The money market

-Nabaraj Adhikari,PhD
Contents
1. Nepalese money market
2. Role of NRB in money market
3. Money market instruments in
Nepal: Treasury bills-feature, types,
importance, participants in the T-
bill market, sale of T-bills, implicit
yield
4. Commercial bills
5. Certificate of deposits
6. Call money market
7. Money market derivatives
Money market

 The term money market is a

misnomer. Money (currency) is not
actually traded in the money market.
 The securities in the money market
are short-term with high liquidity,
therefore, they are close to being
money.
 Money market securities are usually
sold in large denominations.
 They have low default risk.
 They mature in one year or less from
their issue date.
Money market, contd.
 The money market is a market for short-
term transferable securities. The sale of
these securities finances the working
capital of commercial and industrial
firms, financial firms, and Governments.
 What is so interesting about the money
market is that it shouldn’t really exist.
 Financing working capital is precisely
what banks do.
 Why so we need a money market to do
the same thing? The question is all the
more pointed because banks have all the
natural advantages.
Why do we need money market?
 In theory, the banking industry should handle the
need for short term loans and accept short term
deposits. Banks also have an information
advantage on the credit worthiness of
participants.
 Banks do mediate between savers and borrowers,
however, they are heavily regulated. This creates
a distinct cost advantage for money markets over
banks.
 Reserve requirements create additional expense
for banks that money markets do not have.
 Regulations on the level of interest banks could
offer depositors lead to a significant growth in
money markets, especially in the 1970s and
1980s. When interest rates rose, depositors
moved their money from banks to money markets
to earn a higher interest rate.
Why do we need money market? contd.

 The need for working capital fluctuates, so

it is best financed with short-term
borrowing. The need is also a continuing
one, which means that the short-term
borrowing must constantly be renewed. In
these circumstances, borrowing from a
financial intermediary should involve much
lower transactions costs than borrowing
through a securities market.
 Investors in money market: Provides a
place for warehousing surplus funds for
short periods of time.
 Borrowers from money market provide
low-cost source of temporary funds.
Why do we need money market? contd.

 The continuing relationship between

bank and borrower means that
information and contracting costs are
paid only once, however many times
the loan is renewed. With a securities
market, each renewal of the loan
means a new issue, and each new
issue involves new lenders. So the
fixed costs of information and
contracting must be paid over and
over again.
Money market, contd.
 Given these advantages, other things being
equal, the money market should not be able to
compete with banks. If the money market exists
nonetheless, it is because other things are not
equal. As a rule, money markets develop to
perform the economic function of banks, when
banks themselves are blocked from performing
that function. Most often, the block is
Government regulation. To a large extent, money
markets exist to provide ‘work-around’ for
regulatory obstacles. Only by recognising this
basic truth is it possible to make sense of the
money market.
 The formal financial sector is characterised by
the presence of an organised institutional and
regulated system which caters to the financial
needs of the modern spheres of economy.
Money market, contd.
 The informal financial sector is an
unorganised, non-institutional and
non-regulated system dealing with
traditional and rural spheres of the
economy.
 If we see the history of money markets in
nineteenth century England and America.
In both countries, regulatory obstacles
gave rise to an active money market. In
England, the obstacles were removed and
the money market disappeared. In the
United States, the obstacles remained and
so did the money market.
The role of money markets
 The purpose of money markets is facilitate the transfer
of short-term funds from agents with excess funds
(corporations, financial institutions, individuals,
government) to those market participants who lack
funds for short-term needs.
 They play central role in the country’s financial system,
by influencing it through the country’s monetary
authority.
 For financial institutions and to some extent to other
non-financial companies money markets allow for
executing such functions as:
– Fund raising;
– Cash management;
– Risk management;
– Speculation or position financing;
– Signalling;
– Providing access to information on prices.
The role of money markets, contd.
 Money markets are wholesale markets with very
large amounts of transactions, e.g. with transactions
from 500 million US Dollar to 1 billion US Dollar or
even larger ones. This is the most active financial
market in terms of volumes of trading.
 From the start of emergence the traditional money
markets performed the role of monetary policy. In
order to influence the supply side, Governments have
employed methods of direct regulation and control of
the savings and investment behaviour of individuals
and companies. However due to fast technological
advances, internationalization and liberalization of
financial markets, possibilities to carry out policy
objectives through such measures have diminished.
Current policy through market oriented measures is
aimed primarily at demand side. Thus money markets
serve the interface between execution of monetary
policy and the national economies
The role of money markets, contd.
 Another role of domestic money markets is
to serve public policy objectives, i.e.
financing public sector deficits and
managing the accumulated government
deficits. Government public debt policy is
an important determinant of the money
markets operations, since government debt
typically forms a key part of the country’s
money markets (as well as debt markets).
The scope and measures of monetary policy
are also linked to the government’s budget
and fiscal policies. Thus the country’s
money market shifts are dependent upon
the goals of national public policy and tools
used to reach these goals.
The role of money markets, contd.
 Changes in the role and structure of money
markets were also influenced by financial
deregulation, which evolved as a result of
recognition that excessive controls are not
compatible with efficient resource allocation,
with solid and balanced growth of economies.
Money markets went through passive adaptation
as well as through active influence from the side
of governments and monetary authorities.
Finally, money markets were influenced by such
international dimensions as increasing capital
mobility, changing exchange rate arrangements,
diminishing monetary policy autonomy. The
shifts in European domestic money markets were
made by the European integration process,
emergence and development of European
monetary union.
Money market segments
 In a broad sense, money market consists of the
market for short-term funds, usually with maturity
up to one year. It can be divided into several major
segments:
– Interbank market, where banks and non-deposit
financial institutions settle contracts with each
other and with central bank, involving temporary
liquidity surpluses and deficits.
– Primary market, which is absorbing the issues
and enabling borrowers to raise new funds.
– Secondary market for different short-term
securities, which redistributes the ownership,
ensures liquidity, and as a result, increases the
supply of lending and reduces its price.
– Derivatives market – market for financial
contracts whose values are derived from the
underlying money market instruments.
Money market segments, contd.
 Interbank market is defined mainly in terms of
participants, while other markets are defined in
terms of instruments issued and traded. Therefore
there is a considerable overlap between these
segments. Interbank market is referred mainly as the
market for very short deposits and loans, e.g.
overnight or up to two weeks. Nearly all types of
money market instruments can be traded in
interbank market.
 Key money market segments by instruments are provided
in Figure below

Money
market
segments

Government
CDs CPs Swaps Repo treasury
securities
Commercial paper
 Commercial Paper (CP) is an unsecured money
market instrument issued in the form of a
promissory note.
 Who can issue Commercial Paper (CP)?
Highly rated corporate borrowers, primary
dealers (PDs) and satellite dealers (SDs) and
all-India financial institutions (FIs).
 CP can be issued for maturities between a
minimum of 15 days and a maximum upto
one year from the date of issue.
 If the maturity date is a holiday, the
company would be liable to make payment
on the immediate preceding working day.
Swaps
 A Swap is a simultaneous buying and selling of
the same security or obligation. Perhaps the
best-known Swap occurs when two parties
exchange interest payments based on an
identical principal amount, called the "notional
principal amount."
 Think of an interest rate Swap as follows: Party
A holds a 10-year Rs.1,000,000 home equity
loan that has a fixed interest rate of 7 percent,
and Party B holds a 10-year Rs.1,000,000 home
equity loan that has an adjustable interest rate
that will change over the "life" of the mortgage.
If Party A and Party B were to exchange
interest rate payments on their otherwise
identical mortgages, they would have engaged
in an interest rate Swap.
Swaps
 Interest rate swaps occur generally in
three scenarios. Exchanges of a fixed rate
for a floating rate, a floating rate for a
fixed rate, or a floating rate for a floating
rate.
 The "Swaps market" has grown
dramatically. Today, Swaps involve
exchanges other than interest rates, such
as mortgages, currencies, and "cross-
national" arrangements. Swaps may
involve cross-currency payments (U.S.
Dollars vs. Mexican Pesos) and
crossmarket payments, e.g., U.S. short-
term rates vs. U.K. short-term rates.
Nepalese money market
 Institutional arrangement
– Banks and financial institutions
– Government of Nepal
– Corporations and business houses
– Nepal Rastra Bank
 Banks and FIs
 Three major roles in money market
– Borrow in the money market to fund loan
portfolios and satisfy mandatory CRR
requirements
– Dealers in the market for OTC interest rate
derivatives
– To provide, in exchange for fees, commitments
(that help ensure that investors in money
market will be paid on timely basis)
Banks and FIs

 Interbank transaction
– Short-term funds transferred (loaned or borrowed)
between financial institutions, usually for a period
of one day to a week.
– Used by banks to meet short-term needs to meet
reserve requirements.
– Banks do not require to pledge any asset against
these transactions.
– Interbank lending rate gives information about the
rate that banks charges while performing their
transactions with other financial institutions.
• Rate 1: It is the lending rate prevailed in
transaction between A graded institutions.
• Rate 2: It is the lending rate prevailed in
transaction between A, B, or C graded
institutions.
Repo and reverse repo
 It is a transaction in which two
parties agree to sell and repurchase
the same security. Under such an
agreement the seller sells specified
securities with an agreement to
repurchase the same at a mutually
decided future date and a price.
Repo and reverse repo, contd.
 In Nepal, Repo and reverse repo are
conducted at the initiation from NRB as an
OMO instrument.
 This is one market the NRB may use to
conduct its monetary policy, whereby the
NRB purchases/sells Treasury securities in
the repo market.
 The Bank sells Treasury securities, but
agrees to buy them back at a certain date
(usually 3–14 days later) for a certain price.
 There is a bidding of T-bill on every Monday
and Reverse Repo on every Wednesday.
Repo and reverse repo, contd.
 When there is no liquidity in the economy (lack of
cash) NRB pumps in money into the market by
providing short term loans to the banks which is
known as Repo.
 When there is excess liquidity in the market NRB
pumps out the money from the market temporarily
by taking loans from banks which is known as
Reverse Repo.
 Reverse Repo is a tool used by NRB to maintain
liquidity in the market. Similar to T-bill, Reverse
Repo also gets fund from investor but the purpose
is to mop up excess liquidity in the market and to
create a balance.
 Reverse Repo is generally issued for a very short
maturity such as 7 days and is bided at lowest
interest rate which means that investor who bids
at low interest is in the priority.
Outright Sale
 An outright sale occurs when a seller
transfers their ownership of
instruments to a buyer, who in turn
pays the seller immediately for the full
purchase price.
 The seller NRB has the holding
ownership and sells Government
securities. NRB, then transfers the
ownership to BFIs whereas in return
NRB gets fund which mops up the
excess liquidity from the market.
Outright Purchase
 Outright Purchase means that a buyer
will make an offer on the spot and if
the offer is accepted the deal will be
made.
 When the market lacks liquidity, BFI’s
make offer amount for the
Government securities that they have
in their ownership and NRB makes the
payment of the fund such that liquidity
get injected in the market.
Deposit Collection
 Deposit collection mops up the
excess liquidity from the market
through the bidding procedure similar
as that of reverse repo.
 NRB collects the amount from BFIs
and holds it into vault for 3 months. In
turn, BFI’s receive interest as per the
bid.
Rollover of the treasury and reverse repo
 In the rollover process, the certain
banks whose T-bill and reverse repo
are matured in that date will get their
full amount back in their account
which they had invested for certain
days while in the same date the new
issue of the T-bill and reverse repo
are transferred to the NRB account.
Thereafter, NRB will transfer those
amounts to the Government account.
 NRB plays as a mediator between the
Government and commercial banks
Relation between discount rate and bid amount
 In general sense, the interest rate of T-bill is
called discount rate. The interest of the T-bill is
inverse in relation to the bid amount. If the bid
amount is higher then interest will be low.
 So in the treasury bills, all BFIs bid in price and the
result is that the bid price is in descending order
while discount rate is in the ascending order.
 Discount rate is market oriented where the BFIs
have right to bid and achieve the certain interest
rate.
 The coupon rate is that interest rate where the
OMOC meeting will finalise the interest rate, the
interest rate is predetermined.
 OMOC meeting is held on every Monday and
Wednesday among the eight committee members
at the PDMD.
Interest rate relation with monetary policy instrument
 When the liquidity is high, then NRB
issues mop up instrument where the
interest rate is in ascending to
descending order.
 When liquidity is low, NRB issues
injecting instrument of the liquidity
management tools where the
interest rate is from the descending
to ascending.
 There is just the opposite relation in
the mop up and inject instrument.
Money market instruments in Nepal
 Money market helps investors and
borrowers manage liquid assets that
they do not want to tie up for long
periods.
 Treasury Bills, Repos, Reverse
Repos, Deposit Collection, Outright
Purchase and Outright Sale are the
money market instruments in Nepal.
T-bills
 The most common money market
instrument for NRB is T-bill.
 It is a short-term Government loan issued
by Nepal Government through NRB.
 It has no risk, however, high
marketability.
 The major objective of issuing T-bills is to
manage market liquidity as well as obtain
funds for Government’s activities.
 Based on the maturity period, four types
of T-bills are issued by NRB-28 days, 91
days, 182 days, and 364 days.
T-bills
 Treasury bills, commonly referred
to as T-Bills are issued by
Government of Nepal against their
short term borrowing requirements
with maturities ranging between
28 to 364 days.
All these are issued at a discount-
to-face value. For example a
Treasury bill of Rs. 100 face value
issued for Rs.91.50 gets redeemed
at the end of it's tenure at Rs. 100.
T-bills, Reverse Repo and Deposit Collection issuing Process
 Notice for issue of T-bill is published a week before
its bidding date.
 Interested banks, financial institutions, non-financial
institutions and Nepalese citizen can submit their
respective bids that includes bid amount as well as
propose interest rates.
 Bids are received on Monday until 3 p.m. and T-bills
are allocated to respective banks according to the
quoted price the next day.
 A, B, and C graded banks bids as competitive bidders
while the rest as non-competitive. 15% of total
issued amount is separated for non-competitive
bidders.
 The bidding on T-bills must be at least of Rs. 50,000
or the multiple of Rs.50,000.
 2.5% of bidding amount must be submitted to NRB as
an earnest money.
T-bills, Reverse Repo and Deposit Collection issuing Process
 The bid forms are arranged in ascending order
according to the proposed interest rate or
descending order of the bid price. The bidding at
lower interest rate or higher bid price is prioritised.
 Interest rate that fall within cut-off rate are
accepted. If two or more institutions bid same price
under cut-off rate, then the amount is allocated on
pro-rata basis.
 Interest on T-bill is calculated considering 364 days
in a year.
 In case of under-subscription, NRB holds T-bill in
cut-off rate till maturity.
 If any of the institutions are short of money, they
can use T-bill as collateral to receive loan. 90% of
T-bill amount is received while borrowing and 110%
of the amount should be paid later.
T-bills, Reverse Repo and Deposit Collection issuing Process
 T-bill is sold at discount rate and tax
is levied on the discount amount.
 The bidding procedure for reverse repo
is also same as that of T-bill. The only
difference is that for reverse repo is
done in the interest rate rather than
price.
 Also, the bidding procedure for deposit
collection is similar as that of reverse
repo. However, deposit collection
required no any pledging to get issued,
in contrast to that of reverse repo.
Yield (implicit yield) of a Treasury bill
 Yield of a Treasury bill is determined taking into
account the difference between the selling
price and the purchase price. Since Treasury
bills do not offer coupon payments, the yield the
investor will receive if he purchases the
security and holds it until maturity will be equal
to the return based on difference between par
value and the purchase price.
 The annualized yield on Treasury bill is
calculated in the following way: y = (PAR - P) / P
x (365/n)
where, d is the yield, PAR – par value, P -
purchase price of the Treasury bill and n is the
number of days of the investment (holding
period).
An example
 Assume investor requires an 8 percent annualized
return on a 91-day Treasury bill with a Rs.100000
par value.
 The price of the Treasury bill calculated on
discount rate basis is:
P = PAR x (1- (d x n / 360))
where, d is the yield or rate of discount, PAR is
par or maturity value and n is the number of
days of the investment (holding period).
 The price of the security will be
P = Rs.100000 x ( 1 – (0,08 x 91/ 360) =
= Rs.100000 x ( 1 – 0,02 ) = Rs.98000
 If investor requires a return higher than 8 %, he
will discount the par value at a higher return rate.
This will result in a lower price to be paid today.
An example, contd.
 Yield of a Treasury bill is determined taking
into account the difference between the
selling price and the purchase price. Since
Treasury bills do not offer coupon payments,
the yield the investor will receive if he
purchases the security and holds it until
maturity will be equal to the return based on
difference between par value and the
purchase price.
 The annualized yield on Treasury bill is
calculated in the following way:
y = (PAR - P) / P x (365/n)
Where, d is the yield, PAR – par value, P - purchase
price of the Treasury bill and n is the number of days
of the investment (holding period).
An example, contd.
 Assume investor requires pays Rs.98000
for a 91-day Treasury bill with a Rs.100000
par value. The annualized yield of the
security will be y = (100000 – 98000) /
98000 ) x ( 365 / 91 ) =
= 0.02 x 4.01 = 0.0802 or 8.02 %.
If the Treasury bill is sold prior to maturity,
the return is calculated on the basis of
difference between the price for which the
bill was sold in the secondary market and
the purchase price.
 The annualized yield on Treasury bill is
calculated in the following way:
y = (SP - P) / P x (365/n)
An example, contd.
Where, d is the yield, SP – selling price, P -
purchase price of the Treasury bill and n is the
number of days of the investment (holding period).
 In some countries (e.g. US) Treasury bills are
quoted on a discount rate (or refe Treasury bill
rate) basis. The Treasury bill discount rate
represents the percent discount of the purchase
price from par value of a new issue of a Treasury
bill. It is determined in the following way:
d = (PAR - P) / PAR x (360/n)
where, d is the yield, PAR – par value, P -
purchase price of the Treasury bill and n is the
number of days of the investment (holding period).
An example, contd.
 In such a case the year is assumed
having 360 days, and the number of
days of the investment can be actual
or an assumed convention. If a newly
issued Treasury bill is held until
maturity, then its yield is always
greater than rate of discount. The
difference is due to price or value used
in denominator, since purchase price
is always lower than par value.
Besides, the yield is always calculated
on 365 day during a year basis.
Repo and reverse repo auction
Fiscal year Repo (Rs. in millions) Reverse repo (Rs. in millions)

2004/05 66680 5270

2005/06 450 6500

2006/07 2000 14340

2007/08 9000 6570

2008/09 11000 13260

2009/10 131676.8 1000

2010/11 92386.1 19000

2011/12 743.7 0

2012/13 0 0

2013/14 0  523500
Letter of credit outstanding
L/C less than 6 L/C more than 6
Month LC Total month month

Poush 70 75121 51995 23126

Ashwin 70 96641 68609 28033

Asar 70 48945 40068 8878

Chaitra 69 50964 42998 7966

Poush 69 50101 41877 8224

Ashwin 69 53422 47125 6297

Asar 69 43742 37305 6437

Chaitra 68 49418 41627 7791

Budget deficit and sources of deficit financing
Budget
deficit (Rs. External Internal
Fiscal year Expenditure Revenue in millions) debt debt

2066/67 25968.91 21849.18 4119.73 1122.34 2991.4

2067/68 29536.34 24574.12 4962.22 1207.56 4251.58

2068/69 33916.75 28537.14 5379.61 1108.31 3641.87

2069/70 40482.47 34098.92 6383.55 2583.55 3800.00

Composition of Govt. securities in Nepal
Particulars Amount Percent NRB owned

T-Bill 13646 64.13 2147

D-Bond 5711 26.84 29

NSB 1658 7.8 2

CSB 248 1.17 187

FSB 14 0.06  

Total 21278 100 2364

Weighted average T-bills rate

Fiscal year 28-day 91-day 182-day 364-day

2003/04 1.82 2.93 3.41 4.15

2004/05 1.57 2.46 3.14 4.32

2005/06 2.2 2.84 3.4 3.95

2006/07 2.09 2.42 3.29 3.5

2007/08 4.16 4.22 4.6 5.49

2008/09 6.28 5.83 5.44 6.06

2009/10 6.78 6.5 7.58 7.85

2010/11 7.11 7.41 8.31 8.35

2011/12 0.52 1.31 2.17 2.94

2012/13 1.38 1.74 2.1 2.69

An example of auction results of T-bills
Days 28 91 182 364
No. of
banks/Institu
tions 14 12 22  
No. of Bids 82 28 76  
Offer Amount 300 22.82 450  
Bid Amount 695 221 1043  
Bid/offer
Ratio 2.3167 9.6845 2.3178  
Lowest
Discount rate        
Previous 0.0195 0.0248 0.1291 0.49
Today 0.0195 0.0336 0.1499  
Highest
Discount
Rate        
Previous 0.0403 0.0788 0.5 0.72
Today 0.0546 0.05 0.5133  
Weighted
Ownership structure of T-bills
  28 day   91 Day   182 Day   364 Day  

Amt % Amt % Amt % Amt %

Commercial
banks 35000 100 377606 98.78 224544 99.10 500710 98.93

Development
banks 0 0 4176 1.09 447.5 0.20 4125 0.82

Finance
companies 0 0 500 0.13 1600 0.71 1283 0.25

Others 0 0 0 0 0 0.00 0 0.00

Total 35000 100 382282 100 226591.5 100.00 506118 100.00

28-day T-bills
S.N. Issue date Maturity date Amount (Rs. in
Lakh)

223 1/16/2071 2/13/2071 5000

224 1/23/2071 2/20/2071 30000

Total 2 35000
91-day T-bill
Amount (Rs. in
S.N. Issue date Maturity date Lakh)
1191 11/16/2070 2/6/2071 49800
1192 11/13/2070 2/13/2071 22500
1193 11/20/2070 2/20/2071 2282
1194 11/27/2070 2/27/2071 41300
1195 12/4/2070 3/3/2071 45000
1196 12/11/2070 3/10/2071 32300
1197 12/18/2070 3/17/2071 60000
1198 12/26/2070 3/24/2071 60600
1199 2/2/2071 3/31/2071 5000
1200 1/9/2071 4/6/2071 30000
1201 1/16/2071 4/13/2071 5000
1202 1/23/2071 4/20/2071 20000
1203 1/30/2071 4/27/2071 8500
Total 382282
182-day T-bill
Amount (Rs.
S.N. Issue date Maturity date Lakh)
169Ka 8/6/2070 2/6/2071 12834.25
170Ka 8/18/2070 2/20/2071 45000
171Ka 8/25/2070 2/27/2071 25000
172Ka 9/3/2070 3/3/2071 31500
173Ka 9/9/2070 3/10/2071 26507.5
174Ka 9/16/2070 3/17/2071 30000
175Ka 11/6/2070 5/3/2071 15000
176Ka 11/27/2070 5/24/2071 5250
177Ka 12/4/2070 5/31/2071 5000
178Ka 12/11/2070 6/7/2071 5000
179Ka 12/18/2070 6/14/2071 3000
180Ka 1/9/2071 7/4/2071 22500
Total     226591.75
Repo and reverse repo rate
Date Repo rate Reverse repo rate
8/7/2009   2.1
3/1/2010 10.3  
7/1/2010 12.43  
11/1/2010 7.41  
24/06/2010 7.4569  
1/7/2019 8.608  
27/07/2010 3.7962  
15/09/2010 3.0909  
13/10/2010 9.7409  
5/5/2011 10.0456  
2/9/2011 9.2528  
5/8/2013   0.0899
9/1/2014   0.5587
28/02/2014   0.1736
28-days weighted average treasury bills rate (2003-2014)

12

10

8
Annualized percent

Average
6
S.D
Maximum
minimum

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
.

Annual weighted average treasury bills rate for year 2003-2014 (28 days)
8

7.11
7 6.78

6.28

5
Annualized percent

4.16
4 Annual

2.2
2.09
2 1.82
1.57
1.38

1
0.52

0
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Year
Annual 28 days-weighted average treasury bills rate (2003-2014)

5
Annualized percent

Annual

0
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Year
91 days-weighted average treasury bills rate (2000-2014)
10

6
Annualised percent

5 Average
S.D
Maximum
4
minimum

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
.
Annual 91 days-weighted average treasury bills rate (2000-2014)

8
Annualized percent

7.41

7
6.5

6 5.83

4.96
5
4.71

4.22
4 Annual

3.48

2.93 2.84
3
2.46 2.42

2 1.74

1.31

0
2000 / 01 2001 / 02 2002 / 03 2003 / 04 2004 / 05 2005 / 06 2006 / 07 2007 / 08 2008 / 09 2009 / 10 2010 / 11 2011 / 12 2012 / 13 2013 /14

Year
 .
182 Days-weighted average treasury bills rate (2003-2014 )
Annualized percent

10

7 Average
S.D
6 Maximum
minimum
5

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
.

Annual 182 days-weighted average treasury bills rate (2003-2014 )

9

8.31

8
7.58
Annualized percent

6
5.44

5
4.6
Annual
4
3.4 3.29
3.14
3

2.17 2.1
2

0
2003 / 04 2004 / 05 2005 / 06 2006 / 07 2007 / 08 2008 / 09 2009 / 10 2010 / 11 2011 / 12 2012 / 13 2013 / 14

Year
.

364 days-weighted average treasury bills rate (2000-2014 )

10

6
Annualized percent

Average
S.D
5 Maximum
minimum

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
 .
Annual 364 days-weighted average treasury bills rate (2000-2014)
9
Annualized percent

8.35

8 7.85

6.06
6

5.26 5.2
5

4.32 Annual
4.15
3.95
4
3.5 3.49

2.94
3
2.69

0
2000 / 01 2001 / 02 2003 / 04 2004 / 05 2005 / 06 2006 / 07 2007 / 08 2008 / 09 2009 / 10 2010 / 11 2011 / 12 2012 / 13 2013 / 14

Year
. Weighted average interbank transaction rate (2000-2014)

14

12

10
Average
S.D
Maximum
Annualized percent

8 minimum
Average
S.D
Maximum
6 minimum

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
.
Annual weighted average interbank transaction rate (2000-2014)

9
8.44

8 7.74
Annualized percent

5.07
5
Annual
4.5
4.22 4.2
4
3.62
3.39
3.03
3 2.72
2.47
2.26
2

1.28

0
2000 /01 2001 /02 2002 /03 2003 /04 2004 /05 2005 /06 2006 /07 2007 /08 2008 /09 2009 /10 2010 /11 2011 /12 2012 /13 2013 /14
year
 .
Interbank transaction (2002-2014) (Amount)

140000
In million Rupees

120000

100000

80000 Average
S.D
Maximum
minimum
60000

40000

20000

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
 .
Total interbank transaction (2002-2014) (amount)

800000

725767.89

700000
In million Rupees

600000

500000

397563.8
400000
Total

293418.6
300000
258309.1 268846.5

212768.4
200000 175750.2 170184
152837.3
113188
100000
51729

0
2002 /03 2003 /04 2004 /05 2005 /06 2006 /07 2007 /08 2008 /09 2009 /10 2010 /11 2011 /12 2012 /13 2013 /14

Year
. Repo auction (2004-2014)

30000
In million Rupees

25000

20000

Average
S.D
15000 Maximum
minimum

10000

5000

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
 .
Total repo auction (2004-2014)
140000
131676.8
In million Rupees

120000

100000
92386.1

80000

Total

60000

40000

20000
11000
9000
6680
450 2000 743.8
0
2004 /05 2005 /06 2006 /07 2007 /08 2008 /09 2009 /10 2010 /11 2011 /12 2012 /13 2013 /14

Year
 .
Reverse repo auction (2004-2014)

60000
In millions Rupees

50000

40000

30000

Average S.D

20000

Maximum minimum
10000

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
 . Total reverse repo auction (2004-2014)

140000
In millions Rupees

120000 118500

100000

80000

Total

60000

40000

20000
14340 13000
11260
8570 7000
5270 6500

0
2004 /05 2005 /06 2006 /07 2007 /08 2008 /09 2009 /10 2010 /11 2011 /12 2012 /13 2013 /14

Year
. Standing Liquidity Facility (SLF) (2004-2014)
600000

500000
Inmillion Rupees

400000

Average
S.D
300000 Maximum
minimum

200000

100000

0
Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Month
.

Annual Standing Liquidity Facility (SLF) (2004-2014)

600000

554977.5

500000
In million Rupees

400000

300000
Total

216673.98
200000

103832 107782.5
95936.26
100000

49307.34 46979.2

9883.5 5548
0
2004 /05 2005 /06 2006 /07 2007 /08 2008 /09 2009 /10 2010 /11 2011 /12 2012 /13 2013 /14

Year
 .
No of Banks and Financial Institutions

No. of Banks and Financial Institutions (2000-2014)

350

300
25
25 25
25 25
Insurance
250 25 38 Companies
25 36
45 31 31
16 16 NGOs
21 45 16 15
46 16 21
200 21 24
18 35 Cooperatives
19 16 31
47 16
17 47 15 Micro-credit Dev.
17 12
17 46 79 70 Banks
150 17
12 79 59 59
25 43 19 12
14 39 Fin Companies
30 20 77
15 11 78
34 20 20 11
100 Devt. Banks
35 34 11 74
11 11
70
8 60 87 88 86 87 Commercial Banks
7 79
57 58 63
50 54 58
47 48
38
26 29
11 11 14
7 8 31 32 31 31
18 20 25 26 27
13 15 16 17 17 17
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jan

Year
.

Average no. of commercial bank branches by area (2000-2014 )

29%

41%

Kathmandu Valley
Hills
Terai

29%
Commercial bills
Corporations in need of short-term financing usually
borrow money from one or more banks. For large
corporations with good credit ratings, an alternative
to bank lending is the commercial paper market. It
does not pay explicit interest: it is used at a discount
to its face value and it matures at face value.
Commercial bill is a document expressing the
commitment of a borrowing firm to repay a short-term
debt at a fixed date in the future.
Commercial bill is a short term, negotiable, and self-
liquidating instrument with low risk. It enhances he
liability to make payment in a fixed date when goods
are bought on credit.
 Commercial bills, contd.
The commercial bills are issued by the
seller (drawer) on the buyer (drawee) for the
value of goods delivered by him. These bills
are of 30 days, 60 days or 90 days maturity.
If the seller is in need of funds, he may draw
a bill and send it to the buyer for seller is in
need of funds, he may draw a bill and send it
to the buyer for acceptance. The buyer
accepts the bill and promises to make
payment on the due date. He may also
approach his bank to accept the bill.
Commercial bills, contd.
The bank charges a commission for the acceptance of the
bill and promises to make the payment if the buyer
defaults. Once this process in accomplished, the seller
can sell it in the market. This way a commercial bill
becomes a marketable investment. Usually, the seller will
go to the bank for discounting the bill. The bank will pay
him after deducting the interest for the remaining period
of the bill and service charges from the face value of the
bill. The interest rate is called the discount rate on the
bills.
The commercial bill market is an important channel for
providing short-term finance to business. However, the
instrument did not become popular because of two
factors: Cash credit scheme is still the main form of bank
lending, and Big buyers in the corporate sector are still
unwilling to the payment mode of commercial bills.
Certificates of deposits

 A certificate of deposit is a time deposit

with a bank which can be traded.
 Banks borrow funds in the money
market for longer periods by issuing
large negotiable certificate of deposits
(CDs). A large denomination CD is a
certificate issued by a bank as evidence
that a certain amount of money has
been deposited for a period of time-
usually from one to six months-and will
be redeemed with interest at maturity.
Certificates of deposits, contd.
 CDs states that a deposit has been made
with a bank for a fixed period of time, at
the end of which it will be repaid with
interest. Thus it is, in effect, a receipt for
a time deposit and explains why CDs
appear in definitions of the money supply
such as M4. It is not the certificate as
such that is included, but the underlying
deposit, which is a time deposit like
other time deposits.
 M4 is All cash outside banking institutes,
either in circulation with the public and
non-bank firms, plus private-sector and
certificates of deposits.
Certificates of deposits, contd.
 An institution is said to ‘issue’ a CD when it
accepts a deposit and to ‘hold’ a CD when it
itself makes a deposit or buys a certificate
in the secondary market. From an
institution’s point of view, therefore, issued
CDs are liabilities; held CDs are assets.
 The advantage to the depositor is that the
certificate can be tradable. Thus though the
deposit is made for a fixed period, the
depositor can use funds earlier by selling
the certificate to a third party at a price
which will reflect the period to maturity and
the current level of interest rates.
Certificates of deposits, contd.
 The advantage to the bank is that it has the use of a
deposit for a fixed period but, because of the flexibility
given to the lender, at a slightly lower price than it would
have had to pay for a normal time deposit.
 The minimum denomination can be USD 100 000. The
maturities of CDs usually range from two weeks to one
year.
 Non-financial corporations usually purchase negotiable
CDs. Though negotiable CD denominations are typically
too large for individual investors, they are sometimes
purchased by money market funds that have pooled
individual investors’ funds. Thus money market funds
allow individuals to be indirect investors in negotiable
CDs. This way the negotiable CD market can be more
active. There is also a secondary market for these
securities, however its liquidity is very low.
 Negotiable certificates of deposit are certificates that are
issued by large commercial banks and other depository
institutions as a short-term source of funds.
Certificates of deposits, contd.
 Non-financial corporations usually purchase negotiable CDs.
Though negotiable CD denominations are typically too large
for individual investors, they are sometimes purchased by
money market funds that have pooled individual investors’
funds. Thus money market funds allow individuals to be
indirect investors in negotiable CDs. This way the
negotiable CD market can be more active. There is also a
secondary market for these securities, however its liquidity
is very low.
 Negotiable certificates of deposit are certificates that are
issued by large commercial banks and other depository
institutions as a short-term source of funds.
 The negotiable CDs must be priced offering a premium
above government securities (e.g. Treasury bills) to
compensate for less liquidity and safety. The premiums are
generally higher during the recessionary periods. The
premiums reflect also the money market participants’
understanding about the safety of the financial system.
 CD instrument is not available in Nepalese money market
for transaction.
Call money markets
 The call money market is an integral part of the
Money Market, where the day-to-day surplus
funds (mostly of banks) are traded. The loans are
of short-term duration varying from 1 to 14 days.
 The money that is lent for one day in this market
is known as Call Money, and if it exceeds one
day (but less than 15 days) it is referred to as
Notice Money.
 Banks borrow in this market for the following
purpose:
-To fill the gaps or temporary mismatches in
funds
-To meet the CRR & SLR mandatory
requirements as stipulated by the Central
bank
-To meet sudden demand for funds arising out of
large outflows.
Money market derivatives
 Traditionally,  money market instruments are
financial products that mature in one year or
less. Therefore, money market derivatives are
financial products whose values come from the
price of particular money market instruments,
which are referred to as the underlying
instruments. The underlying instruments that
most common money market derivatives are
based on include US Treasury bills, Eurodollar
certificates of deposits (CD), Federal Funds and
interest rates.
 The vehicles through which money market
derivatives are commonly traded are futures,
forwards, options and swaps as well as caps and
floors. Moreover, money market derivatives are
used by money market participants to help limit
risk and/or to enhance returns.
Significance of money market
 Development of trade and industry
 Development of capital market
 Smooth functioning of commercial
banks
 Effective central bank control
 Formulation of suitable monetary
policy
 Non inflationary source of financing to
Government
Significance of money market
 The role of money market in the overall financial
system is prime in as much as the market acts as
an equilibrating mechanism for evening out short
term surpluses and deficits and provides a focal
point for Central Bank’s intervention to bring out
variations in liquidity profile in the economy.
 Money market is the market for short-term and very
short-term requirements of banks, financial
institutions, firms, companies and also the
Government.
 The surplus funds for short periods, with the
individuals and other savers, are mobilised through
the market and made available to the aforesaid
entities for utilisation by them.
 Money market provides a mechanism for evening
short-term liquidity imbalances within an economy.
Money market derivatives, contd.
 The banks can play role as dealers in the money
market for over-the-counter interest rate derivatives,
which has grown rapidly in recent years.
 Money market derivatives is the market for financial
contracts whose values are derived from the
underlying money market instruments.
 Over the counter interest rate derivatives set terms
for exchange of cash payments based on subsequent
changes in market interest rates. For example, in an
interest rate swap, the parties to the agreement
exchange cash payments to another based on
movements in specified market interest rates.
 Banks frequently act as middleman in swap
transactions by serving as counterparty to both sides
of the transactions. However, banks role as an
intermediary in interest rate and currency swap is nil
since there are not such derivative instruments
issued, operated and regulated in Nepal.
Major issues of Nepalese money market
Inadequate Number of Participating Institutions in
Money Market
Still no local governments, dealers, brokers,
money market mutual funds and even corporations
are participating in money market to raise short-
term funds.
Inadequate Number of Instruments- No commercial
paper, negotiable CDs, money market derivatives,
Eurodollars and repos among banks themselves
are available in Nepalese money market.
No Active Secondary Market- There is not an
existence of secondary market for all types of
money market instruments. This absence hinders
both liquidity of the instruments and price
discovery mechanism for the instruments.
 Major issues of Nepalese money market
No Public Announcement of Auction Calendar of T-Bills
No Repo and Reverse Repos are allowed among Banks
and Financial Institutions
No primary Dealership System
Government securities are not yet scripless and No CDS
of T-Bills
No existence of Government security dealers, brokers
and mutual funds
No online bidding System of T-bills, repos and Reverse
repos
High portion of non competitive biddings
Repo, Outright Sale, Outright Purchase are the
instruments having very less practice because of the
economic condition and the liquidity position of the
market.

 
Major issues of Nepalese money market
Rollover of previous T-bills was
performed rather than issuance of new
T-bills, as Government was unable to
pay previous debt on maturity.
Market liquidity was remarkably
increasing and thus the discount rate
in T-bill was excessively decreasing
which implies that there is a negative
relationship between liquidity and T-bill
rate.

 
Interpretation of Nepalese money market
 Money market is a short-term securities
market that consists of treasury bills,
banker’s acceptances and repos (and reverse
repo) in Nepal. This market is still in primitive
stage in terms of instruments and institutions.
Nepal Rastra Bank is the regulator of the
market and plays key role to uplift this
market. With the limited instruments, the
performance of money market in Nepal is still
waiting for advance technology, institutional
intake and effective secondary market that is
capable of price discovery and ensures
liquidity. Addressing the major issues will
make the market more vibrant with better
technology and enough instruments.
Assignments
 Prepare for quiz in the next session
1. What do you mend by money market? Why do you
think money market is important?
2. Explain the role of NRB in money market.
3. What are the popular money market instruments in
Nepal? Explain them briefly.
4. What are the certificate of deposits? Explain the
uses of certificates of deposits in money market.
5. What are the issues and challenges of money
market in Nepal?
6. Visit the websites and review all publications of
Nepal Rastra Bank, and update money market data
covered in the PowerPoint presentation.

Thanking you.