note, sometimes referred to as a note payable,
is a legal instrument in which one party (the maker or issuer)
promises in writing to pay a determinate sum of money to the
other (the payee), either at a fixed or determinable future time
or on demand of the payee, under specific terms.
 Bills of Exchange
• A written, unconditional order by one party (the drawer) to
another (the drawee) to pay a certain sum, either immediately
(a sight bill) or on a fixed date (a term bill), for payment of
goods and/or services received.
• The main features or characteristics carried by a bill of
exchange include:
• A bill of exchange needs to be in writing. It should essentially
include an order to pay. ...
• The parties to the bill (the drawer, the drawee, and the payee)
should be certain and definite individuals.