Money Markets

Prof. Ameet Kumar Banerjee

Chapter Preview

We review the money markets and the securities that are traded there. In addition, we discuss why
the money markets are important in our financial system. Topics for discussion
─ What is Money Markets
─ The Purpose of Money Markets
─ Who Participates in Money Markets?
─ Money Market Instruments
─ Comparing Money Market Securities
─ Regulation of Money Markets
Financial Markets Bifurcation

Financial Market

Money Market (Short Term Capital Market (Long Term

Source for Borrowing and Source for Borrowing and
Lending) Lending)
Why it is called Money Market

• The term “money market” is a misnomer.

• As Money (currency) is not actually traded in the money markets.

• The securities in the money market which are traded are short term instruments with high
liquidity; therefore, they are close proxy to being money.
Characteristics of Money Market
• Platform for short term borrowings.

• Instrument trade have maturity of one year and less with low default risk.

• Large denomination transaction lot (Size).

Purpose of Money Market

• Provide low-cost source of temporary funds.

• Provides a place for warehousing surplus funds for short periods of time.
Participants in Money Market

• Commercial Banks.

• Primary Dealers (PDs)

• Urban Cooperative banks.

• Regional Rural Banks.

• Large Financial Institutions ( Insurance Companies, Mutual Fund Companies and Other Non
banking Financial institution)

Note: : Primary dealers are registered entities with the RBI who have the license to purchase and sell
government securities. PDs was introduced in 1995 by RBI
Money Market Instruments
• G Secs. ( Treasury Bills)

• Commercial Papers

• Certificate of Deposit

• Repurchase Agreements (REPO’S)

• Call Money Market

• Cash Management Bills

G Sec Issues

• A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the
State Governments acknowledging Government’s debt obligation.

• Securities are short term usually called treasury bills ( 91, 182 and 364 days), with original
maturities of less than one year.

• Carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

• Issued at discount and redeemed at par.

Trading of T Bills

T Bills

Primary Market ( Auctioned Secondary or Traders Markets

through E _ Kuber Platform (Post Issue)
Maintained By RBI NDS_OM, OTC and Stock
Exchanges

• Note NDS_OM: Negotiated Dealing System-Order Matching (Introduced in Aug 05)

OTC: Over the Counter Markets
G Sec Segment
• A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the
State Governments.
• Acknowledgement of Government’s debt obligation.
• Securities are short term (usually called treasury bills, with original maturities of less than one
year) or long term (usually called Government bonds or dated securities with original maturity of
one year or more).
• In India, the Central Government issues both, treasury bills and bonds or dated securities.
• State Governments issue only bonds or dated securities
• G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments
Recent developments in G Sec segment

1. Introduction of an electronic screen based trading system.

2. Clearing Corporation of India Ltd. (CCIL) acting as the Central Counter Party (CCP) for
guaranteed settlement.
Trading of G Sec instruments

• G-Secs are issued through auctions conducted by RBI.

• Auctions are done through electronic platform called the E-Kuber, the Core Banking Solution
(CBS) platform of RBI.
• Members of the platform
Commercial banks, Primary Dealers, insurance companies and provident funds, who maintain
funds account (current account) and securities accounts (Subsidiary General Ledger (SGL)
account) with RBI.
Cont..
• RBI, in consultation with the Government of India, issues an indicative half-yearly auction
calendar which contains information about the amount of borrowing, the range of the tenor of
securities and the period during which auctions will be held.
• A Notification and a Press Communique giving exact particulars of the securities, viz., name,
amount, type of issue and procedure of auction are issued by the Government of India about a
week prior to the actual date of auction.
• RBI places the notification on its website (www.rbi.org.in) and a Press Release is also issued in
leading English and Hindi newspapers and auction detail can be sourced from even PDs.
• The RBI conducts auctions of T Bills mostly every Wednesday. The 91 day T-bills are auctioned
(Dutch auction) on every Wednesday. While the Treasury bills of 182 days and 364 days tenure
are auctioned on alternate Wednesdays.
• Note: The Reserve Bank releases a quarterly calendar of T-bill issuances for the upcoming quarter
in the last week of the preceding quarter. e.g. calendar for April-June period is notified in the last
week of March.
Auction

Yield based
• A yield based auction is generally conducted when a new G-Sec is issued.
• Investors bid in yield terms up to two decimal places (e.g., 8.19%, 8.20%, etc.).
• And then Bids are arranged in ascending order and the cut-off yield is arrived at the yield
corresponding to the notified amount of the auction.
• The cut-off yield is then fixed as the coupon rate for the security.
• Successful bidders are those who have bid at or below the cut-off yield.
• Bids which are higher than the cut-off yield are rejected.
Example

• Maturity Date: January 11, 2026

• Coupon: It is determined in the auction (8.22% as shown in the illustration below)
• Auction date: January 08, 2016
• Auction settlement date/Issue date: January 11, 2016*
• Notified Amount: ₹1000 crore
Example Cont..

Details of bids received in the increasing order of bid yields

Cumulative Price* with
Bid Amount of bid
Bid Yield amount coupon as
No. (₹ Cr)
(₹ Cr) 8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
The issuer would get the notified amount by accepting bids up to bid at sl.
no. 5. Since the bid number 6 also is at the same yield, bid numbers 5 and 6
would get allotment on pro-rata basis so that the notified amount is not
exceeded. In the above case each of bidder at sl. no. 5 and 6 would get ₹ 50
crore. Bid numbers 7 and 8 are rejected as the yields are higher than the cut-
off yield.
*Price corresponding to the yield is determined as per the relationship given
under YTM calculation
How does trading of G Sec takes place

• The securities can be bought / sold in the secondary market through

• Negotiated Dealing System-Order Matching (NDS-OM) (anonymous online trading)
• Over the Counter (OTC) and reported on NDS-OM
• NDS-OM-Web.
• Stock Exchanges
NDS OM

• In August, 2005, RBI introduced an anonymous screen based order matching module called NDS-
OM.
• An order driven electronic system, where the participants can trade anonymously by placing their
orders on the system or accepting the orders already placed by other participants.
• NDS-OM is operated by the CCIL on behalf of the RBI.
• Direct access to the NDS-OM system is currently available only to select financial institutions like
Commercial Banks, Primary Dealers, UCB’s and NBFC.
• The advantages of NDS-OM are price transparency and better price discovery.
Stock Exchanges

• SEBI directed the stock exchanges (like NSE, BSE, MCX) to create dedicated debt segment in
their trading platforms.
• In compliance to this, stock exchanges have launched debt trading (G-Secs as also corporate
bonds) segment which generally cater to the needs of retail investors.
OTC/Telephone Market

• In this market , a participant, who wants to buy or sell a G-Sec, may contact a bank / PD/financial
institution either directly or through a broker registered with SEBI and negotiate price and quantity
of security.
• negotiations are usually done on telephone and a deal may be struck if both counterparties agree
on the amount and rate.
• All trades undertaken in OTC market are reported on the Reported segment of NDS-OM
Major Players G Sec market

• Commercial banks

• Primary Dealers (PDs) . E.g. PNB Gilts Ltd, Morgan Stanley India Primary Dealer Pvt. Ltd,  

• Insurance companies.

• Co-operative banks,

• Mutual funds, Provident and Pension funds Companies.

• Foreign Portfolio Investors (FPIs) are allowed to participate in the G-Secs market within the
quantitative limits.
Pricing Of T Bills

• Money market: The day count convention followed is actual/365, which means that the actual
number of days in a month is taken for number of days (numerator) whereas the number of days in
a year is taken as 365 days.
• T-Bills, which are essentially money market instruments, money market convention is followed.
Cont..

• Note : The minimum bid amount is ₹10,000 and in multiples of ₹10,000 in dated securities and
minimum ₹ 25,000 in case of T-Bills and in multiples of ₹ 25,000 thereafter.
• Multiple bidding is also allowed, i.e., an investor may put in multiple bids at various prices/ yield
levels.
In which form is G –Sec held

• May 20, 2002, it is mandatory for all the RBI regulated entities to hold and transact in G-Secs only
in dematerialized form.
Why dos the G Sec Price Change

• The price is determined by demand and supply of the securities.

• Specifically, the prices of G-Secs are influenced by the level and changes in interest rates in the
economy and other macro-economic factors, such as, expected rate of inflation, liquidity in the
market, etc.
• Developments in other markets like money, foreign exchange, credit and capital markets also
affect the price of the G-Secs.
• Further, developments in international bond markets, specifically the US Treasuries affect prices
of G-Secs in India. Policy actions by RBI (e.g., announcements regarding changes in policy
interest rates like Repo Rate, Cash Reserve Ratio, Open Market Operations, etc.) also affect the
prices of G-Secs.
T Bill 91
T Bill 182
T Bill 364
Yield of T Bill
Call Money Market
• Call money market is a market for uncollateralized lending and borrowing of funds.
• This market is predominantly overnight and is open for participation only to scheduled
commercial banks and the primary dealers.
Statistics

Ca ll Mo ne y
Ye a r Ca ll mo ne y Ca ll mo ne y Ca ll mo ne y Ca ll mo ne y
Lo w ra t e High ra t e We ighte d a ve ra ge ra te Ave ra ge t u rno ve r
% % % Rs . Millio n
2 0 1 5 -1 6 2 .5 12 6 .8 5 1 0 9 ,6 4 8 .3 0
2 0 1 6 -1 7 4 9 .5 6 .1 9 1 2 8 ,3 5 5 .0 0
2 0 1 7 -1 8 3 8 .4 5 5 .9 1 1 2 0 ,7 1 5 .9 0
2 0 1 8 -1 9 4 .1 9 .5 6 .2 1 1 5 4 ,5 5 8 .8 0
2 0 1 9 -2 0 0 .5 6 .9 5 5 .3 1 3 5 ,9 9 8 .5 0
2 0 2 0 -2 1 1 .5 5 .2 5 3 .3 4 8 5 ,7 5 2 .2 0
Repurchase Agreements (REPO)

• Repo or ready forward contact.

• Borrowing funds by selling securities with an agreement to repurchase the securities on a

mutually agreed future date at an agreed price.
• The reverse of the repo transaction is called ‘reverse repo’.

• The repo market is regulated by the Reserve Bank of India.

• All the above mentioned repo market transactions traded/reported on the electronic
platform called the Clearcorp Repo Order Matching System (CROMS).
• Repoable securities include Central Government dated securities (G-Secs), Treasury Bills
(T-Bills), State Development Loans (SDLs) and Corporate Bonds.
Statistics
Liquidity Adjustment Facility and Open Market Operations of RBI
Repo Repo Repo Rev erse repo Rev erse repo Rev erse repo
End- period Turnov
rate er Av erage daily turnov
End-erperiod rate Turnov er Av erage daily turnov e
Year % Rs. Million Rs. Million % Rs. Million Rs. Million

2015-16 6.75 28,783,710.00 115,170.50 5.75 20,583,010.00 72,784.20

2016-17 6.25 15,388,370.00 57,744.50 5.75 33,053,070.00 112,417.80
2017-18 6 12,231,270.00 46,083.50 5.75 51,030,380.00 183,445.40
2018-19 6.25 20,159,760.00 74,690.60 6 65,888,220.00 232,971.80
2019-20 4.4 11,934,400.00 45,092.80 4 119,276,430.00 376,600.00
2020-21 4 10,000.00 32.1 3.35 1,508,417,180.00 4,278,476.10

1508.41718 trillion (INR)
Repo
Reverse Repo
Market Repo
Commercial Paper (CP)

• Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note.

• Corporates, primary dealers (PDs) and the all-India financial institutions (FIs) that have been
permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India
can issue CP.

• CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from
the date of issue.

Note : CPs are actively traded in the OTC market. Such transactions, however, are to be reported on
the Fixed Income Money Market and Derivatives Association of India (FIMMDA) reporting
platform within 15 minutes of the trade.
Commercial Paper (CP)

• CP can be issued in denominations of Rs.5 lakh or multiples thereof.

• All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from
Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and
Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or
the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified
by the Reserve Bank of India.

• Commericial papers are rated as Top Tier : A1/P1/F1 Second Tier : A2/P2/F2 (depending on the
agencies )
Cont..
• All commercial papers issued in India should carry (A2/P2) credit ratings.

• CPs are issued at discount and redeem at par.

• CPs are active traded in secondary market of OTC.

Note:
All such transactions, needs to be reported on the Fixed Income Money Market and Derivatives
Association of India (FIMMDA) reporting platform within 15 minutes of the trade for dissemination
of trade information to market participation thereby ensuring market transparency.
Statistics

Interest Rates, Amo unt Raised and Outstanding Amo unt o f Commercial Paper (CP)

Year Lo w rate High rate Amo unt raised Outstanding amo unt
% % Rs. Million Rs. Million
2 01 5 -1 6 6 .52 1 3.1 4 1 6,2 8 7,6 0 0.0 0 2 ,6 02 ,4 00 .0 0
2 01 6 -1 7 5 .68 1 4.9 2 2 0,8 1 6,4 0 0.0 0 3 ,9 79 ,7 00 .0 0
2 01 7 -1 8 5 .48 3 7.7 3 2 2,9 2 5,3 0 0.0 0 3 ,7 25 ,8 00 .0 0
2 01 8 -1 9 6 .03 1 7.4 9 2 5,9 6 4,4 0 0.0 0 4 ,8 30 ,8 00 .0 0
2 01 9 -2 0 4 .75 1 4.4 7 2 1,9 6 8,9 6 0.0 0 3 ,4 45 ,2 70 .0 0
2 02 0 -2 1 2 .65 1 4.1 9 1 7,4 1 1,3 3 0.0 0 3 ,6 43 ,7 40 .0 0

17.41 trillion INR

Certificate of Deposit (CD)
• Certificate of Deposit (CD) is a negotiable money market instrument.

• Issued in dematerialised form or as a Usance Promissory Note,.

• Banks can issue CDs for maturities from 7 days to one year.
Certificate of Deposit (CD)
• CDs are issued in denominations of 1 lakh and in multiples of Rs. 1 lakh and Free
transferable.

• CDs may be issued at a discount on face value.

• Banks / FIs are also allowed to issue CDs on floating rate basis.

Note : Banks / FIs cannot grant loans against CDs. 

Who can Issue CDs

CDs are issued by 

(i) Scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks};

(ii) Financial Institutions (Fis permitted by RBI to raise short-term resources within fixed Limit)

Note: the liquidity of this market improved significantly with RBI reducing the tenor from 90 days to
14 days in OCT -2000
Statistics (INR Millions)

Year Low rate (%) High rate (%) Am ount rais ed Outs tanding am ount
2 0 1 4 -1 5 7 .5 5 1 0 .2 5 7 ,7 2 8 ,5 0 0 .0 0 2 ,8 0 9 ,7 0 0 .0 0
2 0 1 5 -1 6 7 8 .9 6 ,2 9 1 ,3 0 0 .0 0 2 ,1 0 5 ,9 0 0 .0 0
2 0 1 6 -1 7 5 .9 2 8 .5 3 4 ,0 7 5 ,6 0 0 .0 0 1 ,5 5 7 ,4 0 0 .0 0
2 0 1 7 -1 8 6 8 .5 4 ,4 0 2 ,8 0 0 .0 0 1 ,8 5 7 ,3 0 0 .0 0
2 0 1 8 -1 9 6 .2 5 9 .6 5 5 ,6 5 2 ,4 0 0 .0 0 2 ,7 2 2 ,6 0 0 .0 0
2 0 1 9 -2 0 4 .9 3 8 .8 3 ,8 8 2 ,5 4 0 .0 0 1 ,7 2 9 ,9 6 0 .0 0
2 0 2 0 -2 1 3 .0 8 7 .9 4 1 ,3 0 7 ,1 7 0 .0 0 8 0 6 ,2 2 0 .0 0

1.307 Trillions (INR)

CD’s rates
CD’s Amount raised and Outstanding Bal.
Cash Management Bills (CMBs)

• In 2010, Government of India, in consultation with RBI introduced a new short-term instrument,
known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of
the Government of India.

• The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
Addendum
Overnight Indexed Swap

• Overnight Interest rate swaps are rupee swaps where the floating rate is
• These swaps are widely used by Banks and Corporates to hedge the interest rate risks.
• The users may undertake these swaps for shifting its liability from fixed rate to floating rate (or
vice verse)benchmarked to the overnight NSE MIBOR Rate.
• Users : Mutual Funds, PDs, Banks, Corporates with rate exposure.
Indian Benchmark Swap

• INBMK swaps are rupee swaps where the floating rate is benchmarked to the 1 Year INBMK
Rate.
• These swaps are used by Banks and Corporates to hedge the interest rate risks arising from
government securities.
• The users may undertake these swaps for shifting its liability from fixed rate to floating rate (or
vice verse)
• Users : PDs, Banks, Corporates with G sec rate exposure.
Market Share
Statistics
Figure
Figure
Thank you