MONEY MARKET

Call Money Market

Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule. Brokers use call money as a short-term source of funding to cover margin accounts for the purchase of securities. The funds can be obtained quickly. Duration of call money market is on overnight basis

Operations of call money market

Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-the-telephone market Borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. Loan is repaid with interest

Advantages of Call Money

High Liquidity High Profitability Maintenance Of SLR Assistance To Central Bank Operations

Drawbacks of Call Money Market

Uneven Development Lack Of Integration Volatility In Call Money Rates

MONEY MARKET
1) Meaning of Money Market: Money market refers to the market where money and highly liquid marketable securities are bought and sold having a maturity period of one or less than one year. It is not a place like the stock market but an activity conducted by telephone. The money market constitutes a very important segment of the Indian financial system. The highly liquid marketable securities are also called as money market instruments like treasury bills, government securities, commercial paper, certificates of deposit, call money, repurchase agreements etc.

According to the Geoffrey, money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.

1! What is Money Market?

As per RBI definitions 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).
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

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It doesnt actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.

2 ! Features of Money Market?

It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only. In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

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Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

3 ! Objective of Money Market?

To provide a parking place to employ short term surplus funds. To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to users of shortterm funds to meet their requirement quickly, adequately at reasonable cost.

4 ! Importance of Money Market?

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Development of trade & industry. Development of capital market. Smooth functioning of commercial banks. Effective central bank control. Formulation of suitable monetary policy. source of finance to government.

5 ! Composition of Money Market?

Money Market consists of a number of submarkets which collectively constitute the money market. They are, Call Money Market Commercial bills market or discount market Acceptance market Treasury bill market

Features of Bills Market

1.

Genuine trade bills

2.
3. 4. 5. 6. 7.

Borrowing practice
Presence of large quantity of commercial bills Financial discipline among the parties to bills Banks must encourage bills as an ideal security Facilities for rediscounting Wide spread use of bills as a source of financing across the board Existence of intermediaries Credit information facility

8. 9.

Shortcomings of Indian Bill market

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2.
3. 4.

5. 6.

Lack of bill culture Stamp duty Inadequate credit rating Absence of secondary market: Even facilities of rediscounting is available only with the apex level financial institutions Attitude of commercial banks RBI has been making efforts to give bill financing the necessary boost. Various committees like Dahejia committee, Tandon committee, Chore committee, Vaghul committee etc have recommended time and again shifting to bill finance from cash credit system

Market for Government Securities

1The Government securities market consists of securities issued by the State government and the Central government. Government securities include Central Government securities, Treasury bills and State Development Loans. They are issued in order to finance the fiscal deficit and managing the temporary cash mismatches of the Government. All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, and even individuals are eligible to purchase Government Securities.

The securities are issued at par value (Rs 100) and have a coupon rate which is decided at the time of issue by auction technique. These securities pay interest at the coupon rate on a half yearly basis and are redeemed at par value on maturity. These are called dated securities because these are identified by their date of maturity and the coupon, e.g., 7.99% GOI 2017 is a Central Government security maturing in 2017, which carries a coupon of 7.99% payable half yearly. Government securities are highly liquid instruments available both in the primary and secondary market. In the primary market Government securities are issued through auctions (yield based or price based auctions) which are conducted by the Reserve Bank of India. There is a scheme of non-competitive bidding in these auctions wherein retail investors can participate for small amounts ranging from Rs 10,000 to Rs 2 cr face value. The tenor of these securities ranges from 1 year to 30 years.

6 ! Instrument of Money Market?

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.

They were Treasury bills Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market.

New instrument
Now, in addition to the above the following new instrument are available:

Treasury Bills Repurchase agreement/ Reverse Repo Commercial Bills Commercial papers. Certificate of deposit.

Treasury Bills (T-Bills)

(T-bills) are the most marketable money market security. They are issued with three-month, six-month and one-year maturities. T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. T-Bills are so popular among money market instruments because of affordability to the individual investors.

Commercial Bills

Meaning : A document expressing the commitment of a borrowing firm to repay a short-term debt at a fixed date in the future. Defination : A bill of exchange issued by a commercial organization to raise money for short-term needs.

Features of Commercial Bills

Commercial bills can be traded by offering the bills for rediscounting. Banks provide credit to their customers by discounting commercial bills. Commercial bills ensure improved quality of lending, liquidity and efficiency in money management

Features of Commercial Bills Contd

The market for buying and selling of commercial bills is known as commercial bill market It is important for trade and industry and also for the development of money market Bill financing is the most common method of meeting the short term credit needs of the trade and industry Banks discount and rediscount the bills

Features of Commercial Bills Contd

Use of bills imposes financial discipline on the borrowers It is an excellent opportunity avenue for short-term investments for banks The system offers an flexibility to the money markets. Helps ease out the liquidity crunch in the banking system

Other Features of Commercial Bills

A commercial bill is a self liquidating instrument. It carries low risk Negotiable Short Term instrument Useful in Credit Sales

Advantages of Commercial Bills

Liquidity Certainty of Payment Ideal Investment Simple Legal remedy High & Quick Yield Easy Central Bank Control

Certificate of deposit (CD)

A CD is a time deposit with a bank. Like most time deposit, funds can not withdrawn before maturity without paying a penalty. CDs have specific maturity date, interest rate and it can be issued in any denomination. The main advantage of CD is their safety. Anyone can earn more than a saving account interest.

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 CPs.

Repurchase agreement (Repos)

Repo is a form of overnight borrowing and is used by those who deal in government securities. They are usually very short term repurchases agreement, from overnight to 30 days of more. The short term maturity and government backing usually mean that Repos provide lenders with extreamly low risk. Repos are safe collateral for loans.

7 ! 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 nationalised banks ii. Private banks Indian Banks Foreign banks 4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

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II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperative i. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks

8 ! Disadvantage of Money Market

Purchasing power of your money goes down, in case of up in inflation. Absence of integration. Absence of Bill market. No contact with foreign Money markets. Limited instruments. Limited secondary market. Limited participants.

9 ! Characteristic features of a developed money Market?

Highly organaised banking system Presence of central bank Availability of proper credit instrument Existence of sub-market Ample resources Existence of secondary market Demand and supply of fund

10 ! Recent development in Money Market

Integration of unorganised sector with the organised sector Widening of call Money market Introduction of innovative instrument Offering of Market rates of interest Promotion of bill culture 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)

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Summary

The money market specializes in debt securities that mature in less than one year. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a money market mutual fund. T-bills are short-term government securities that mature in one year or less from their issue date. T-bills are considered to be one of the safest investments.

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A certificate of deposit (CD) is a time deposit with a bank. Annual percentage yield (APY) takes into account compound interest, annual percentage rate (APR) does not. CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD. Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than Tbills because of the higher default risk. Bankers acceptance (BA) are negotiable time draft for financing transactions in goods. Repurchase agreement (repos) are a form of overnight borrowing backed by government securities.

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