FINANCIAL MARKETS

MONEY MARKET

- Dr. Sandeep Goel

 MONEY MARKET
• Money market: “Short-term market” for securities maturing in a year or
less.
• Short-term financing for short and permanent needs.

• Short-term investing for income and liquidity.

• Reserve Bank of India (RBI) – the Central bank of the country plays the
major role in regulating and controlling the India money market.
• Participants
o Commercial banks
o Central and state governments
o Financing Companies - NBFCs
 MONEY MARKET INSTRUMENTS
1. Money market at call and short notice
Call market is the most liquid market. The loans made in this
market are of the shortest term—overnight.
“The call money rate (that is, interest rate in the Call money market) is a
prime indicator of the level of liquidity in the entire financial system.”

It is repayable on demand, and money at short notice is repayable

within 14 days of serving a notice.
o Call money (1 day)
o Notice money (1-15)
o Term money (>15 days)
2. Government Securities (G-Secs) – “Treasury Bills (T-Bills)”
Treasury Bills are short-term ‘government securities.’ They are one of
the safest money market instruments as they are issued by RBI on
behalf of Central Government.
 Issued by the GOI, RBI acts as an Issuing Agent
 Short term marketable securities with minimum default risk, liquidity risk and
interest rate risk
 Duration – 91 days, 182 days, and 364 days

 Issued at a discount/ redeemed at par

 Minimum of Rs. 10,000 and in multiples thereof
 Highly liquid and credit risk free

 Yield = (Face Vale - Purchase Price) 365

Purchase Price Days to Maturity

X
 Issue of G-Secs – “T-Bills”
 G-Secs (long-term and short-term) are issued through auctions conducted by RBI.
 E-Kuber: Auctions are conducted on the electronic platform called the E-Kuber,
the Core Banking Solution (CBS) platform of RBI.
 E-Kuber Members: Commercial banks, scheduled UCBs, Primary Dealers,
insurance companies and provident funds, who maintain funds account (current
account) and securities accounts (Subsidiary General Ledger (SGL) account) with
RBI, are members of this electronic platform and can place their bids through this.
 Non-E-Kuber Members: All non-E-Kuber members including non-scheduled
UCBs can participate in the primary auction through scheduled commercial banks
or PDs. For this purpose, the UCBs need to open a securities account with a bank /
PD – such an account is called a Gilt Account. A Gilt Account is a dematerialized
account maintained with a scheduled commercial bank or PD. [The G-secs for
retail trading through BSE can be held by investors in the same Demat
account as is used for equity at the Depositories.]
-contd.-

Source: http://www.tradingeconomics.com/india/interbank-rate
 T-Bills Annualized Yield - Example

You pay Rs. 98.52, for a 91-day T-bill. It is worth Rs. 100 at
maturity. What is its annualized yield?
•Settlement date: 07/1/16
•Maturity date: 06/4/16
F–P 365
Yt = 
P n (days to maturity)

Rs. 100 – Rs. 98.52 365

Yt = 
Rs. 98.52 91

= 0.0602 = 6.02%
 Auction of T-bills – ‘Price based’

Price Based Auction: A price based auction can be ‘uniform price’ or

‘multiple price.’ It involves the following:

o Bidders quote in terms of price per ₹100 of face value of the security (e.g.,
₹102.00, ₹101.00, ₹100.00, ₹ 99.00, etc., per ₹100/-).

o Bids are arranged in descending order

-contd.-

‘Price based auction’ of an existing 91 day T-bill

•Maturity Date: April 13, 2016
•Auction date: January 13, 2016
•Auction settlement date: January 14, 2016
•Notified Amount: ₹300 crore
* Settlement is done on January 14, 2016 under T+1 cycle.

Acceptance of Competitive bids

on ‘Uniform Price’ and ‘Multiple Price’ Auction methods
Let us assume that RBI has notified an amount of Rs. 300 crore for competitive bidders in a
Treasury bill auction and received the following bids:
Bidders Bid Price Bid Amount Cumulative Bid Amount
(Rs.) (Rs. Cr.) (Rs. Cr.)
A 98.50 90 90
B 98.40 60 150
C 98.35 80 230
D 98.30 70 300
E 98.20 85 385
F 98.00 30 415
 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. [Like T-bills, Cash Management Bills are also
issued at a discount and redeemed at face value on maturity.]
LIQUIDITY ADJUSTMENT FACILITY (LAF)
 LAF is a facility extended by RBI to the scheduled commercial banks
to avail of liquidity in case of requirement or park excess funds with
RBI in case of excess liquidity on an overnight basis against the
collateral of G-Secs including SDLs. Basically, LAF enables liquidity
management on a day to day basis.

 The operations of LAF are conducted by way of repurchase agreements

(repos and reverse repos) with RBI being the counter-party to all the
transactions. The interest rate in LAF is fixed by RBI from time to time.
LAF is an important tool of monetary policy and liquidity management.
3. Certificate of Deposits (CDs)
Certificate of Deposit is like a promissory note issued by a bank in
form of a certificate which entitles the bearer to receive interest.
 Short-term borrowings, issued by bank as promissory notes
 Negotiable/Transferable
 Issued at a discount for fixed maturity
 Tenure – 15 days to one year [the maturity most quoted in market is 90
days]
 Size – Minimum Amount Rs. one lakh and in multiples of Rs. 1 lakh
 Registered or bearer or demat form
4. Commercial Papers (CPs)
Commercial Paper is the short-term unsecured promissory note
issued by corporate and financial institutions at a discounted
price like t-bills.
o Tenure – 7 days to one year
o Introduced in 1990

Eligibility for issue of CP:

a) the tangible net worth of the company, as per the latest audited balance
sheet, is not less than Rs. 4 crore;
b) the working capital (fund-based) limit of the company from the banking
system is not less than Rs.4 crore, and
c) the borrowal account of the company is classified as a ‘Standard Asset’
by the financing bank/s.
 Commercial Papers Annualized Yield - Example

You pay Rs. 98.50, for a 90-day CP. It is worth Rs. 100 at maturity.
What is its annualized yield?
•Settlement date: 06/1/16
•Maturity date: 04/4/16
F–P 365
Yt = 
P n (days to maturity)

Rs. 100 – Rs. 98.50 365

Yt = 
Rs. 98.50 90

= 0.0608 = 6.08%
5. Repurchase Agreements (Repo) & Reverse Repurchase
Agreements (Reverse Repo)
Repo and Reverse Repo are short-term instruments which enable collateralized
short-term borrowing and lending through sale/purchase in debt instruments
approved by the RBI (such as Treasury Bills, Central/State Govt. securities).
o Repo or repurchase agreement is a short-term borrowing for dealers in
government securities.The dealer sells the government securities to investors, usually
on an overnight basis, and makes a commitment to buy them back (on the following
day).
o For the party selling the security (and agreeing to repurchase it in the future) it is a
repo; for the party on the other end of the transaction (that is, buying the security and
agreeing to sell them in the future), it is a reverse repurchase agreement (or Reverse
Repo).
o Repo helps banks to invest surplus cash.
 DEVELOPMENTS IN MONEY MARKET
 Prior to mid-1980s participants depended heavily on the call
money market
 The volatile nature of the call money market led to the
activation of the Treasury Bills market to reduce dependence on
call money
 Development of the Liquidity Adjustment Facility

 Setting up of central counter party – Clearing Corporation of

India Ltd. (CCIL)